For the ninth year in a row, the International Tax Foundation (taxfoundation.org) has listed Estonia to have the best tax code in the OECD in their tax competitiveness tier list. The ranking consists of several different factors and the structure of a country’s tax code is a huge determining factor of the country’s economic performance.
The Tax Foundation is an US independent tax policy nonprofit, which has been conducting research over worldwide tax policies since 1937. Their principled research, insightful analysis, and engaged experts have had the same goal for over 80 years: improving lives through reasonable tax policies that lead to greater economic growth and opportunity. Fortunately, Estonia, being as far away from the United States as it is, has remained in front of the list in the ever improving methodology in which the tax competitiveness index is calculated upon.
As it is possible to see from the rankings list, Estonia is leading with the overall rank of 1 and Latvia is right behind it. According to the Tax Foundation, this can be attributed to the recent changes in the Latvian tax system, where they took over the Estonian Corporate Taxation system. Switzerland, a highly valued business area, comes in 4th in the list.
The tier list takes several components into consideration, including corporate, individual, consumption and property taxes and their systems, as well as the amount of cross-border agreements that a company has. The Estonian top score is thanks to four main positive features in its tax system.
In Estonia, it is standard that you do not pay income tax every year on your corporation’s profits but instead, only pay out a flat 20 percent tax rate on corporate income when you distribute profits. This allows for an Estonian company to indefinitely postpone paying income tax, as it uses the undistributed profits for future investments, which, in return, leads to bigger earnings on investments and greater business opportunities. This taxation principle has remained in place for over 20 years, which makes it very stable and is the reason why people from all over the world are opening companies here, you can have certainty that Estonia’s forward-thinking policies will not change overnight.
A flat 20 percent tax is applied on individual income for Estonian tax residents that does not apply to personal dividend income. This means that if you have paid the corporate income tax while distributing dividends, there is no additional individual income taxation. If dividends are paid out regularly, a 14% corporate income tax and 7% personal income tax applies, in case the shareholders are natural persons, however, the tax burden remains the same and if anything, it is only beneficial in some scenarios.
Whereas in a lot of countries property tax can be driven into crazy heights since it is calculated based upon the value of real property or capital, in Estonia, the property tax only applies to the value of land. So for a small country with limited land, it is reasonable, from a taxation perspective, to invest in the real estate.
With a few specific restrictions, all of the foreign profits earned by domestic corporations are exempt from domestic taxation. This raises the value of an Estonian entity for a holding company.
In addition to the information gathered and cited from the Tax Foundation, we at Anson|Baer see that our clients are greatly benefiting from another fact that did not specifically make the list. If an Estonian company has employees, who are working remotely from abroad and are not Estonian tax-residents, there are no employment taxes in Estonia, rather all of the taxes should be paid at the country where the employee is working from physically or is a tax resident at. This can make it great for IT companies, centralized in Estonia, to use digital nomads or remote workers for their workforce, without the hassle or tax burden in Estonia.
Interested to learn about Estonian tax system more in-depth? We have an Estonian Taxes article to help you out, which you can find by clicking here. Want to know, why Estonia is a great place to start a business at overall? There are some main points available by clicking here.
As always, for any specific questions or just to get a good overview and a clearer picture, please do not hesitate to contact us, we are glad to help you to first find a reason to and then incorporate in Estonia. All of our contact information is available here.
Source: https://taxfoundation.org/publications/international-tax-competitiveness-index/, Tax Foundation 2022