Since 2000, Estonia has a unique system of taxation of corporate profit, also known as zero corporate taxes on reinvested profit in Estonia, this representing a good reason to choose to investment in this country. This means that, in Estonia, there is no charge for the reinvested profit and only the distributed profit is subject to taxation. Moreover, the taxation procedure is shifted from the moment when the profits are collected to the moment when they are distributed to the capital beneficiary.
The taxes of profit (corporate tax) in Estonia is applied for all the distributed profit, for example dividends, gifts, donations, expenses and payments which are not related to the company distributing the profit, fringe benefits.
The corporate tax has had downward slope in recent years as the Estonian Parliament decided to cut the corporate tax rate in 2005 from 26% to 24%. In 2006 the tax rate was reduced to 23% and in 2007 the corporate tax reached to 20%.
Before 2005 when the taxes on reinvested profit in Estonia turned to zero, there existed depreciation allowances in amount of 8% for buildings and 40% for equipment, but, as long as in Estonia there are no taxes applied for profits reinvested, there is no need for depreciation allowances.
The first effect after the introduction of the zero taxation was the decreasing incomes in the consolidated budget, at half value from the previous year. However, this situation returned to a normal status and the revenues from the corporate tax recovered within few years. Moreover, the revenues from the tax on profits reached higher levels in later years, comparative to the incomes received before the issuance of law concerning the taxes on reinvested profit in Estonia.
Thus, this law on reinvested profit in Estonia had only a temporary negative effect against the state revenues and a beneficial long-term effect and dynamic effect due to the support offered by the government. This measures' effect can be seen in the increasing of investments, production and taxable income, reaching the conclusion that lower taxes contribute to economic growth while increasing budgetary revenues of the state.