Capital:
TallinnForm of government:
Parliamentary republicArea:
45 227 кm2Population:
1 millionCurrency:
€ (EUR)Taxation in Estonia
Corporate profits are not taxed until the profits are distributed in the form of dividends, buybacks by the company of its own shares to maintain their market price, reduction in capital, proceeds from the sale of property in liquidation, or conditionally distributed in the form of transfer pricing adjustments, expenses and payments, for no commercial purpose, social benefits for employees, gifts, donations and hospitality.
Corporate tax (tax on distributed profits of a company)
Distributed profits are subject to corporate tax at the rate of 20% (20/80 of the net amount of distribution of profits). For example, a company with 100 units of profit available for distribution distributes 80 units as dividends and pays corporate income tax on 20 units. From an Estonian point of view, this tax is treated as a corporate income tax and not a withholding tax, so the tax rate is not affected by double tax treaties. Certain domestic and foreign taxes may be credited against corporate income tax in accordance with domestic law or double tax treaties. Some distributions are exempt from such tax ('participation exemption'):
- dividends received from companies that are tax residents of Estonia, the EU, the EEA or Switzerland, in which the Estonian company owns at least 10% of the shares;
- profits received through a permanent establishment in the EU, EEA or Switzerland;
- profits received through foreign representations in all other countries, provided that such profits are taxed in the country of representation;
- dividends received from all other foreign companies in which an Estonian company owns at least 10% of the shares, provided that the main profit was subject to foreign tax, or foreign income tax was withheld from the received dividends;
- liquidation proceeding, share repurchases or reduction of capital, which are subject to taxation by the distributor of such income;
- dividends paid by Estonian companies to non-resident legal entities (including companies in 'low tax jurisdictions').
VAT
The supply of most goods and services in Estonia is subject to VAT. Certain goods and services are exempt from VAT. The standard VAT rate is 20%. Reduced rate - 9% applies to:
- accommodation services;
- books;
- certain periodicals;
- pharmaceuticals and medical devices included in the special list.
At 0% rate is taxed:
- export of goods from Estonia;
- deliveries of goods within the EU;
- products listed in Annex V of the VAT Directive that may be placed in a VAT licensed warehouse;
- services that are not considered to be provided in Estonia;
- goods/services exported from the European Union;
- goods/services sold to VAT payers from other countries of the European Union.
The following activities are exempt from VAT:
- some universal postal services;
- certain medical services;
- certain social security services;
- services in the field of general education, including educational materials, except for business purposes;
- insurance services, including reinsurance and insurance mediation;
- leasing real estate or parts thereof;
- immovable property, except for the primary acquisition of buildings or parts thereof, as well as repaired buildings or parts thereof;
- some financial services;
- operations with securities.
Registration as a VAT payer, declaration and payment.
There are two options for registering as a VAT payer:
- Mandatory - when the turnover for the calendar year reaches 40,000 euros (or more);
- Voluntary - possible until a turnover of 40,000 euros is reached.
The VAT taxation period, as in most countries, is a calendar month. The deadline for filing and paying value added tax is the 20th day of the month following the reporting month.
Withholding tax
Withheld from interest, royalties and dividends paid to non-resident corporate shareholders. Also applies to interest payments, only if the interest rate exceeds the market rate and only to the extent that it exceeds the market rate.
Local taxes
Local governments have the power to impose local taxes, but only a few municipalities currently do so.
Employer contributions
Employers are required to withhold income tax on employees
- social security tax is 33% of total wages;
-
Unemployment Insurance:
- the employer pays 0.8% of the total salary;
- employee - 1.6% of total wages.
Social benefits for employees are taxed as income. Effective January 1, 2008, a 20% income tax is levied on the gross value of the social benefit plus 33% of the social security contribution.
Capital Gains Tax
Branch income tax. Branches of foreign companies are taxed according to the same principles as resident companies, i.e. taxed on distributed income.
- Individuals-residents of Estonia - 20%;
- Estonian resident companies - 0%;
- Non-residents of Estonia - 20% (income received from the sale of real estate or 10% or more of the corporate rights of a company in which more than 50% of the property is real estate in Estonia).
Transfer pricing rules in Estonia
Estonian regulation is based on the arm's length principle, which requires that prices charged between related parties be equivalent to prices that would be charged between independent parties performing the same or similar functions in the same or similar circumstances. If transfer prices applied in intercompany transactions do not comply with the arm's length principle, any hidden distribution of profits is subject to corporate income tax (20/80 of the net amount of distribution of profits). Estonian transfer pricing regulation is largely in line with OECD principles, however there are some specifics that should be taken into account (eg preference for local peers). In addition, due to the nature of the Estonian corporate tax system, which taxes only distributed profits, transfer pricing adjustments do not increase a taxpayer's taxable income and are not considered non-deductible for corporate income tax purposes.
Thus, a transfer pricing adjustment calculated for a loss-making company results in a corporate income tax deduction. The Estonian transfer pricing regulation contains recommendations regarding the comparability of transactions in terms of functional analysis and contractual terms of the transaction, as well as economic circumstances and business strategies. There are also guidelines for intellectual property, intra-group services and cost-reimbursement agreements. CFC (Controlled Foreign Companies) rules and thin capitalization rules do not apply in Estonia at the moment.
Rules to combat the use of low-tax schemes in Estonia
In Estonia, there are certain rules to combat the use of low-tax schemes for certain transactions with companies in low-tax jurisdictions that treat them as intended distribution of profits. There is a general anti-avoidance rule that allows the tax authorities to ignore the legal form of a transaction and reclassify it for tax purposes according to its “real” economic substance if there is reason to believe that the transaction was made for the purpose of tax evasion. There is also a special anti-avoidance rule under which the dividend exemption does not apply to arrangements or series of agreements that are not genuine because the main purpose or one of the main purposes is to obtain a tax advantage. The exemption applies to the extent that they are put in place for good commercial reasons that reflect the necessary and appropriate economic substance of such business activity.
Taxation on payments to non-residents
- Dividends - 0%;
- Royalty - 10%;
- Interest - 20% (on the difference between paid and market rates - only for transactions between related parties);
- For services from companies from low-tax jurisdictions - 20%.
Income tax
From January 1, 2018, a reduced tax rate on paid dividends (starting from the 3rd year of regular payments) is in effect and is equal to 14%.
Reporting is submitted to the following state bodies:
- Estonian tax department, if the Estonian company has a VAT number or employees who receive a salary. Reports are submitted monthly: by the 10th for income and social taxes and by the 20th for turnover tax. If an Estonian company has a turnover within the EU, a report on the turnover of goods within the EU is submitted monthly by the 20th;
- Estonian commercial register. Every year from January 1 to June 30, an Estonian company must submit in the prescribed form a financial report on its activities for the previous financial year (usually from 01.01 to 31.12);
- Department of Statistics (selection). Not all Estonian enterprises report on a quarterly basis, but those selected by the Department of Statistics on the basis of its criteria;
- Central Bank of Estonia (selectively and extremely rarely). Not all Estonian companies report quarterly, but those selected by the Central Bank on the basis of its criteria, if the company has foreign economic activity.
