Ultimate Guide to Tax in Estonia

Ultimate Guide to Tax in Estonia

This Ultimate Guide to Tax in Estonia presents a general overview of the most important tax rates in Estonia for businesses to consider.

Estimated reading time: 10 minutes


Country profile:

Estonia is a member country of EU since 2004 and since 2011 is a member of euro area. Estonia is a member of Schengen area.

Economy & forms of business:

Estonia – a forward-thinking corporate climate with a reliable and adaptable infrastructure and one of the most developed Baltic countries that benefits from Nordic influence.

Estonia is one of the most attractive locations in European Union for foreign direct investment that offers free trade and business environment in accordance with EU standards, opening the gates to CIS countries as well.

Business environment in Estonia is extremely diverse, for example, many businesses are branches of European companies from Scandinavia, Russia, UAE, Ukraine and other jurisdictions.

1.) Business services – ITO centres, various provisions of services, HR, finance & banking (Fintech establishment), retail sector, decentralized exchange etc..

2.) Digital industry – Estonia is famous for its rapid technological development, offering various possibilities of manufacturing and export of high-tech security systems, control technologies, industrial automation and highly skilled workers for implementing & developing Blockchain systems. Estonia also is a crypto-friendly country with a possibility of crypto-licencing.

3.) Foreign trade – Exports and imports of computer services and other technical and business services, natural resources like wood and wood products, computers and electronics, metal items and power.

4.) Maritime industry – Not only Estonia offers a various possibilities of maritime trade with other countries, Estonia specializes in high-tech design and construction of small and medium-sized commercial and leisure vessels.

Estonian government’s economic and fiscal policies are focused on attaining long-term economic growth. Despite Covid-19 pandemic, Estonia has achieved great results, positioning itself as one of the world’s leaders of growing GDP. As of the end of 2021, Estonia also offers on of the best credit ratings in the Baltic area (Moody’s, S&P, etc.).

The legal environment in Estonia is supportive to business and the entrepreneurial mindset. Foreigners have the same rights as Estonians when it comes to forming a company and conducting business. There is no distinction between foreign-owned and operated businesses and businesses owned and managed by Estonians.

Estonia offers great regulatory environment for company establishment and digital management of the company. Estonian e-Residency option will allow a foreign individual to apply for digital identity granted by the government that enables for document digital authentication and signing, management of the company and tax filing.

  • Private Limited Liability Company in Estonia (OÜ): Estonian limited liability company is the most popular entity for starting a business in Estonia (for foreigners, residents and e-residents). This type of company must have at least one shareholder, who can be an individual or a firm of any nationality. The obligation of shareholders is restricted to their paid or unpaid shareholdings. This type of company can be used for different types of businesses. Minimum share capital is EUR 2500, which does not have to be paid right away.
  • Public Limited Company (AS): This type of company is intended for large-scale operations with a much larger minimum share capital – EUR 25,000. A public limited company can list its shares on a stock exchange.
  • Branch of the foreign company: Foreign enterprises can also establish a branch in Estonia to conduct their operations. It can also then be managed entirely online with an e-Residency digital ID card after the registration.

Read More about the Company Registration in Estonia, Check Out – ESTONIA COMPANY REGISTRATION


Estonia Double Tax treaties

Bilateral tax treaties (DTT) between countries have an impact on the taxation of non-residents’ income earned in Estonia. Full list of DTT’s of Estonia and their contents are available on the website of the Ministry of Finance.


Tax Residency in Estonia

Corporate Residence in Estonia:

If a legal entity is founded under Estonian law, it is considered a resident for tax purposes. For the purposes of determining corporate residence, there is no management and control criteria.

Permanent Establishment in Estonia:

A foreign entity’s PE (including a branch listed in the Commercial Register) is considered a non-resident taxpayer in Estonia.

A PE is defined under Estonian legislation as an entity through which a non-permanent resident’s commercial operations are performed in Estonia. A PE is regarded as an organization through which a non-permanent resident’s business operations in Estonia are carried out under Estonian law.


Key tax rates in Estonia: CIT and VAT

Corporate Income Tax in Estonia:

The standard corporate income tax rate in Estonia is 20%. In Estonia, corporate earnings are not taxed until they are dispersed as dividends or deemed to be transferred.

The 20% CIT is normally applied on distributed earnings at a rate of 20/80 of the net amount of profit distribution. Because this tax is classified as a CIT rather than a WHT in Estonia, the tax rate is unaffected by any applicable tax treaties. Certain pay-outs are not subject to this tax.

Who is taxed?

  • Non-resident PE’s are taxed exclusively on profits distributed from revenue generated from Estonian sources.
  • Resident firms are taxed on profits distributed from their worldwide income.
  • Non-residents’ other Estonian-source income may be assessed for final WHT or CIT.

Tax reduction options:

From 2018, companies who distribute profits on a regular basis, a reduced CIT rate of 14% is offered. Dividends paid in an amount less than or equal to the amount of taxable dividends paid in the three previous years (20%) will be taxed at a rate of 14 percent (the tax rate on the net amount will be 14/86 instead of the standard 20/80 principle).

Companies that distribute profits and pay 14% CIT are also required to withhold 7% income tax on dividends paid to resident and non-resident natural persons. Lower withholding tax rates may be available as a result of tax treaties.

Corporate earnings that have not been dispersed are generally tax-free in Estonia. This exemption covers active (e.g. trading) and passive (e.g. dividends, interest, royalties) income. It also includes capital gains from the sale of various forms of assets, such as stocks, bonds, and real estate. However, all expenses that are distributed, but are not business related would be taxed at standard rate.

