In Estonia there is no traditional corporate income tax, which means that retained profits enjoy deferred taxation, which is considered as the most attractive tax incentive for companies to invest in Estonia. Corporate profits are subject to income tax upon distribution i.e. dividend payments, liquidation proceeds, etc.
In addition, certain payments, such as fringe benefits, gifts, donations, costs of entertaining guests, expenses and payments that are not business-related are also identified as profit distributions for income tax purposes. Expenses related to business are not taxable if they have been incurred for the purposes of deriving income from a taxable business or are necessary or appropriate for maintaining or developing such business and it is clearly justified that the expenses are business-related. Also, no income tax is charged on business gifts, gifts and donations to specified non-profit associations and costs of entertaining guests not exceeding limits set by law.
The corporate tax rate is fixed as 20/80 on the net amount of the payment, which means that net distribution/payment is grossed up first and then subject to a tax rate of 20%. A calculation example in case the net payment is 1,000 EUR: the tax base is 1000 / 80% = 1,250 EUR, and the corporate income tax is 1,250 EUR x 20% = 250 EUR. From year 2019, a lower tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly (The profit distributed in a calendar year, which is smaller than or equal to the average distributed profit of the previous three calendar years (starting from 2018) on which a resident company has paid income tax). The natural person receiving such dividends taxed at a lower rate (14/86) in the hands of the Estonian company, has to pay income tax at a rate of 7% in addition. It has to be withheld by the payer. A non-resident natural person has to pay income tax on dividends received from the Estonian company in the resident country also and he or she cannot take into account the corporate income tax (20/80 or 14/86) paid in Estonia by the Estonian resident company to avoid double taxation of the recipient. Only the income tax withheld at a rate of 7% may qualify to avoid double taxation of the natural person recipient.
|Transfer pricing in Estonia|
|Arm’s length principle||since 1999|
|Documentation liability||since 2007|
|Lack of documentation||Up to EUR 3,200. A criminal penalty may also be imposed up to EUR 16 million.|
|Tax shortage||Daily interest of 0.06% on the tax underpayment|
|share capital or voting rights; other special rules relating mutual business interest or control|
Level of attention paid by Tax Authority:
There is no withholding tax on dividends, interest and royalty paid by an Estonian company to either an Estonian or foreign company, provided that certain criteria are met. Also, there is no corporate income tax applied in case of pass-through dividends corresponding to certain rules. Income tax is withheld from rent from a commercial or residential lease (20%), payments to a non-resident for services provided in Estonia (10%), and payments to a legal person located in a low-tax-rate territory for services provided to an Estonian resident (20%). Estonia has a wide international treaty network with 63 double tax treaties.
Other direct taxes include a gambling tax and a land tax applicable in specific cases. Also, there is a social tax, which is described under the social security system below.
The general rate is 20%, while the reduced rate is 9% (e.g. books and workbooks used as learning materials, particular medicinal products, particular periodic publications, certain accommodation services). Exportation is zero-rated. VAT is not imposed on certain goods and services of social nature. Other VAT-exempt goods and services include insurance services, leasing or letting of immovable properties, the sale of immovable properties or parts thereof before their first use, securities and financial services. The options/limits based on the EU Directive are presented within the VAT legislation:
|VAT Options in Estonia|
|Distance selling||EUR 35,000/year|
|VAT group registration*|
|Cash accounting||turnover < 200,000 EUR|
|Import VAT deferment|
|Local reverse charge||specific real estate, metal waste, gold|
|Option for taxation|
|- letting of real estate|
|- supply of used real estate|
|VAT registration threshold**||EUR 40,000/year|
* There must be an element of common control over the members of the group.
** If the trade is below the registration threshold, voluntary VAT registration might be possible.
At the end of 2014 Estonia introduced an additional reporting form that companies need to submit together with their VAT returns for reporting all transactions exceeding 1,000 EUR with a single partner in a calendar month. Also, in 2014 new rules were introduced regarding vehicle-related VAT-deductions, which in general (with one specific exception) restrict more than 50% of total input-VAT deduction related with vehicle costs (purchase of car, fuel, repair, etc.).
Other indirect tax types in Estonia include excise duty and customs duty.
In Estonia there is a flat rate of PIT, which is 20%, and it is generally applicable to active (e.g. employment, assignment fee) and passive income (e.g. capital gains, dividend and interest). Resident individuals can use a monthly tax-free amount, which is maximum 500 EUR per month starting from 2018. The monthly tax-free minimum is applicable only with lower income and the application of it goes according to the following formula: 1) annual income up to 14 400 EUR gives 6000 EUR as annual basic exemption, 2) in case annual income increases from 14 400 EUR to 25 200 EUR, basic exemption decreases according to the following formula: 6000 – 6000 ÷ 10 800 × (income amount – 14 400), 3) if annual income is above 25 200 EUR, basic exemption is 0.
In addition, there a specific list of tax deductions, which can be applied via the annual tax returns e.g. deduction of housing loan interests (in certain limits), voluntary pension payments, donations and training expenses, an additional tax allowance in case more than one child, etc.
Active incomes fall under the scope of the SSC system: individual social contributions equal altogether 1.6%-3.6% depending of the type of mandatory pension subscription; the employer’s contribution is altogether 33.8% (social tax 33% and unemployment insurance 0.8%). Passive incomes are in general not subject to SSC. Benefits in kind are taxed only on the level of the employer at two rates: corporate income tax (20/80 on net amount) plus social tax 33%, which is altogether approximately 60%. The examples below show the cost of the employer and employee in case of minimum wage level and the average wage in the private sector.
|Wage-related taxes in Estonia||Minimum wage||Average wage in private sector|
|in EUR||in EUR|
|TOTAL WAGE COST
("SUPER GROSS" SALARY)
|Employer unemployment insurance||4||0.80%||10||0.80%|
|GROSS SALARY||540||100.00%||1 292||100.00%|
|Personal income tax||4||20.00%||159||20.00%|
|Employees’ unemployment insurance||9||1.60%||21||1.60%|
|Employees’ pension insurance*||11||2.00%||26||2.00%|
|*Minimum monthly tax deduction (for tax residents)||500||-||449||-|
|NET SALARY||516||95.64%||1 086||84.07%|
*Annual tax deduction is 6000€ when annual income is under 14 400€.
*Formula for calculating annual tax deduction 6 000 – 6 000 / 10 800 × (annual income – 14 400) when annual income between 14 400€ and 25 200€.
*Annual tax deduction is 0€ when annual income is over 25 200€.