Advantage of Taxation in Estonia

taxation-estonia

Taxation in Estonia is growth-friendly and allows foreign companies to optimise tax costs. Estonian tax system provides for the payment of income tax only in the case of distribution that allows foreign companies to use an Estonian company for reinvestment.

There are many statutory preferential business opportunities in Estonia. Here is one of them, which is unique in its financial and legal nature in comparison with other EU countries. According to the Estonian legislation, at the time of the company establishment there is no need to contribute its share capital (from 2,500 EUR). The articles of incorporation determine the period for the authorised capital to be contributed, which can be set from a year up to a date of payment of dividends. It should be taken into account that while the share capital is not contributed, the owner (founder) is personally liable with their unauthorised funds in the share capital.

The main taxes for companies in Estonia are available here.

Taxation in Estonia

In case of establishment of an Estonian company in another country, the taxation will be subject to the law of that respective country. If the principal activity of an Estonian company takes place in another country, a company becomes a tax resident of that respective country.

Corporate income
taxes

Income tax — 0%
there is no income tax in Estonia.

Value added tax (VAT) — 20%
is applicable if a company is taxable, i.e. a VAT payer.

Tax on dividends — 25%
dividends can be paid from the net profit.

Personal income taxes

(for Estonian residents only)

Unemployment tax — 1.6% for the employee and 0.8% for the employer.

Social tax — 33%
only applicable to Estonian residents

Income tax on natural persons — 20%
is applied if a fixed salary is being paid.

Payroll taxes

(for non-residents)

If an employee is a non-resident of Estonia, the income tax is withheld at a rate of 20%

A Board Member of an Estonian company has the right not to pay themself a salary and, as a result, there is no need to pay payroll taxes from it.

More information available at e-MTA.

Tax and accounting consultation:

Foreign participation and foreign
members of the Management Board

In Estonia, when establishing company, the non-residents are provided with all necessary services of the financial and public sectors both in Estonian and English languages. So far, Estonia has entered into the Convention for the Avoidance of Double Taxation with 59 countries. The standard VAT rate (value added tax) is 20% of the cost of goods or services, while internal transactions within the EU countries are exempt from VAT. This, and the fact that a member of the Board of an Estonian company is spared from paying the salary to one’s self makes for a growing interest in Estonia as the starting point for the arrangement of international business and is increasing year by year.

Estonian tax system ensures a favourable environment for growing business due to the following reasons:

  • Good reputation
  • Geographical location
  • User-friendly e-service system (in both the banking and public sectors)
  • Consulting in English and Russian
  • International double taxation avoidance agreements entered with 59 countries
  • No currency control and no restrictions on international bank payments

Company in Estonia OÜ will help you to register your business in Estonia.

