Recent amendments to the Estonian Income Tax Act have a retroactive effect from July 1, 2017. Among the changes is a requirement for companies granting equity awards in Estonia to notify the Tax and Customs Board (TCB) of the grant of the awards within five business days of the acceptance of the award by the employee, unless the award agreement has been notarized or digitally signed (based on EU standards of digital signatures). At this stage, it is uncertain whether an electronic acceptance process through an intranet or broker website would qualify as a digital signature.
Of even greater concern is the impact of the notification requirement on the Fringe Benefit Tax (FBT) exemption. By way of background, any equity award granted to Estonian employees is subject to an employer-paid FBT at a rate of 66.25%. An exemption applies if the shares subject to an award may not be issued for a minimum three-year period from the grant date.
The notification requirement is an attempt by the TCB to monitor compliance with this three-year period, such that the three-year period will start only from the date the notification is filed with the TCB, or from the date the award agreement is notarized or digitally signed. This will significantly complicate reliance on the exemption because it will make it more difficult to track the three-year period (until now, it was understood that the three-year period could be measured from the grant date.)
It should be noted that the notification requirement may not be relevant for companies granting equity awards in Estonia but not relying on the FBT exemption. In better news, the amendments also provide that, if shares are issued before the expiration of the three-year period in the context of a merger in which 100% of the shares of the issuing company are sold, only a portion of the award income will be subject to FBT. Similarly, if an employee dies or terminates due to disability and receives shares pursuant to the award at termination (e.g., upon acceleration of RSUs) before the expiration of the three-year period, only a portion of the income will be subject to FBT.