The Estonian taxation system is one of the most profitable in the world. It includes state and local taxes. A tax is a financial obligation that the law imposes on a taxpayer and is enforceable in the manner, amount and duration prescribed by law. The taxpayer is obliged to pay only the state and local taxes prescribed by law.
The Estonian tax system attracts foreign entrepreneurs, inter alia, by a tax rate on retained earnings equal to 0 per cent. However, as in everything, it is necessary to understand the specifics of the application as well as to have information about possible nuances.
The general rule is that the undistributed and reinvested profits of a company in Estonia are not taxable. In other words, no profit tax is paid when a company decides not to reinvest the profits rather than pay them as dividends.
If the Tax and Customs Department proves that any of the company’s transactions were conducted at prices far from the market (non-market pricing), the entrepreneur may have to pay a tax on the amount of lost profits or over-expenditures.
Rates
- Income tax for a private person on retention rate — 20%.
- The income tax rate of a legal entity applied to dividends of profits is 20/80. The income tax rate of a legal entity, which is applied to a regularly distributed profit dividend, is 14/86, and income tax is withheld at a rate of 7 per cent in addition to dividends paid to an individual.
- The amount of income tax-free depends on the income received (up to EUR 500 per month and up to EUR 6,000 per year).
- The social tax rate is 33%. The monthly rate on which the minimum social tax obligation is based is 584 euros; respectively, the minimum social tax duty is 192.72 euros per month.
- Social tax is levied to obtain the income necessary for State pension and health insurance, from payments made in the context of an employment or service relationship, from payments made in favour of a member of the management or control body of a legal entity, Payments made under a contract of obligations concluded for the provision of services to an individual, as well as special benefits and income tax paid from that place. In such cases, the payer of the social tax is the person who makes the payment, and the tax period is the calendar month.
- Unemployment insurance rates: 1.6 per cent for the worker and 0.8 per cent for the employer.
- The compulsory cumulative pension payment rate is 2 per cent.
- In calculating the December 2020 payroll and other payments and calculating the taxes (payments) withheld, it should be borne in mind that taxes are calculated on a cash basis.
LKS Consult OÜ provides legal advice on taxation and accounting services. Please contact us and we will be glad to help.