Category: Accountancy

Lowest Tax Rates in Europe

[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.

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.[/vc_column_text][/vc_column][/vc_row]

Taxes in Estonia (2021)

[vc_row][vc_column][vc_column_text]Estonia is one of the smallest member States of the European Union, with a population of just over 1.3 million in 2021. However, in terms of average wages and the quality of life in general, Estonian citizens are ahead not only of their nearest neighbours – Latvia and Lithuania – but also of larger European countries, such as Poland and the Czech Republic. The economy of Estonia is stable and dynamic, and the real pride of the State is considered to be the sphere of information technologies.

Minimum wage

According to the Estonian Statistical Office, the minimum wage in Estonia in 2021 is EUR 584 per month (EUR 3.48 per hour). Compared to last year, the bet did not change. This indicator is regulated by the local law «On Employment Contracts», according to which in case of full-time employment in Estonia, every employee, including foreigners, is guaranteed a wage at least equal to the minimum level.

Pension rate

Pension tax rates will change from 2021 As of 1 January 2021, Stage II pension will be excluded from the calculation of annual, non-taxable income. No income tax applied A lifetime pension is not subject to income tax. A fixed-term pension is exempt from income tax if the recommended duration or longer period is chosen. Regardless of the method of payment, your pension will not be taxed if your disability is officially established.

Tax rate 10%

Pensions with a duration shorter than the recommended, lump-sum pension at retirement age, and if less than five years remain before retirement age, are subject to income tax. The tax rate in this case is 10 per cent.

20% tax rate (from 2021)

If a saving pension is withdrawn earlier than 5 years before reaching retirement age, its payment will be subject to income tax of 20 per cent.

Tax 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.

Read more here.

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

Lowest Taxes in Europe

[vc_row][vc_column][vc_column_text el_class=”padding”]When choosing the appropriate jurisdiction, it is worth considering each specific situation: the type of activity of the company, its organizational and legal form, the purpose of the owner, the desire or unwillingness to become a resident of the country and much more:

• Amount of authorized capital at company registration
• Corporate tax rate and special profit allocation conditions
• Conditions for residents and non-residents
• Protection of company assets
• Foreign exchange risks
• Taxation for natural persons

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.

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.

Tax system

The Estonian tax system consists of state and local taxes:

State taxes are income tax, social tax, land tax, heavy vehicle tax, sales tax, customs duty, gambling tax, excise tax and enterprise income tax. The Government Revenue Manager is the Tax and Customs Department, which ensures that taxes are paid into the State budget.

Local taxes include advertising tax, road and street closure tax, vehicle tax, entertainment tax and parking fees. In addition, part of the tax on personal income as well as the land tax are paid into the budget of local governments.

Simplicity

Simplicity of the tax system plays a very important role in tax collection and the confidence of taxpayers. In comparison with other European Union countries, Estonia has always been positively identified in this respect. We have mostly uniform tax rates and fewer differences. This means that tax obligations are easily understood and respected.

A simpler tax system also means lower tax collection costs. Thanks to a simple system and electronic service, Estonia needs only 37 EUR cents to collect tax revenues of 100 EUR, which is one of the best results among developed countries. All people enjoy the benefits of society, but when taxes are no longer paid, the State is under-resourced and these benefits become unavailable.

The specialists of LKS Consult OÜ will be happy to assist you with company registration and accounting services.[/vc_column_text][/vc_column][/vc_row]

Dividend Tax in Estonia

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A dividend is a payment made pursuant to a decision of the competent authority of a legal entity with a net profit or with an undistributed profit for the preceding business years, based on the share of the beneficiary in a legal person (ownership of shares or shares, participation in a full or limited partnership, or membership in a commercial cooperative or other forms of participation in accordance with the laws of the country of the place of business).

The new dividend tax system in Estonia has been in force since January 2018, but it can only be partially implemented since 2019, with the proviso that dividends were paid in 2018. Estonia now has two income tax rates – 14 per cent and 20 per cent (in practice 14/86 and 20/80) to tax dividends.

Commercial associations pay tax at 20/80 on profit distribution or dividend.

According to the Estonian legislation, a resident business association may apply a lower tax rate of 14/86:

1. 1/3 of the allocated profits in 2018 with which the resident business association paid income tax;
2. 1/3 of the allocated profits in 2018 and 2019 with which the resident business association paid income tax.

2021

Commercial association may, for the fourth year, levy a lower tax rate of 14/86 dividend payments equal to the average of taxable dividends and equity for the three preceding calendar years.

Natural person

If a person is paid a dividend at a lower tax rate, 7 per cent of the income tax should be additionally deducted. Income tax is deductible from dividends paid to an individual, both resident and non-resident.

How to declare

The resident commercial association declares in Annex 7 of Form TSD and in Form INF 1 dividend payments, both at the lower tax rate and at the normal rate.

In the e-MTA environment there is in Annex 7 of Form TSD «Calculation of the Distributed Profit for Application of a Lower Tax Rate», where the commercial association is displayed at the moment:

• In the previous year, dividends paid and equity payments (profit-sharing) from which the business association paid income tax
• Profits for which a lower tax rate is applied
• In a calendar year, distributed profits with a lower tax rate
• Profit, which can be distributed in a calendar year with a lower tax rate

The amount of the dividend – the income of the individual and the withheld income tax on dividends – is declared in form INF 1. The form INF 1 under code 13050 has the form of MDK – dividends stamped at a lower tax rate, and still the type of DK payment – dividends, covered at the usual rate. The gross amount of dividends – the income of a natural person with the form of payment «MDK» is declared in the form INF 1 under the code 13060, the rate of withheld income tax under the code 13073 and withheld income tax under the code 13074.

If an individual is paid a dividend at a lower tax rate, or if the dividend continues to be paid to an individual from the received dividend at a lower tax rate, the income tax is usually withheld at 7%, but, in the case of a non-resident natural person, the tax treaty and the residence certificate may reduce the withholding income tax rate (respectively 0 per cent or 5 per cent).

Important things to consider:

• The authorized capital must be paid
• Dividends cannot be paid until the authorized capital has been paid.  If dividends are paid from the net profit of a financial year, a report for the financial year must be submitted and approved.

LKS Consult OÜ provides accounting services and legal advice on taxation. Please contact us, and we will be glad to help.

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Corporate Tax in Estonia

[vc_row][vc_column][vc_column_text]In most countries tax system is designed so that the state budget is replenished, to a large extent, by tax revenues. In Estonia, about 80 per cent of the state’s income is taxed. The central taxes are corporate tax in Estonia, personal income tax, social tax, VAT, various excise taxes, etc.

Estonia offers one of the world’s most favourable tax systems for startups and small businesses.

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»).

Lawyers and accountants of LKS Consult OÜ can advise you on various legal issues. Our team will be pleased to advise on tax-related issues in Estonia and provide accounting services. Please do not hesitate to contact us, and it will be our pleasure to help you.

The legal department of the LKS Consult OÜ can develop a package of documents within the framework of Estonian legislation according to the needs and specifics of your business.

The contents of the documents affect how your company will be managed, how its profits will be distributed, what rights the company owners share, and how decisions will be made in the company. The rights and obligations of clients and partners of your company are clearly defined in the documents.[/vc_column_text][/vc_column][/vc_row]