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Taxes in Estonia

Updated on Friday 13th November 2020

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One of main aspects to consider when moving to another country to work or start a business is taxation. From this point of view, Estonia attracts many investors and workers who can benefit from various tax incentives and deductions offered by the authorities.
 
Below, our company formation specialists in Estonia offer a complete picture of this country’s taxation system. If you need help in understanding how taxes are levied in Estonia or have any question about the legislation here, you can ask for the support of our agents.
 

Direct and indirect taxes in Estonia

 
The taxation system of Estonia is made of direct and indirect taxes which are further divided into:
 
  1. the personal income tax which is imposed to natural persons generating money from various sources;
  2. the corporate tax which is imposed on the profits of companies based on their residency;
  3. labor taxes which are imposed on both employers and employees in Estonia;
  4. the value added tax which is the most important indirect tax as it is a large contributor to the economy;
  5. withholding taxes which is are imposed on various income sources and which can benefit from tax deductions or reductions;
  6. other taxes which comprise municipal levies, real estate taxes and land taxes.
 
It is important to note that Estonia is among the few worldwide countries that use a electronic tax system which eases the filing of tax forms with the local authorities.
 
If you want to open a company in Estonia and have any question about the taxes it will be subject to, you can ask our local consultants for information.
 

How to determine the taxes to pay in Estonia

 
Just like in other European countries, the taxation system in Estonia relies on the fiscal domicile of a person or company in order to determine how these will be taxed. The fiscal domicile is directly connected to the residency of natural persons and to companies having a management place or main headquarters in Estonia in order to be taxed on their worldwide income.
 
There are also special regulations on the taxation of foreigners (persons and companies) with activities in Estonia, the main aspect to consider being if any bilateral treaty is in place between Estonia and their countries of residence. In their case, the income tax will be levied on the profits or other income generated in Estonia.
 
Bases on their residence, both Estonian residents and non-residents can benefit from various tax incentives. This is also the case of companies with operations here.
 
If you need information on how taxation occurs in Estonia, our specialists in company formation can assist you. You can also rely on us for tax and VAT registration upon the establishment of a company in Estonia.
 

Tax residency in Estonia

Estonia is the only country in Europe to enable the concept of e-residency, however, when it comes to taxation, there is another principle that applies. This occurs because when it comes to taxes, a person will pay the income levy in the country of origin even if he or she is an e-resident of Estonia.
 
In order to become an Estonian tax resident, an individual must live in this country at least 183 days in a calendar year. As an ordinary resident, a person will pay the income tax on worldwide earnings in Estonia based on the tax returns filed with the local authorities.
 
When it comes to companies, tax residency is easier to establish, as any business that has a legal seat or management place in Estonia is considered a domestic business, and thus imposed with the corporate tax on its worldwide profits.
 
In order to avoid situations in which foreign citizens and companies generating income in Estonia are taxed both here and in their countries of origin, Estonia has signed numerous double taxation agreements which contain specific provisions on how the avoidance of similar taxes being applied twice.
 
If you need more information on how to become a tax resident in Estonia and obtain the benefits attached to this status, you can rely on our local agents. We can also help foreign citizens interested in obtaining e-residency in this country.
 
We invite you to read about how taxes are paid in Estonia from the infographic below:
 

Taxes in Estonia

 

Corporate tax in Estonia
 

The tax system in Estonia does not require the payment of a corporate tax for undistributed profits, a characteristic quite unique to Estonia. The exempted undistributed profit covers both active and passive types of income, as well as gains from sales. This tax regime is available for both Estonian companies and foreign companies registered in Estonia.
 
The corporate tax in Estonia is levied at a rate of 20%, however, in 2019 a few modifications brought to the taxation system provide for a reduced rate of only 14% if a company’s taxable profit in a calendar year is lower or equal to the average taxable profits in the previous 3 years. For 2020, there is a transition period for this lower rate to be implemented. For 2019, the reduced rate is levied on 1/3 of the taxable profit for 2018, while in 2020, the reduced rate will be applied to 1/3 of the taxable profits for 2018 and 2019.
 
When it comes to the profits falling under the corporate tax in Estonia, the following are subject to levies:
 
  • - share buy-backs;
  • - proceeds resulted from liquidation;
  • - capital reductions;
  • - distribution of profits.
 
Undistributed profits of companies are tax-free in Estonia.
 
If you have questions about the taxation of companies in Estonia, our specialists can help you. We also offer various accounting services to local and foreign investors.
 
When it comes to foreign companies operating through permanent establishments in Estonia, among which branch offices, these will be taxed on the profits earned here. Even so, these can benefit from special tax rules in accordance with the provisions of double tax treaties (where these exist). At the moment, Estonia has more than 50 double tax agreements in place.
 
For more details about the taxes in Estonia, our company formation agents can help you.
 
 

Taxable income in Estonia
 

Estonian Tax Authorities levy a corporate income tax only on profits that are distributed as capital reductions, dividends, share buy-backs, liquidation incomes or profit distributions. This tax is regarded as a corporate income tax in Estonia, and not a withholding tax and therefore it cannot be subject to double tax treaties. The distributed profits are subject to a 21% tax rate.
 

The value added tax in Estonia

 
One of the most important taxes in Estonia is the value added tax (VAT). It is an indirect tax which is collected by companies and other economic operators after being imposed on the consumer. In order to pay the VAT, a company must first register with the Estonian Customs Board, however, registration becomes mandatory once a business makes an annual turnover of 40,000 euros.
 
Even if VAT registration is not mandatory from the first operations of a company, for those selling goods and services in Europe, voluntary registration is recommended once the business is incorporated.
 
The standard rate of the VAT is 20%, however, reduced rates are available for certain categories of goods and services.
 
