Income Tax in Estonia

Taxes on personal income:

An individual who is a resident of Estonia is liable to tax on worldwide income, irrespective of the origin of the income. Non-residents are taxed on their Estonian-source income.

Taxable income includes both active income, such as employment and business income, as well as passive income, such as capital gains, rents and royalties, interest, dividends, certain insurance proceeds, pensions, scholarships, grants, prizes and lottery winnings, etc. This list is not exhaustive; consequently, any income derived by a resident individual not falling within the above categories is taxable, unless a tax exemption is available.

Most items of personal income are taxed on a gross basis, mainly through withholding at source, whereas business income and capital gains are taxed on a net basis subject to certain conditions.

There are no special taxation rules for expatriates.

Personal income tax rates:

Estonia has a proportional (i.e. flat) tax rate of 20%, which applies to all items of income derived by a resident taxpayer. From 2018 onwards, dividends that have been subject to the reduced rate of 14% at the level of the distributing Estonian company will have WHT of 7% levied. Certain pension payments are subject to 10% income tax.

Income determination:

In general, individual taxpayers are taxed on a cash basis. Exceptionally, the Estonian controlled foreign company (CFC) (anti-deferral) rules attribute undistributed profits of foreign ’tax haven’ companies to resident individual taxpayers if such companies are controlled by Estonian residents.

Employment income:

Employment income is taxed on a gross basis and includes salaries, fees for personal services, and directors’ fees. In general, fringe benefits are only taxable at the employer level and are not included in the gross income of an employee.

For resident individuals, foreign-source employment income is exempt from Estonian income tax if the following two conditions are met:

·      The individual is present in a foreign country for employment purposes for more than 182 days during any 12-month period.

·      The foreign-source employment income is taxable in the foreign country and this can be substantiated by written documentation, which has to indicate the amount of the related foreign income tax (even if this is zero).

Non-resident individuals are liable to Estonian income tax on Estonian-source employment income. This is deemed to arise if the location of performing personal services is in Estonia and the remuneration is paid by an Estonian employer (including non-residents acting as employers in Estonia and PEs of non-residents if the remuneration is paid out or borne by it) or if the individual has been present in Estonia for employment purposes for more than 182 days during any 12-month period. Directors’ fees paid for the work done for Estonian companies are always taxable in Estonia regardless of the residence of the payer of the fees.

Capital gains and investment income:

Capital gains from the sale or exchange of assets are generally taxed on a net basis as part of ordinary income, but capital losses can only be offset against capital gains. Certain qualifying capital gains are exempt from income tax, such as the gain from the sale of a personal residence.

Certain capital gains realised by non-residents form part of their Estonian-source income, for which they are liable for self-assessing 20% Estonian income tax and submitting a tax return to the Estonian tax authorities. Such types of income include:

·        certain capital gains (e.g. gains linked with immovable property located in Estonia)

·        profits derived from business conducted in Estonia without a registered PE, and

·        other items of income from which tax should have been withheld but was not.

Investment income is generally taxed on a gross basis as part of ordinary income. This may include, for example, certain foreign dividends, interest, and insurance proceeds. However, a tax-exempt investment account scheme is applicable for resident individuals, under which individuals can defer the moment of taxation of investment income and capital gains derived from qualified securities. Under certain conditions, individuals can reinvest such income or gains without paying any income tax.

In fear of an increase in payment of 'dividend salaries', the total corporate income tax (CIT) burden of a dividend is kept at approximately 20%. If a resident individual receives a dividend that has been taxed at 14%, then a 7% WHT rate applies. Foreign dividends are tax exempt provided that either the underlying profits out of which dividends are paid have been subject to foreign income tax or if income tax was withheld from dividends received.

If the recipient of a dividend that is taxed at 14% CIT is a non-resident individual, a 7% WHT rate will apply unless a tax treaty provides for a lower rate of WHT (5% or 0%).

Rental and royalty income:

Rents and royalties generated from the use of certain assets are generally taxed on a gross basis as part of ordinary income, unless the taxpayer elects for net basis taxation as part of business income.

For non-resident individuals, the gross amounts of rents and royalties are generally subject to WHT at source, at 20% and 10%, respectively.

Exempt income:

For resident individuals, there exist numerous items of tax-exempt income (i.e. excluded from gross income). As described above, some of the more important items of tax-exempt income include qualifying foreign employment income, qualifying foreign dividends, and certain qualifying capital gains.

Individual – Residence:

Individuals are considered residents of Estonia if they have a permanent residence in Estonia, their stay in Estonia during any 12-month period exceeds 182 days, or they are Estonian public servants who are sent abroad on assignment. An individual may be deemed to have become a tax resident from the date of one’s arrival to Estonia. For the purposes of determining the number of days, any part of a day counts as a full day.

If the tie-breaker article in an applicable double tax treaty (DTT) allocates the residence of a dual-resident individual to a foreign country (most often if the home and family of the individual remain abroad during an assignment to Estonia), then the individual will be taxed as a non-resident in Estonia regardless of the above-mentioned Estonian domestic rule.

The change of tax residence must be notified to the Tax and Customs Board.

Tax administration:

Taxable period:

The period of taxation is a calendar year.

Tax returns:

In general, resident individuals must file an individual tax return by 31 March following the year in which the income arises. Electronic filing of tax returns becomes available from 15 February. Certain items of foreign-source tax-exempt income must be reported for information purposes.

Married resident taxpayers may elect between filing their tax returns jointly or separately.

For non-residents, the tax withheld at source at domestic or treaty rates generally constitutes final tax as regards their Estonian-source income, and the non-resident is generally not obligated to submit a tax return to the Estonian tax authorities for income so taxed. However, for certain types of Estonian-source income, non-residents are liable under Estonian domestic law to self-assess Estonian tax and submit a tax return to the Estonian tax authorities by the following deadlines:

·      Capital gains realised from certain types of assets should generally be reported by 31 March of the year following realisation of the gain.