This tax system applies to Estonian resident corporations and non-resident enterprises with permanent establishments (PE’s) in Estonia.

Exemption applies to:

  • Dividends received from a firm based in an EEA Member State or Switzerland are not subject to income tax if the Estonian company owns at least 10% of the shares or votes in that company.
  • Dividends received from a firm based in another country if an Estonian company owns at least 10% of the shares or votes in that company and income tax has been withheld or paid on the earnings on which the dividend was paid.
  • In some situations, the dividends paid out of profits attributed to a resident company’s permanent establishment are exempt from tax. However, if dividends are received from corporations in low-tax nations (Black listed countries), the exemption does not apply.

There are no specific tax incentives in Estonia, since all the system operates on reinvestment principle, offering to reduce the tax rate to 0%.

Value Added Tax in Estonia:

The standard VAT rate is 20%, whereas the reduced VAT rate is 9%. The reduced VAT applies to the following items:

a.) books and certain periodicals;

b.) certain medications and medical equipment;

c.) accommodation services.

Certain transactions are subject to zero-rate (0%) VAT in Estonia. The turnover threshold for mandatory VAT registration is EUR 40,000 from the beginning of a calendar year.

To register as VAT payer in Estonia or appoint a fiscal representative, please contact our lawyers directly.


CFC rules

Amendments to Estonian legislation based on anti-tax avoidance regulations from the European Union (EU) 2016/1164 Anti-Tax Avoidance Directive (ATAD) went into effect on January 1, 2019. Controlled foreign corporation (CFC) requirements, a new general anti-abuse rule (GAAR), and thin capitalisation rules in the form of taxation of “exceeding borrowing costs” were all established by these modifications.

What is CFC in Estonia?

  • Any non-resident firm in which the resident company alone or with its associated parties owns more than 50% of the voting rights or capital, or is entitled to more than 50% of the profits, is categorized as a CFC in Estonia.
  • A foreign PE of an Estonian company is also considered to be a CFC.

In general, the Estonian CFC taxation laws must be implemented if an Estonian firm owns at least 50% of a controlled foreign corporation (CFC) or has a foreign branch that does not engage on genuine economic activity.

Requirements:

The following requirements must be completed in order for the tax liability to be triggered:

a.) The profit generated by the CFC was based on a fictitious transaction or series of transactions.
b.) The primary goal of the underlying transaction (or series of transactions) was to obtain a tax benefit.
c.) The CFC is efficiently handled by key personnel of the controlling company’s shareholder who created the profit opportunity.

The percentage of a CFC’s earnings related to transactions conducted primarily for the purpose of obtaining a tax benefit must be credited to the resident firm and taxed as profits.

Exemption:

If specified benchmarks in terms of yearly profit and financial income received by the controlled foreign firm are not surpassed, an exemption may apply.

An exception permits the firm to exclude a CFC that fits both of the following characteristics from the scope of the provision:

a.) The prior financial year’s accounting profit was not more than EUR 750,000.
b.) Profits from subsidiaries, affiliates, and financial investments, interest income, and other financial income (e.g. non-trading income) did not exceed EUR 75,000 over the same period for the foreign firm.


Withholding tax in Estonia

CIT must be deducted from certain payments by withholding agents.

Resident legal entities, resident people registered as sole proprietorships or serving as employers, and non-residents with a PE or operating as employers in Estonia are all considered withholding agents.

By the tenth day of the month after the payment, the tax must be recorded and paid. Payments to resident firms, registered sole proprietorships, and registered PEs of non-resident corporations are not subject to CIT.

Withholding tax is levied in Estonia on the following payments made to non-residents:

Interest0%, 20% (on interest exceeding the market interest rate)
Royalties0%*, 10%
Fees for services provided in Estonia10%
Rental payments20%
Dividends0%**
Dividends to natural persons (in case of CIT of 14%, see section above)7%***
WHT in Estonia: Table 1.

*if the beneficiary is an affiliated firm of the paying company that is based in another EU Member State or Switzerland, or a permanent establishment of such a company that is based in another EU Member State or Switzerland.

** There is no WHT on dividends in general. However, as stated below 7% WHT applies to dividends paid to resident and non-resident individuals if the distribution has been subject to the reduced CIT rate initially (2018 regulatory framework).

*** may be reduced with DTT’s.

Non-residents without a PE in Estonia have no tax reporting obligations in Estonia since the tax deducted from these payments at domestic or treaty rates constitutes final tax on their Estonian-source income.


Tax administration & other useful information

General information on tax in Estonia: In Estonia, making a profit does not automatically entail paying taxes. Only when earnings are transferred to shareholders does a tax liability emerge. There will be no tax on profit distribution if the profit is transferred to shareholders from dividends received from a subsidiary or permanent establishment in another country.

Tax year: In most cases, the tax term is a calendar month, but in other cases, such as exceeding borrowing costs, the tax period is a calendar year. By the tenth day of the month following a taxable distribution or payment, the combined CIT and payroll tax return (form “TSD” with appendices) must be filed to the local tax authorities. Electronically submitted tax returns are possible.

The tenth day of the month after a taxable distribution or payment, CIT and payroll taxes must be remitted to the local tax authorities. CIT payments are not necessary in advance.


Contact our lawyers for tax consulting in Estonia

E-mail: store@eulawfirm.eu

T. +371 26742086


Want to know about Tax guide in Lithuania – Check this Ultimate Guide to Tax in Lithuania

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