Estonia 107 - Paying Taxes


  • Continuing with our legal introduction series, here comes the dreaded part - paying taxes.

    Personal Income Tax

    Estonian residents pay tax on their worldwide income. An individual is an Estonian resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of 12 consecutive calendar months.

    Taxable income includes, in particular, wages, business income, rental income, pensions and scholarships, etc. Dividends received from resident companies (and non-resident companies, provided that income tax has been withheld or underlying profits have been taxed) are exempt. Non-residents pay income tax on certain income received from Estonian sources (please see “Taxation of Non-Residents”).

    The general flat rate of the personal income tax is 20%.

    Corporate Income Tax

    Resident companies and permanent establishments of the foreign entities (including branches) are subject to income tax only in respect of distributed profits (both actual and deemed), including dividends, liquidation proceeds, fringe benefits, gifts and donations, non-business expenses, etc. Thus, corporate profits are not subject to income tax until profits are distributed.

    All distributions are subject to income tax at the rate of 20/80 of the net amount of the taxable distribution (i.e. 20% of the gross amount).

    Taxation of Non-Residents

    Non-resident taxpayers are only liable for income tax regarding specific categories of Estonia-sourced income.

    Such taxable income includes business income, income derived from commercial leases and royalties, interest (if exceeding arm’s length interest), etc. No additional tax is levied on dividends received from Estonian companies in Estonia provided that the shareholding exceeds 10%.

    Income tax is charged on gains derived by a non-resident from transfer of property if:

    • the sold or exchanged immovable is located in Estonia;

    • the movable was subject to entry in an Estonian register prior to the transfer;

    • the transferred real right or the right of claim is related to an Estonian immovable;

    • the holding is transferred by a person who at the time of the transfer owned at least 10% of shares of votes in a company, whose property directly or indirectly comprised at least 50% Estonian immovables, as of the transfer or during a certain period within two years immediately preceding the transfer.

    Permanent establishments of non-residents are subject to corporate income tax on the same grounds as resident corporations (i.e., only profit distributions, granted fringe benefits, gifts and donations, etc., are subject to income tax).

    Applicable tax treaties must be taken into account. Estonia currently has 50 tax treaties in force. The list may be found here.

    Social Tax

    Employers pay social tax on payments in cash and in kind made to individuals. The general tax rate is 33% and it is payable by the employer in addition to the wages payable to the employee. Payment of social tax is due on a monthly basis.

    The tax rate will be 32,5% as of 2017 and 32% as of 2018.

    Unemployment Insurance Contribution

    An unemployment insurance contribution is withheld at a rate of 1,6% of the gross wages of the employee. In addition to this, employers pay the unemployment insurance contribution at a rate of 0,8% of the sum of gross wages on a monthly basis.

    Taxation of Wages: Example Calculation

    If a gross wage of EUR 1,000 is payable, then the unemployment insurance contribution, income tax and mandatory pension contribution are withheld in the aggregate amount of EUR 194.8.

    The net wage is therefore EUR 805.2. Note that minimum monthly wage of EUR 170 is tax-exempt.

    In addition, social tax and the employer’s unemployment insurance contribution are payable by the employer “on top” of the wages in the aggregate amount of EUR 338. The aggregate expense for the employer is therefore EUR 1,338.

    VAT

    The Estonian VAT system is largely harmonized with the common EU VAT system. VAT is charged on supplies of goods and services in the course of business activities and self-supply of goods and services.

    The threshold for obligatory registration as a taxable person is approx. EUR 16, 000 of taxable supply from the beginning of the calendar year. Voluntary registration is possible before reaching the threshold.

    The standard rate of VAT is 20%, the reduced rates are 9% (books, medicinal products, etc.) and 0% (export, intra-Community supply, Community goods placed under tax warehousing arrangements, etc.).

    Certain goods and services, such as postal and insurance services, supply of immovables, etc, are exempt from VAT. In case of VAT-exempt goods or services, input VAT is not deductible.

    Land Tax

    A land tax is payable on all land, with certain exceptions. The land tax rate is  0,1 - 2,5% of taxable value. The taxable value is determined based on the Land Valuation Act. There are currently no other property taxes in Estonia.

