Taxation in Estonia

In terms of economic freedom, Estonia is ranked as one of the best in the world. In the 2016 Index of Economic Freedom (prepared by the Heritage Foundation) Estonia is placed 9th out of 178 countries. The Ease of Doing Business index published by the World Bank (2017) puts Estonia in 12th position. According to Transparency International (the Corruption Perception Index 2016), Estonia is the least corrupt country in Central and Eastern Europe.

In 1994, Estonia became the first country in Europe to introduce a so-called “flat tax”, replacing the three-tiered tax rates on personal income, and another on corporate profits, with one uniform rate of 26%.

After the year 2000 it was decided to abandon the taxion of profit unless it was distributed to shareholders as dividends. This gave companies an incentive to retain their earnings and reinvest them into business innovation. As of 2017, the tax rate on dividends is 20%.

Tax system

Taxes can be grouped into two main categories: state and local taxes. State taxes include income tax, social tax, land tax, gambling tax, value-added tax (VAT), customs duty, excise duties and heavy goods vehicle tax. Local taxes may be established by local government – for instance, on the use of infrastructure or other resources in a certain region.

Corporate tax

Businesses registered in Estonia are by default considered to be a tax resident there. The tax burden in Estonia is not the heaviest, but the country is not a “tax haven”, as it is often mistakenly described. The tax code is generally straight forward, with a 20% flat tax on most items.

Estonian tax rates

  • Income tax (payable by a private individual): 20%
  • Corporate tax on distributed profits: 20%
  • VAT: 20%
  • Social tax (payable by an employer): 33%

0% tax on undistributed profit

Estonia’s tax system is unique and especially attractive to growing businesses that reinvest profits into company growth.

The 20% corporate tax is only paid on distributed profits.

Therefore as long as profits are reinvested rather than being distributed to shareholders through dividends, no corporate tax is paid.

If the company decides to distribute dividends, then the corporate tax of 20% becomes payable and based on the amount of distributed dividends.

The Estonian tax system is highly attractive particularly to startup firms such as fintech, IT development and many others. Startup firms can attract investments and finance expansion of their subsidiaries in other EU countries without a corporate tax burden.

If the receipient of the dividends is a resident of Estonia (for tax purposes), then their personal income tax of 20% becomes payable from the received dividends.

Social tax

Employers registered in Estonia (including the permanent establishments of foreign entities) must pay social tax on all payments made to employees, except those specifically exempted by law. In the case of an individual engaged in business and registered as such with the Tax Authorities, social tax liability lies with the individual. Fringe benefits and the resulting income tax are also included in the taxable base. Currently only employers and individuals engaged in business are liable to make social tax contributions. Employees are not required to pay these.

The rate of social tax is 33% (20% for social security and 13% for health insurance) of the employee’s gross earnings.

VAT

VAT is charged on supplies of goods and services in the course of business activities as well as the self-supply of goods and services.

The revenue threshold for obligatory registration as a taxable person is EUR 16,000. The threshold for a taxable person with limited liability in the case of acquisition of goods is EUR 10,000. There is no threshold in the case of acquisition of services.

The taxable period is one calendar month and VAT returns must be submitted to the tax authority by the 20th day of the month following the taxable period.

A taxable person is an individual or entity engaged in business and registered as a taxable person. A taxable person or entity must add the 20% VAT rate to the taxable value of the goods transferred or rendered services. They must also pay VAT and keep records in accordance with statutory requirements.

The standard rate of VAT is 20%; the reduced rate is 9% and even 0% in some cases.

Below is a brief overview Estonian taxation for e-residents and examples of different scenarios

https://e-resident.gov.ee/faqs/taxation/#withholding-taxes

We always strongly recommend that you seek tax planning advice from a professional accountant in Estonia as well in your home country.

CategoryEstonia, Taxes