Are expenses related to the formal education at university considered as exempted from tax or taxable (including non-resident)?
Expenses to cover level studies are justified if the employer needs a specialist with such a qualification in order to fulfill his/her goals. Coverage of the cost of tertiary education by the employer is seen as a normal investment, the aim of which is to create preconditions for the successful employment of the employer in the future. When making such an expense, it is justified to expect the employee’s subsequent contribution to recoup the investment made in him.
The employee must have a valid contract and the employee must have started working. The tax credit does not extend to the costs of undergraduate studies once the contract has been concluded, but by convention, work will only start after, for example, three months.
Thus, the cost of studying a work-related profession can be reimbursed in order to become a better specialist, it must be justified. The education and training costs of an employee and a board member can be reimbursed in this case.
Are the scholarships related to the improvement of employee qualifications exempt from tax or taxable (including non-resident?
If the scholarship recipient has an employment relationship with a company (employer), the scholarship payable is subject to taxation with all salary income taxes and payments.
According Income Tax Act § 29 (9) Income tax is charged on pensions, scholarships and grants, cultural, sports and scientific awards, benefits and gambling winnings paid on the conditions provided for in § 19, and benefits paid on the basis of the Family Benefits Act which are paid to a non-resident by the Estonian state, a local government, a resident or a non-resident through or on account of its permanent establishment located in Estonia.
Are there specific formal conditions that should be met (e.g. study certificates, presentation of the purpose of the scholarship)?
The tax authority recommends concluding an agreement on compensation for training expenses with employees (§ 34 of the Employment Contracts Act), which indicates the content and expenses of level training, the direct need and reason for making the expenses.
The same conditions apply to a person studying at a foreign university.
What are the limits that apply?
There is no financial limit, i.e. no fixed amount provided for. Important that there is work-related learning to apply this knowledge at work and it must be justified. Completion of level studies is certified by a certificate or diploma.
The expenses of higher education directly related to the duties can be reimbursed tax-free for the following persons:
- an employee working under an employment contract;
- a member of the management board of a legal person;
- to the chief executive officer of another non-resident’s permanent establishment.
This exemption does not extend to natural persons employed or providing services under a contract of employment, agency or other contract under the law of obligations.
The expenses of higher education are tax-free under the following conditions:
- direct need, justification (for investment);
- valid employment relationship.
- Employment Contracts Act: https://www.riigiteataja.ee/en/eli/502062021007/consolide#para34
- Income Tax Act: https://www.riigiteataja.ee/en/eli/531052021003/consolide
- Instructions: p 3.10 (in Estonian): https://www.emta.ee/et/ariklient/tulu-kulu-kaive-kasum/erisoodustused/selgitused-erisoodustuste-deklaratsiooni-tsd-lisa-4#_3.10._Rida_10
Have more questions about taxation and tax expenses related to scholarships and formal education expenses paid by Estonian company? Feel free to contact our consultants.