One of the important aspects to consider about the Estonian VAT is that companies selling goods and services must issued invoices that must adhere to specific rules when it comes to the imposition of this tax.
 
When dealing with VAT invoices, it is best to request the services of specialists. We offer tailored accounting services and assistance in various accounting matters.

Other types of taxes in Estonia

 

Dividend tax in Estonia

Dividends are not subject to a tax rate in Estonia.
 

Fringe benefits for employees in Estonia

Companies that employ in Estonia is liable for taxation on any fringe benefits granted to any of its employees, including directors. Only the employer has the obligation to pay taxes on the fringe benefits given to the employees. These benefits are subject to 21/79 corporate income tax and 33% social tax. Please address to our company formation specialists for more details on these types of  taxes in Estonia.
 

Foreign exchange taxes in Estonia

Gains from foreign exchange gains are tax neutral because in Estonia there are no taxes levied on undistributed corporate profits.
 

VAT in Estonia

In Estonia, the standard VAT rate is 20%, but there are also some exceptions. For example, a 9% VAT rate applies to books, newspapers, medicine and accommodation, while postal, health and insurance are exempt from VAT altogether.
 
Companies with VAT numbers can also apply for EORI registration in Estonia.

The personal income tax in Estonia
 
The personal income tax in Estonia applies to residents on salaries, wages, bonuses, business incomes, interests, royalties, rents, capital gains, pensions. Residents are exempt from paying the income tax on dividends for Estonian or foreign companies when profits have already been taxed.
 
Non-residents will only pay the income tax if the money is earned on Estonian territory and it includes employment contracts or business conducted in Estonia, royalties, leasing or vending of properties in Estonia, pensions.

Social tax in Estonia
 
The social tax in Estonia is 33 % for employers and it is divided into 20 % for social security and 13 % for health insurance. Employers will pay this amount on all payments made to employees except for those exempt by law. Fringe benefits and the income tax are included too. Only employers and persons engaged in business have to pay social tax.
 
Salaries are subject to unemployment insurance premiums of 2,8%  of the employee gross salary and 1,4% paid by employers of monthly gross salaries and the funded pension payment of 2% of the gross salary of a resident employee.
 
Local taxes in Estonia
 
There are some local taxes imposed by the municipality in certain areas in accordance with their Local Taxes Act, however these cases are very rare. The few municipalities that actually impose taxes, refer to sales and advertisement taxes, road and street closure taxes, parking charges and vehicle taxes, taxes on keeping animals and entertainment taxes.
 
Real estate and land tax in Estonia
 
Land owners must pay a tax on an annual basis that is calculated based on the land value and rates between 0.1% and 2.5%, depending on the local authorities. The land taxes can be paid in three instalments, by 15 April, 15 July and 15 October. There is no tax on the value of buildings. Transfers of properties are generally subject to state and notary fees.  If you need more information about these types of taxes in Estonia, you can rely in our incorporation agents.
 
Benefits for foreign investors in Estonia
 
Even though there are no special tax benefits for foreign investors in Estonia, the tax system is rather unique and very favorable for any type of investments. The lack of corporate tax for certain profits is very attractive, together with economic stability, excellent location and well developed infrastructure. 
 

Filing tax returns in Estonia

 
The determination of the taxes that both individuals and companies must pay in Estonia is based on the tax returns these submit. If in the case of individuals, the personal income tax return is filed once a year, companies are subject to more stringent requirements. Some of them are also required to submit audited accounts.
 
Companies must meet the following filing terms:
  • - VAT returns must be filed monthly by the 20th day of the month;
  • - social and income tax returns must also be submitted on a monthly basis by the 10th of the month;
  • - an annual report must be submitted no later than 6 months after the end of the financial year.
 
Audited accounts are required in the case of limited liability companies, both private and public, meeting at least two of the following requirements:
  • - an annual turnover above 4 million euros;
  • - a balance sheet of more than 2 million euros;
  • - more than 60 employees.
 
If you want to open a company in Estonia and need guidance, you can rely on our support.
 

Tax incentives in Estonia

 

Estonia offers many tax incentives to both individuals and companies, however, each financial stimulant is based on meeting certain criteria. One of the most important incentives for companies with employees is the daily allowance which is a tax-free amount of money an employer can pay to employees for work-related trips.
 
Companies also benefit from other tax incentives, one of the most important is that there is no corporate tax on reinvested profits. This incentive is available for both domestic companies and permanent establishments of foreign businesses operating here that can benefit form a 0% income tax on all reinvested profits, while distributed ones are imposed with a tax of 20%.
 
Among the distributed profits that are subject to taxation are:
 
  • - corporate income distributed during the financial year;
  • - gifts and donations;
  • - unrelated business expenses and other payments;
  • - transfer of assets to the main office of foreign company.
 
In certain cases, tax credits are also available to both local and foreign companies. Most of them are applied under Estonia’s double tax treaties.
 

Why invest in Estonia?

 
There are many attractive business fields in the country, among which cryptocurrency and fintech. Investors who wish to invest will need to apply for the Estonia crypto license
 
Foreign investors are attracted to Estonia, the country occupying the 18th position in the 2020 World Bank Doing Business Report. From a foreign direct investments (FDIs) point of view:
 
  • - in 2018, Estonia’s net FDI inflow was 1,3 billion US dollars;
  • - the total FDI stock was 24,3 billion USD, which represented 80.3% of the country Gross Domestic Product (GDP);
  • - the financial and insurance services attracted the majority of foreign investments – 28.6% out of all sectors;
  • - Sweden was the most important FDI investor in Estonia with a percentage of 27.7.
 
For more information regarding the taxes in Estonia or other company formation issues please contact our specialists.
 
 

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