Scholarships and grants
Scholarships and grants within the meaning of the Income Tax Act are future-oriented benefits, which are paid for the promotion of the acquisition of knowledge or skills, development of competences and creative or scientific activities. Scholarships and grants do not include payments, which recognise or remunerate any activities or by making which the person who made the payment acquires the rights to the work.
For example, educational establishments can pay scholarships or grants to the pupils or students in their lists of learners and income tax shall not be imposed on such scholarships or grants. The pupil or the student must be the learner in the school paying the scholarship or grant at the time when the person is specified to receive the scholarship or grant or when the agreement concerning the scholarship or grant is concluded in order to apply tax exemption. Also, tax exemption applies to the scholarships paid by the Education and Youth Authority, which is operational since August 2020.
In the case of the scholarship or grant payable by an association entered in the list of associations benefiting from income tax incentives, a public competition must be arranged and the results of such competition must be made available to the public. In this case, income tax is not be charged on the scholarship or grant. Tax exemption does not apply to the scholarship or grant payable to the person related to the association.
Income tax is not charged on benefits if the basis of payment is law or a rural municipality or city council regulation. Tax exemption does not apply to benefits for persons in alternative service, benefits to reservists and benefits paid on the basis of the European Union Common Agricultural Policy Implementation Act.
Exemption from tax does not apply to benefits payable in connection with employment relationship. For example, such benefits are the beginner’s allowance for teachers and beginner’s allowance for medical specialists.
The Unemployment Insurance Fund pays the business start-up subsidy to unemployed persons pursuant to the Labour Market Services and Benefits Act. The Unemployment Insurance Fund grants the subsidy to a natural person for commencement of dedicated business activity and for operation
- through a new company being founded or
- as a self-employed person.
If a person has applied for the subsidy through a company (for example, a private limited company) to be engaged in business, he or she has to transfer the amount of the subsidy to the company being founded and the expenses incurred shall further be entered in the accounts of the company. In this case, regarding the subsidy and expenses, the principles of taxation prescribed for the company shall apply.
If a person applies for the subsidy for operation as a self-employed person (a sole proprietor), he or she must register himself or herself in the e-Business Register as a sole proprietor and indicate the amount of the subsidy in the income tax return as income from business (Form E). The registered sole proprietor can take the incurred expenses related to business into account when business income (including the subsidy) is taxed.
The supports paid by the Estonian Agricultural Registers and Information Board (ARIB) since 2015 that had not been related to the business, had been charged by ARIB already upon payment thereof and these are entered into the income tax return pre-completed by the person.
The aid received in connection with business is subject to taxation in the person’s income tax return form E. Therefore, if sole proprietors request aid that is related to their business, the received aid must be included in their business income and they may deduct the expenses incurred from their income (incl. from the aid).
In the event of area payments the question of taxation depends on the fact, whether the plots of land for which the area payments were requested, are used for business purposes. If the receipt of aid depends on the number of heads in cattle, the next question that matters is: Is the cattle raised for receiving income from the sale of the product (e.g. milk, meat, wool, skins and furs, etc.).
The benefits which may be requested by sole proprietors only must be declared under business income and the expenses incurred may be deducted from business income.
Upon receipt of aid on the basis of information of a previous period it is important to know if the expenses necessary for achieving an objective (e.g. harvesting expenses) have been deducted. If such expenses have been deducted from business income, then the aid must be reflected under business income also in the cases when in the year of receipt of aid the person was not engaged in business any more.
Awards or prizes are remuneration to persons for the recognition of their previous activities. At the same time, awards are differentiated from scholarships or grants in that the scholarships and grants are future-oriented whereas the awards are paid afterwards. Income tax is not charged on international and state cultural and scientific awards and sports awards granted by the Government of the Republic.
Persons need not indicate the scholarships and grants, benefits or awards exempt from tax in their income tax returns and these do not form part of their annual income.
Last updated: 15.02.2022