Taxation of Estonian companies is the most profitable in the European Union. The main advantage is 0% on the company’s retained earnings and the possibility of not having employees who need to be paid a salary every month – a member of the company’s management Board can work for dividends. The absence of a tax on retained earnings is especially beneficial for those entrepreneurs who invest all their profits in the development of an Estonian company. Examples of taxes applicable to individuals and businesses are listed below:
- Taxes that must be withheld by the employer when paying wages:
Old-age pension saving contributions (only for residents of Estonia) – 2% of gross salary, unemployment tax on employee’s salary (only applicable for residents of Estonia) – from 0.5% to 2.8% of gross salary and income tax 20% of gross salary.
- Taxes that must be paid by the employer in connection with the payment of wages to the employee:
Mandatory unemployment insurance contribution (from 0.25% to 1.4% of gross salary) and social tax (33% of gross salary and occurs in the case of payroll and is subject to transfer by the enterprise to the Fund). These taxes are payable by the employer in addition to the payment of wages (i.e. the taxes that the employer withholds from the employee when paying wages are included in the “tax base” from which the social tax and the employer’s mandatory unemployment insurance contribution are paid).
Payroll taxes for non-residents
If a non-resident is a member of the Board of an Estonian company, only 20% of the income tax is paid on one’s salary.
Value added tax in Estonia-VAT
The standard VAT rate in Estonia is 20%, 9% (reduced rate) and 0% (exemption with the possibility of offset).
Income tax business/sales tax (profit tax)
Profit tax or corporate income tax is 0% (there is no concept of profit tax in Estonian legislation, but there is a concept of taxation in the distribution of profits, which applies only in the case of payment of dividends or wages)
Tax on dividents
The tax on dividends or tax on profit distribution is 20/80. The tax rate for paying dividends is 25%. To pay dividends, a member of the company’s management Board will need to make a profit statement for the current period.