Category: Accountancy

Lowest corporate tax in Europe

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Estonia is well known for the friendly attitude of officials towards business and developed digital infrastructure. Almost all business processes can be controlled online – register a company, file reports, ask questions to public services, etc. It also attracts moderate prices for business support.

Taxes in Estonia are administered by the Estonian Board of Taxes and Customs. A large proportion of tax returns are available via the Internet.[/vc_column_text][vc_column_text css=”%7B%22default%22%3A%7B%22margin-top%22%3A%2210px%22%7D%7D”]Main tax advantages:

• There is no tax on retained earnings
• Profit tax is paid only when a company decides to distribute dividends to its owners Corporate tax rate on allocated profits is 20% (14% may be applied in some cases since 2020)
• The VAT rate for certain goods and services is 0% and 9%
• Standard VAT rate is 20%
• Double taxation treaties with 60 countries worldwide, including Belarus and Ukraine

Corporate tax

In Estonia, income tax is 0%, which means there is no need to pay corporate tax on income earned. Instead, corporate taxes are paid distributing company profits — for example, when paying out dividends to shareholders — or other taxable payments.

Estonia’s corporate income tax is paid only after dividends (interest, royalties, etc.) have been distributed. That is, all retained profits of the company are exempt from tax. The tax is deferred until the profit is considered as distributed. After distribution, profits are taxed at 20% of the net amount.

It is worth noting that since 2018 the income tax for enterprises in Estonia is reduced to 14%. This applies to companies that regularly distribute profits. Payment of dividends in Estonia in an amount that is less than or equal to the number of taxable dividends paid during the previous three years will be taxed at a rate of 14%. If the average is exceeded, the tax will be 20%. If the beneficiary of the dividend is a natural resident or non-resident, the rate is 7 per cent.

Some domestic and foreign taxes may be applied to corporate income tax under domestic laws or double taxation agreements. Some distributions are exempt from such a tax:

• Dividends obtained from Estonian, EU, EEA or Swiss tax resident companies in which the Estonian company owns at least 10% of the shares;
• Profits obtained through a permanent establishment in the EU, the EEA or Switzerland; Profits earned through foreign missions in all other countries, provided that such profits are taxed in the country of the mission;
• Dividends obtained from all other foreign companies in which the Estonian company owns at least 10 per cent of the shares, provided that the main profits were subject to foreign tax or the foreign income tax was withheld from the dividends received; Liquidation proceedings, repurchase of shares or reduction of capital, which are taxable by the distributor of such proceeds;
• Dividends paid by Estonian companies to non-resident legal entities (including companies with «low tax jurisdictions»).

LKS Consult OÜ  provides accounting services and legal advice on taxation. Please contact us and present your enquiry.[/vc_column_text][/vc_column][/vc_row]

Tax advisor in Estonia

[vc_row][vc_column][vc_column_text]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.

Taxes in Estonia are administered by the Estonian Board of Taxes and Customs. A large proportion of tax returns are available via the Internet.

Basic rates

• Income tax 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) accrued/withheld, it should be borne in mind that taxes are calculated on a cash basis.

While working with us, our clients quite often need some professional advice and help. For these purposes, LKS Consult OÜ has developed the tax advisor service.

Advice is provided in order to give an overview of taxation in case of international transactions arising in the course of your Estonian company’s activity. The exact scope and cost of advice depends on your query.

International companies shall be aware of taxation and laws in the countries of activity. We will be happy to advise you on issues related to taxation, tax agreements, and potential risks that may arise during your company’s operation.

