Taxation of Unattributed Envelope Wages with Social Tax Must Be Based on Solid Evidence

The Ministry of Finance recently published a draft law amending the Income Tax Act, which changes the taxation of unattributed envelope wages. Under the proposed amendment, the tax authority would be able to treat undisclosed envelope wage payments as fringe benefits, requiring both income tax and social tax payments. Currently, the tax authority can only demand income tax on unattributed envelope wages, treating them as non-business-related expenses.

The Estonian Chamber of Commerce and Industry (ECCI) informed the Ministry of Finance that it supports the bill’s goal of preventing tax evasion and ensuring fair competition.

However, the Chamber emphasized that the Tax and Customs Board must not interpret certain company activities too easily or arbitrarily as payment of envelope wages, leading to additional tax obligations.

For example, the Tax and Customs Board should not assume that a company has paid envelope wages solely because it has withdrawn cash from its account.

Classifying any unidentified payment or activity as envelope wages and taxing it with social and income tax is unjustified. The tax authority must be able to prove, based on solid evidence, that a company has indeed paid envelope wages to its employees.

The Ministry of Finance estimates that the proposed amendment would increase social tax revenue by €1.7 million per year.

At this stage, it is unclear whether and in what wording the proposed change will be implemented.