Lowest Income Tax in Europe
The Estonian legislation offers its residents a very interesting tax system. Cooperation with Estonian companies can be advantageous in many areas of activity, for example in the delivery of goods from/to EU countries, when registering as a holding company. Look in more detail at Estonian taxation and the possibilities of companies from this state.
Income tax is divided into income tax on natural persons and income tax on enterprises (income tax on a legal person is also paid for permanent employment of non-residents and all employers providing unique benefits). In addition to paying the income tax on the enterprise, you are also obliged to withhold the employee’s payments and pay the income tax to the Tax and Customs Department as an employer.
- The income tax rate for private person earnings— 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).
If payment is made in one month:
- up to 1,200 euros, then tax-free income is 500 euros
- between 1,200 euros and 2,100 euros, then tax-free income is applied in the amount calculated according to the formula 500 – 500 – 900 (1,200)
- over 2100 euros, then the tax-free income is zero.
If you conduct business as an individual entrepreneur, you must pay income tax on income from business activities, from which business expenses are deducted. The income tax rate for individual entrepreneurs is 20 per cent. The tax period is a calendar year; as an individual entrepreneur, you must declare income once a year. The tax return must be filed by 30 April of the year following the tax period.
If you have received taxable income for the previous period, you must pay the advance income tax by 15 September and 15 December. The advance payment is 25 per cent of the income tax calculated on business income in the previous tax period.
Personal income is also taxed. The person making the payments must withhold and pay income tax on the employees’ gross salary, additional fees, bonuses, holidays, and other benefits that are considered to be waged.
The personal income tax rate for 2021 is 20 per cent. A single, non-taxable income of €6,000 per year or €500 per month is applied to all earnings. The additional non-taxable income from pensions and compensation for industrial accidents is lost.
If the employee has submitted to the person making the payment (employer) a declaration of the application of the tax-exempt income, you may deduct the permissible tax-free income for the calendar month before calculating the withholding income tax.
In addition to the income tax, it is necessary to deduct from the income of the employee the payments for compulsory cumulative pension and payments for unemployment insurance. It is also necessary to pay a social tax on the gross salary of the employee.
Any commercial organization that is a resident of Estonia is obliged to pay a tax on profits in the form of dividends or other contributions, regardless of the form of payment. No tax is levied on profits distributed in the form of a stock issue.
Dividend profits may be exempt from income tax if the following conditions are met:
- Dividends were obtained from a commercial partnership that falls under the tax system of another country where it has already paid its income tax (the exception is for low-tax countries) and less than 10% of the shares of this commercial partnership are owned by a resident of Estonia.
- Dividends are accrued on the basis of profits which belong to the resident’s place of permanent activity if he is located in one of the treaty countries or Switzerland.
- Dividends are obtained from a company outside the scope of p. 1 but also under the jurisdiction of another State. At the time the dividends are received, the Estonian resident must own at least 10% of the shares or votes of the company, and income tax has already been deducted from the dividends.
- Dividends are paid from profits that belong to a place of active business partnership in a foreign country, and these profits are already taxed on turnover.