Estonia - not the haven it used to be?Estonia has previously enjoyed a relatively high reputation among startups and international high tech companies due to its friendly and very incentivised tax environment. Well, if a new law regarding the different kinds of income goes through we might have to say good bye to that reputation. Baltic Business News reports that the government is in talks of revising the Income Tax Law to change the status of benefits, such as share options and shares. Instruments which are highly used by early and later stage companies to motivate employees.

This in itself is nothing new as we know. It is a very tempting way in startups to avoid building an excess payroll cost structure when it’s not needed. Therefore it can be said to be one of the main ways startups motivate employees as the expendable money is usually very scarce. Currently the drill is that employees who receive these sort of benefits pay an income tax on the options and shares only when they cash them in. Furthermore, special kind of social tax has not been added to the burden.

The new Income Tax Law draft amendment regards these sort of benefits in such a manner that employees would have to pay both income tax and social tax on the benefits once they have been received. This order of taxing the benefit is contrary to the common belief that you are only taxed on capital gains and financial gains. Even though as administrations and tax organisations may see that such benefits add value to the person at hand, they forge that there is no cash flow attached to the benefit, thus further burdening the beneficiary regarding the incentive. In the end, this would make shares and share options a non-viable alternative in motivating employees in startups and ultimately bring up costs for everyone in the startup environment.

We sincerely hope that the draft amendment is given one more look regarding this issue. While this issue is now being discussed in Estonia, I would like to see more countries move toward this sort of environment regarding startups. Tax incentives are a powerful way of motivating people to work against extraordinary obstacles and truth be told, tax incentives do not mean lost taxes it just means the “business model” reagarding taxes is thought in a new manner. The government shouldn’t worry about money being lost, they’ll get their share in the end – just like the rest of us.

Photo by 98PoundGeekling.

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