FREQUENTLY ASKED QUESTIONS

  • What does the “resident of Estonia” mean?
    An individual is a resident if one of the following conditions is met:
    • A natural person is registered at the place of residence in Estonia.
    • An individual who has stayed in Estonia for at least 183 days within 12 consecutive calendar months.
    • Estonian diplomats currently in the service are also residents of Estonia.
    Tax requirements in Estonia apply depending on the residency status. The corporate tax status is determined by where the turnover is generated, where the profits are distributed, and in which country the employee is registered as a taxable resident.
  • Does an e-resident have to pay taxes in Estonia?
    Not necessarily. e-Residency in Estonia does not imply automatic tax residency and only gives the opportunity to use electronic services offered by the Estonian state, including e-services for establishing and running an Estonian business. If your company’s turnover is less than 40,000 EUR per calendar year (including outside Estonia), the VAT is not calculated.
  • How are dividends taxed in Estonia?
    The corporate income tax rate in 2020 is 20/80. Dividends paid on a regular basis are subject to the lower tax rate of 14/86. When paying dividends to an individual with a reduced tax rate, an additional income tax of 7% is withheld.
    A resident company is obliged to apply a reduced tax rate of 14/86 (16%):
    • In 2019 – by one third of the profit distributed in 2018, from which the resident company paid income tax;
    • In 2020 – by one third of the profits distributed in 2018 and 2019, from which the resident company paid income tax.
  • What is double taxation, and can it be avoided?
    Double taxation means paying the same taxes in the country of economic activity. Double taxation can be avoided if the country in which your company is incorporated, as well as where you reside as an individual, has signed an agreement on the avoidance of double taxation.
    The list of countries with which Estonia has entered into a double taxation treaty is available here.
  • What is the advantage of taxation for an Estonian company?
    Taxation of Estonian companies is the most beneficial in the European Union. The main advantage is a 0% tax on retained profit of the company and a possibility of not having employees that need to be paid a salary every month – a Member of the company’s Board can work for dividends. The absence of tax on retained earnings is especially beneficial for those entrepreneurs who invest all their profits in the development of an Estonian company.
  • What is payroll taxation in Estonia?
    If you are the owner and the only employee of your own company, then you have the right to choose which salary to assign yourself: the employee’s salary, the director’s remuneration, or both. A Member of the Board of an Estonian company has the right not to pay themself a salary and, as a result, there is no need to pay payroll taxes from it.
    An Estonian company pays payroll tax only if the employee actually works in Estonia. If the employee is not a tax resident of Estonia and does not work in Estonia, but the company still pays their salary, then payroll taxes must be paid in the country where the employee is a taxable person.
    The tax rates for resident-individuals in Estonia are: 20% income tax, 33% social tax, and 1.6% unemployment tax.
    The taxation of a Board Member’s renumeration is slightly different from that of an employee’s salary. If the Board Member is a tax resident of Estonia, then all taxes will be paid in Estonia, however, if the Board Member is a foreigner who does not work and does not live in Estonia, then 20% of income tax will have to be paid in Estonia. Social tax is paid in the country where the Board Member wishes to receive social benefits.
    In the case of a digital nomad, payroll tax is paid in the country of tax residence.
  • What is personal income tax?
    Estonian residents are required to pay income tax on their personal income worldwide. Personal income tax is withheld from the country’s population from the total wages of employees on a monthly basis and is paid directly by the employer.
    Taxable income does not include dividends paid by Estonian or foreign companies if the related income is already taxed.
    Non-residents of Estonia undertake to pay income tax only on income received from Estonian sources.
  • What is the payroll tax for a non-resident Board Member?
    If a Member of the Board of an Estonian company is a non-resident, then 20% of income tax is paid from their salary.
  • What is considered taxable income in Estonia?
    Taxable income in Estonia is:
    • income from work under an employment or contractual agreement in Estonia,
    • income from a business carried out in Estonia,
    • interest income received from Estonia,
    • income from the rental of property located in Estonia,
    • profit from the sale of assets located in Estonia,
    • remuneration of Board Members paid by Estonian companies,
    • government pensions and scholarships.
  • Is there a labor tax in Estonia?
    Yes, it is called social tax and is 33% (20% of social security and 13% of health insurance). In addition to social tax, the employer will be required to withhold and pay unemployment tax of 1.6% of the employee’s gross income.
  • Do I have to pay taxes for foreign employees outside Estonia?
    No. If the company has employees who are not tax residents of Estonia and work outside Estonia, the salary payments to these foreign employees are not taxed in Estonia and we do not file tax returns for these employees. Foreign employees must declare their income on behalf of an Estonian company in the country in which they are taxable.
  • How can the permanent establishment (place of business) affect company’s tax residency?
    If the permanent establishment takes place in a country other than the country of registration, place of management, and business activity of the company, then it is important to understand that the country of company’s taxation may also change. When doing business on a permanent basis in another country (for example, having warehouses, selling goods, providing services), there is a risk of changing the permanent establishment in Estonia to the country where the company actually operates. In this case, taxation will be carried out in accordance with the tax regulations of the country where the business is located, not Estonia.
    The inspection authorities of the foreign country shall notify of the change of tax residence resulting in tax liabilities. In this case, the general Estonian tax rules no longer apply to your company. So, at the end of the financial year, the payment of company taxes will take place in accordance with the laws of a foreign country.
    Company in Estonia OÜ strongly recommends an international tax advice aimed at minimising the risk of unexpected tax liabilities for your company.
  • Residents of which countries can use the e-services of the Estonian Tax and Customs Board?
    Logging into the self-service system of the Estonian Tax and Customs Board and using electronic services will be allowed to holders of the electronic ID of one of the following EU Member States:
    • Spain (DNIe)
    • Croatia (Personal Identity Card eOI)
    • Italy (Carta di identityità elettronica)
    • Luxembourg (Luxembourg eID Card)
    • Belgium (Belgian Citizen eCard, Foreigner eCard)
    • Germany (national identity card, electronic residence permit)
    If the above authentication methods do not suit you, we recommend applying for an e-Residency in Estonia. The Estonian e-resident Digi-ID card enables you to digitally sign documents, to authenticate and enter all self-service state portals.
  • What to do if the estimated turnover in the near future exceeds 40,000 EUR?
    The company can apply in advance for the registration of VAT in Estonia before the designated threshold of 40,000 EUR is reached.
  • Is it possible to do business in Estonia without income tax?
    Yes, since there is no income tax on retained and reinvested profits in Estonia.
    Distributed income tax is 14-20%.

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