·   Capital gain from the sale or disposal of immovable property located in Estonia should be reported within one month from realising the gain.

·      Profits derived from business conducted in Estonia should generally be reported by 30 June of the following year (or within two months if business activities in Estonia are terminated).

·      Other items of Estonian-source income from which income tax was not withheld but should have been withheld should be reported by 31 March of the year following the year in which the income was received.

Payment of tax:

A resident individual will receive an income tax assessment based on one’s return as filed at least 30 days before the tax payment is due and, based on that, must pay the final amount of income tax due by 1 July of the year following the period of taxation. The resident taxpayer who reported business income, foreign income, or capital gains in the tax return must pay the final amount of income tax due by 1 October of the year following the period of taxation.

Non-residents will not receive tax assessments. In general, non-residents must pay the income tax due to the tax authorities within three months from the deadline of submitting the tax return.

Late payment interest on tax arrears is 0.06% per day.

Taxes on corporate income:

All undistributed corporate profits are tax exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.

The taxation of corporate profits is postponed until the profits are distributed as dividends or deemed to be distributed, such as in the case of transfer pricing adjustments, expenses and payments that do not have a business purpose, fringe benefits, gifts, donations, and representation expenses.

Distributed profits are generally subject to the 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.

From 2018 onwards, a lower CIT at the rate of 14% for those companies making regular profit distributions will become available. The payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years (20%) will be taxed with a rate of 14% (the tax rate on the net amount being 14/86 instead of the regular 20/80). In cases where the recipient of the 14% dividend is either a resident or non-resident individual, a 7% WHT rate will apply unless a tax treaty provides for a lower WHT rate (5% or 0%). 2018 is the first year to be taken into consideration for the purposes of determining the average dividend.

From the Estonian perspective, this tax is considered a CIT and not a WHT, so the tax rate is not affected by an applicable tax treaty. Certain distributions are exempt from such tax.

In Estonia, resident companies are taxed on profits distributed from their worldwide income, while PEs of non-residents are taxed only on profits distributed from income derived from Estonian sources. Other Estonian-source income derived by non-residents may be subject to final WHT or CIT by way of assessment.

Income determination:

Distributable profits are determined based on financial statements drawn up in accordance with Estonian Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS), and there are no adjustments to accounting profits for tax purposes (e.g. tax depreciation, tax loss carryforward or carryback).

The CIT liability associated with the distribution of dividends is accounted for as an expense at the time the dividends are declared, regardless of when the profits were generated or distributed.

Dividends paid by Estonian companies are generally subject to 20/80 CIT at the level of the distributing company. However, dividends distributed by Estonian companies are exempt from CIT if the distributions are paid out of:

·      dividends received from Estonian, EU, European Economic Area (EEA), and Swiss tax resident companies (except tax haven companies) in which the Estonian company has at least a 10% shareholding

·        profits attributable to a PE in the European Union, European Economic Area, or Switzerland

·        dividends received from all other foreign companies in which the Estonian company (except tax haven companies) has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or if foreign income tax was withheld from dividends received, or

·        profits attributable to a foreign PE in all other countries, provided that such profits have been subject to tax in the country of the PE.

In addition, stock dividends (bonus shares) distributed to stockholders are exempt from 20/80 CIT charge.

Certain domestic and foreign taxes can also be credited against the 20/80 CIT charge under domestic law or tax treaties.

From 2018 onwards, a lower CIT at the rate of 14% for those companies making regular profit distributions will become available. The payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years (20%) will be taxed with a rate of 14% (the tax rate on the net amount being 14/86 instead of the regular 20/80). 2018 is the first year that is taken into account for determining the average dividend payment. In cases where the recipient of the 14% dividend is either a resident or non-resident individual, a 7% WHT rate will apply unless a tax treaty provides for a lower WHT rate (5% or 0%).

Corporate residence:

A legal entity is considered resident in Estonia for tax purposes if it is established under Estonian law. There is no management and control test for the purpose of determining corporate residency. Most tax treaty tie-breakers for legal entities are based on competent authority procedures.

Permanent establishment (PE):

A PE (including a branch registered in the Commercial Register) of a foreign entity is deemed to be a non-resident taxpayer. Under the domestic law, which deviates from the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, a PE is defined as an enterprise through which the permanent business activities of the non-resident are conducted in Estonia. A PE is deemed to be created as a result of the business activities conducted in Estonia that are geographically linked or have movable character or as a result of the business activities of an agent that is authorised to conclude contracts in the name of the non-resident.

Tax administration:

Taxable period:

The tax period is a calendar month.

Tax returns:

The combined CIT and payroll tax return (form TSD with appendices) must be submitted to the local tax authorities by the tenth day of the month following a taxable distribution or payment. Tax returns may be filed electronically via the Internet.

Payment of tax:

CIT and payroll taxes must be remitted to the local tax authorities by the tenth day of the month following a taxable distribution or payment. No advance CIT payments are required.

Advance rulings:

The aim of the advance ruling system is to provide certainty on the tax consequences of specific transactions or combination of transactions taking place in the future. The ruling is binding on the authorities (and not on the taxpayer) if the transaction was made within the deadline and the description provided in the ruling and the underlying legislation has not been substantially changed in the meantime. Estonian legislation specifically excludes obtaining rulings when the interpretation of the legislation is objectively clear, the situation is hypothetical, or the main purpose of the planned transaction is tax avoidance. In addition, transfer pricing valuation issues are excluded from the scope of the binding ruling system.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.