Estonian taxes overview
Key benefits that stand out…
Simple flat rate system
Corporate Income Tax is payable only if dividend is distributed, if not distributed, the tax burden is 0%
Estonian companies can pay high salaries to non-residents. Salaries for non-residents are not taxed in Estonia
Unprofitable or unsuccessful investments are considered as business costs
All Estonian companies are Estonian tax residents
No thin capitalisation or CFC rules
No WHT on dividents, interests and royalties*
No withholding taxes on market level expenses**
Transfer pricing regulation mainly follows the OECD guidelines
Company residence is determined according to the place of registration
VAT regulation in Estonia is mostly in accordance with European Union Directive 2006/112/EC
No taxation of flow-through dividends
Estonia is an EU and OECD member and a “white list” country
Maintenance of Estonian company is cheap compared to other white list countries and some offshore jurisdictions
Efficient tax compliance (cheap, quick, easy)
VAT registration is easy compared to Western Europe
The management/beneficial owners can apply for Estonian e-Residency
The possibility to file for temporary residence permit
Tax treaties with more than 60 countries
Low taxation of property
Secure and modern banking facilities and e-governance
Cooperative and accessible tax authorities
*subject to certain conditions
**business related, arm’s length expenses such as loan interest, service payments etc are not subject to CIT
Taxes in detail
Principal taxes (Corporate)
- Value added tax 20%
- Social tax 33%
- Unemployment tax 0.8%
- Corporate Income Tax payable on profit distribution 20% on gross (will be withheld in case profit is distributed), which makes 20/80 on net (see detailed explanation below)
Corporate Income Tax
In Estonia, corporate income tax is not paid when the profit is earned, but rather when it is distributed in the form of a dividend or otherwise. Thus indefinite tax deferral is possible as long as profit is retained or reinvested.
Example of tax calculation:
The aggregate sum of dividend payable to the shareholders from the profit of the financial year of 2015 (or later) is 100 000.- EUR
Allocated dividend amount 100 000 EUR
Income tax 100 000 x 20/80 = 25 000 EUR
The shareholder receives 100 000 EUR
The company’s cost is 125 000 EUR
The corporate income tax can be lowered to 14% (only as a payout to a legal entity) if the company is paying dividends on a regular basis. The income tax will be calculated according to the average of the payout of the previous 3 years – this means that the income tax percentage for the average dividends over the previous 3 years is 14% and for anything exceeding the average is 20%. The system will be fully implemented in 2021 and 2018-2021 will be a transition stage.
- Dividends payed out in 2018 (from income of previous periods) – according to the old system, 20% (20/80).
- Dividends payed out in 2019 – 1/3 of dividends by 14% (14/86), the rest 20% (20/80).
- Dividends payed out in 2020 – 1/3 of dividends from 2018 and 2019 14% (14/86), the rest 20% (20/80).
- Starting from 2021 – 14% for dividends that correspond to the average dividends from the previous 3 years, the rest 20%.
- Social tax 33%
- Individual income tax 20%
- Unemployment insurance tax 1.6%
- Tax-exempt per year is 6000.- EUR, with yearly income up to 14 400.-
- The tax-exempt for income from 14 400.- up to 25 200.- is calculated by using the following formula:
Tax exempt = 6000 – 6000/10800 * (yearly income – 14 400)
- Tax-exempt for yearly income of 25 200.- EUR and more is 0.-
- Contribution to compulsory pension (retirement) fund 2% or 3%
Capital Gains Tax
There is no separate capital gains tax in Estonia. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made.
Branch Profit Tax
There is no specific branch profit tax in Estonia. Branches of foreign companies are taxed under the same principles as resident companies, i.e. taxed on the distribution of profits.
Fringe Benefits Taxes
Fringe benefits are taxed as salary income. 20% income tax is levied on the gross value of the benefit plus 33% social security contribution.
Local government has the right to impose local taxes but presently only a few municipalities do so.
Foreign Tax Relief
Under Estonia’s double tax treaties, foreign tax is mostly either relieved by exemption or credited.
Related Party Transactions
Related party transactions may be adjusted for tax purposes if the transactions are not at arm’s length. Transfer pricing rules follow the OECD principles.
Gifts, Donations, Representational Expenses
Income tax 20% on gifts and donations, representational expenses above 32.- EURO per month + 2 % of the amounts taxable by social tax as well as other expenses not related to business.
The taxation principle is the same as for profit taxation
Dates to declare and to pay taxes:
- VAT and VIES 20th of next month
- Social and income tax 10th of the month following the month of payment
- Annual report 6 months after end of fiscal year
Audit is required
Is obligatory for PLC-s (Aktsiaselts) and for LLC (OÜ – Osaühing) if…
…at least two of the following requirements are fulfilled
- Turnover exceeds 4 000 000 EUR
- Balance sheet total exceeds 2 000 000 EUR
- Number of employees is 60 or more
…one of the following requirements is fulfilled
- Turnover exceeds 12 000 000 EUR
- Balance sheet total exceeds 6 000 000 EUR
- Number of employees is 180 or more
External control of annual report
…if at least two of the following requirements are fulfilled
- Turnover exceeds 1 600 000 EUR
- Balance sheet total exceeds 800 000 EUR
- Number of employees is 24 or more
…or one of the following requirements is fulfilled
- Turnover exceeds 4 800 000 EUR
- Balance sheet total exceeds 2 400 000 EUR
- Number of employees is 72 or more