Issues that may be addressed when getting advice:

• Taxation of an Estonian company
• Tax agreements between Estonia and other countries
• Analysis of the identification of potential operational risks
• Taxation of dividends and other income
• Cross-border VAT rules
• Taxes arising in different countries

Advice procedure:

• Send us your questions so that we can determine the scope and cost of advice.
• Get a quote from us.
• Select the time, language and format of consulting (by phone, via Skype, at our office)

Apart from accounting services and tax advisor services, LKS Consult OÜ  offers accounting services for Estonian companies that already have a VAT number, as well as accounting services for companies without a VAT number. We have successful experience in various business segments and are currently developing over 900+ companies in Estonia and abroad. Therefore, our company additionally offers clients assistance in registering a VAT number in Estonia, assistance in obtaining an EORI number, and drawing up an annual report.[/vc_column_text][/vc_column][/vc_row]

Flat/apartment tax in Estonia

[vc_row][vc_column][vc_column_text]The income tax does not apply to the income derived from the alienation of a dwelling which, prior to the alienation, the taxpayer used as his place of residence (article 15, part 5, paragraph 1, of the Income Tax Act (Act on Income Tax)). For the application of tax exemption, the law provides an additional condition: tax exemption applies to only one transaction for two years (article 15, part 6, of the Act).

In taxation, the tax administrator applies equal taxation if the place of residence is alienated and:

• In the serf book, both the dwelling and the storage and parking space related to the dwelling are listed as one apartment property,
• In the serf book, both residential premises and a storeroom (non-residential premises) and a parking space (non-residential premises) are included as independent apartment property.

If the storeroom and parking space registered as independent housing units are disposed of together with the living space in one sale, then the tax exemption on the sale of residence is applied to the entire transaction, subject to a limitation of one transaction for two years.

If non-residential premises (storage space or parking space) are sold separately (another transaction) from the dwelling (before or after the alienation of the dwelling) or if the storage space or parking space is not used as part of the dwelling, a is used for commercial purposes (for example, for hire or use in business), in which case the sale is taxable.

 Share of a perfect flat

If a portion of the ideal share relating to the real part is expropriated (for example, to increase the real part of the apartment property or to create a new apartment property), then the transfer for payment is taxed, i.e. the ideal share of the land, Parts of a building or equipment shall not be treated separately as taxpayer living space.

These parts of the apartment property are not part of the real part of the apartment property (part of the apartment building of the taxpayer), but are the ideal parts of the shared ownership of the apartment house connected to the real part.

Guest apartment

A guest apartment is a hotel enterprise in which the hotel unit is an apartment leased in full (article 18, part 8, of the Tourism Act). The guest apartment is used for commercial purposes, therefore does not apply to the guest apartment tax exemption.

The Law of Obligations distinguishes between residential and commercial premises and essentially excludes the use of residential premises as commercial premises and vice versa. In the sense of the Law on Obligations, a dwelling is a dwelling house or apartment used for permanent residence. Commercial premises are premises used in economic or professional activities.

Unlike an ordinary apartment intended for residential use, the purpose of using the guest apartment is commercial. If the taxpayer did use the guesthouse as his or her place of residence prior to the alienation, and this is confirmed, then in exceptional cases tax exemption may be justified as in the case of the sale of a conventional flat, used for living.

Residential building

In this case, the income derived from the disposition of the property (the difference between the sale price and the acquisition cost) is taxed. Costs directly related to the sale (services of a notary, a broker, government fees, expenses related to the valuation of real estate, etc.) can be deducted from the profit from the sale of real estate. The actual amounts paid for the acquisition, replenishment and improvement of a property are recorded as the acquisition cost. Costs incurred by another person or expenses incurred for another person are not included as acquisition value. The purchase of the property is supported by a serf book. The property received as a gift has no acquisition value.

LKS Consult OÜ provides accounting services and legal advice on taxation. Please contact us regarding your taxation issue.[/vc_column_text][/vc_column][/vc_row]

Lowest Income Tax in Europe

[vc_row][vc_column][vc_column_text]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.

Rates

• 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.

Individual persons

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.

Employees

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.

Exceptions

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.

LKS Consult OÜ  provides accounting services and legal advice on taxation. Please contact us and present your enquiry.[/vc_column_text][/vc_column][/vc_row]