    Key statutes:
    Taxation Act 2002
    Income Tax Act 2000
    Value Added Tax Act 2004
    Social Tax Act 2001
    Land Tax Act 1993
    Alcohol, Tobacco, Fuel and Electricity Excise Act 2003

    Information posted above is intended as a general guide and does not constitute legal advice.


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  • Excellent material Tark! Thank you for that! Anxious to explore collaborations possible with Anguilla for global structures ... especially with regard to the "residence" of Intellectual Property. Cheers, Lyn



  • Can the founder set it's salary to 1 EUR? Is that valid in Estonia like in some other countries? How does that work in terms of taxation?



  • Marko, I am pretty sure Tark will confirm that company law permits any range of compensation to the employees, directors, officers, etc ... even to other companies. But, whether the receipt of those (or other benefits) constitute a taxable income to the recipient or an allowable expense to the company... is where it becomes messy!

    For example I doubt that your country of residence would agree that you are only earning $1.00 per year in salary ... but that you are entitled to the use of the the company's Porsche for your personal use for free! Similarly, the gov't may disallow the cost of the Porsche and its operation as a business expense for the company.

    The best way to discuss such topics is by using an organogram showing all the people and companies... their jurisdictions and their interconnections. Cheers, Lyn



  • Marko,

    In principle, a company does not need to have employees and thus, no payment is needed. However, in case only a token payment is made as salary but dividends are paid out of the company, the Estonian Tax and Customs Board would likely classify the dividends (at least partially) as salary. Thereafter, the dividends would be taxed as salary. For example, most of the GPs in Estonia operate through limited liability companies that they themselves own. However, at one point, the tax board started scrutinizing those GPs who only pay out a minimum salary but declare large dividends as it was deemed obvious that the dividends were actually part of the compensation for work.

    In addition, as Lynwood noted, using company property (including real estate, vehicles) for personal gains is taxable. The local tax board is employing quite potent means to find out about such use of company property, for example there have been cases where the utility bills for an apartment were used to prove that the apartment was occupied as an everyday private residence.

    If you are looking to plan your business activities in Estonia, I would suggest using the help of a trained professional acquainted with the details of your situation. Drop me a note if you would like to discuss the matter more in depth.

    Information posted above is intended as a general guide and does not constitute legal advice.



  • Dear Tark, I have just posted some comments for Giorgio concerning incubating business through the eResNetwork but I was uncertain about some potentially taxable flows from Estonian CFC's abroad.

    I wonder whether or not dividends from, say an Anguillian (controlled foreign company) can be paid into the Estonian parent company without precipitating income tax until those dividends are ultimately paid out to the Estonian shareholders.

    I suspect this to be the case and it might also mean that VAT could be avoided for all "rest of world' business done through Anguilla.

    Hoping for lots or good discussion on all of these topics at Latituce59. Cheers, Lyn



  • Dear Tark, I have just read the excellent article at
    http://neweuropeaneconomy.com/fdi/digital-economy-estonia/
    wherein they state that dividends from a foreign entity are exempt from Estonian tax.as I suspected, however their may be some strict anti-avoidance rules which may over-ride the articles generalization. I suspect there needs to be substance, economic purpose, transparency in the sub.



  • Dear Lynwood,

    Generally, indeed, there is no corporate income tax in Estonia, i.e. corporate income is taxed only at the moment of distribution. This means however, that all non-business expenses and other similar outlays are also taxed as dividends. Tax treaties with third countries may come into play as well as issues regarding whether the dividends are taxed at the source (e.g. Anguilla). Lastly, as always with taxation, there are always the specifics of the case to consider and therefore, the regulation is difficult to generalize.

    I would recommend the home page of the Estonian Tax and Customs Board for short summaries regarding the most common issues around taxation. However, for some reason their home page in English contains mainly broken links at the moment.

    Information posted above is intended as a general guide and does not constitute legal advice.



  • Much thanks Tark,

    Rest assured that when we find clients who wish Estonia as the parent or as the EU hub... but Anguilla as the "residence" of related IP... we will seek your advice based on the specifics of the structure, the purpose, the transparency, etc.. I feel there is some excellent synergy between the two countries based upon the BEPS regulations. Cheers, Lyn


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