Company investment in human capital

According to an international survey, investment by Estonian employers into the human capital of their employees is at a very low level compared to other European Union Member States. However, employers say they would not consider offering fringe benefits to employees until mandatory taxes from these benefits are reduced.

A recent study launched by Mercer Human Resources Consulting shows that, on average, Estonian firms spend very little on their employees’ training, health conditions and collective free-time activities. According to the survey, while in developed countries like Belgium, Finland, the UK and the US this expenditure varies from 14% to 7% of total labour costs, in Estonia it only represented 0.7% of total labour costs. In this respect, Estonia has the worst record among other Baltic States: for example, in Latvia, the average expenditure of companies is slightly higher (0.8%), while in Lithuania the expenditure represents 1.5% of total labour costs.

Legislative background

According to Estonian legislation, an employer is obliged to pay income and social tax on any fringe benefits granted to employees. According to the Income Tax Act, fringe benefits constitute any goods, services, remuneration in kind or monetary benefits which are given to an employee. Fringe benefits can include:

  • full or partial covering of housing expenses;
  • the use of a vehicle or other property of the employer free of charge or at a preferential price for activities not related to employment or the employer’s business;
  • payment of insurance premiums;
  • compensation for official travel expenses and payment of daily allowances, in so far as they exceed the limits established by the government;
  • compensation for the use of a car in personal ownership or used on the basis of a leasing contract, in so far as they exceed the limits established by the government;
  • loans given at a lower interest rate than the minimum rate established by the Minister of Finance (currently 4%);
  • the transfer free of charge or sale or exchange at a price lower than the market price (or purchase at a higher price than the market price), of an article, security, property right or service; and
  • coverage of expenses relating to formal or informal education acquired in the adult education system.

Fringe benefits do not include cash payments ordinarily regarded as salary, wages, additional remuneration or payments, or remuneration of a member of a management or controlling body or payments for goods and services. Similarly, expenses incurred in the employees’ journey between their residence and their place of employment are not classified as fringe benefits if it is impossible to make the journey using public transport with a reasonable outlay of time and money.

For several years, the primary aim among both the trade unions and employers has been to abolish taxes on the employer’s costs arising from workers’ formal and informal education and training (EE0501101F, EE0402101N). In the current economic climate, where the Estonian economy faces structural unemployment and a lack of a qualified workforce, the need for training and retraining employees as well as implementing the concept of lifelong learning should be high priorities on Estonia’s economic and labour policy agenda.

Point of view of the social partners

According to Harri Taliga, chair of the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) (EE0308101F), Estonian firms only cover those labour costs they are obliged to by legislation, i.e. wage costs and obligatory social contributions. In general, companies in the former 15 EU Member States allocate much financial resources on training and lifelong learning for employees. The common understanding in these countries is that such an expenditure represents an investment into employees’ human capital, and not costs related to the company’s workforce. However, in Estonia, the prevailing view is that the expenditure related to employees are costs, not investments. According to Mr Taliga, a primary reason for such an attitude is the punitive Estonian tax system, described above.

Tarmo Kriis, chair of the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) (EE0310102F), also pointed to the Estonian tax system as the main reason why voluntary collective benefits play such a marginal role. When Estonia introduced a 'zero %' corporate income tax rate from reinvested profit, a special tax on fringe benefits was introduced at the same time. For example, if a company is willing to cover the cost of the physical training of its employees, then it must pay a tax which equals personal income tax (24%) and payroll tax (33%). In real terms, if companies decide to cover a proportion of their employees’ training costs - say, an amount of EEK 1,000 - then this in fact will cost the firm about EEK 1,800. Despite the high taxation rate, Mr Kriis stated that the gap in investments into employees’ human capital compared to the former 15 EU Member States is narrowing, and already the situation today in different industries in Estonia is very diverse.

Companies which invest in human capital

According to Rein Reisberg, director of the Regional Labour Inspectorate in Lääne-Virumaa county, the biggest problem in Estonia is not the fact that employers do not spend voluntarily for different additional benefits, but that very often they do not even cover the compulsory costs related to workers, such as the improvement of the working environment at the workplace, job safety and health issues, etc. There is much evidence of breaches of law concerning work environment and safety matters.

However, there are also positive examples. For example, a branch of the Finnish company in the forestry sector, Mets&Puu, provides the same fringe benefits for their workers as their mother company in Finland. These benefits include funding study in higher education, providing sport clubs, paying employees’ health-related costs, etc. In the railway sector, besides the agreements on minimum wages and working and rest time, several enterprise-level collective agreements also contain other social guarantees, such as donations to trade unions, funding cultural and sport activities for their employees and their children’s treatment in sanatoriums, etc.

In 2004, a company survey was launched in the central Estonian county, Läänemaa, including interviews with 168 firms. The main objectives of the survey were to get information about employees’ training possibilities, forecasts about labour demand in the future, the quality of the local labour force, etc. The analysis of results showed that the majority of firms funded the training or retraining of their workers. More than half of the firms had organised on-the-job training and most of the training was related to development of company- or job-specific skills and knowledge. The only problem with this survey is that these results are not representative of all firms, since according to the sample selection procedure, the results reflect more the activities of bigger firms than small and micro firms. The survey shows that bigger companies have recognised the importance of lifelong learning and on-the-job training. But since the small and micro firms tend to predominate in Estonia, these companies too have to recognise the importance of employees’ training and retraining needs.


Labour taxation is relatively high in Estonia. Taking into account the tax wedge, in Estonia labour tax expenditures relative to labour costs are as high as in the former 15 EU Member States. In nominal terms, these costs are much smaller, as the income level is much smaller in Estonia. The special tax on fringe benefits is very high in Estonia and constitutes a serious obstacle to increasing investment into human capital at company level.

It is equally critical that the attitude of employers change too. The poorly developed industrial relations system in Estonia and social partners’ unequal positions are an indication that companies often treat labour as a tool to increase their profit. This is a relatively common perception in central and eastern European countries and conflicts with the mutually accepted understanding of 'Social Europe'. (Raul Eamets, Kaia Philips, University of Tartu)

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