Estonian taxes

The Estonian tax system consists of national taxes and local taxes collected by local governments in their jurisdiction. National taxes include income tax, social tax, land tax, gambling tax, value-added tax, duty and excise taxes and heavy goods vehicle tax. Local governments have the authority to impose local taxes, but effectively only few municipalities have introduced local taxes, in particular: sales tax, boat tax, advertisement tax, tax for closing of streets, motor vehicle tax, tax on keeping domestic animals, amusement tax, and parking fees.

Estonia does not impose any gift, inheritance or estate taxes. Various transactions may be subject to payment of state fees (stamp duties).

Principal Taxes

The system of taxation is described in the Law on Taxation. The existing state taxes are:

• income tax: 21%;
• value-added tax (VAT): 18% (20% since July1, 2009);
• social tax (social security contributions – state pension and health insurance): 33%;
• unemployment insurance tax: 0.3% employer + 0,6% employee;
• excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles, packages);
• gambling tax;
• land tax.

Income Tax

The income of Estonian resident individuals is generally subject to 21% flat income tax. Estonian residents are individuals having a permanent home in Estonia or staying in Estonia 183 days or more in a calendar year. Credit is given for taxes paid abroad. Non-residents are subject to Estonian tax on their Estonian source income. The relatively low tax rate in Estonia is however balanced by the small number of allowable deductions for resident individuals. From January 2000, Estonia introduced its first CFC legislation.

However, from 1 January 2000, resident companies and permanent establishments of the foreign entities (including branches) are subject to income tax only in respect of all distributions (both actual and deemed), including:

• dividends and other profit distributions;
• gifts, donations and representation expenses; and
• expenses and payments not related to business.

All distributions will be subject to income tax at the gross rate of 21/79 of the amount of taxable payment. The transfer of assets of the permanent establishment to its head office or to other non-residents is also treated like distribution. Dividends paid to non-residents are additionally liable to withholding tax at the general rate of 21%, unless the non-resident legal entity holds at least 15% of the share capital of the distributing Estonian company. Various withholding taxes may apply also to other payments to non-residents, if they do not have a permanent establishment in Estonia or unless the tax treaties otherwise provide.

As the tax period of corporate entities will be a month, the income tax must be returned and paid monthly by the 10th day of the following month.
Under the income tax legislation, therefore, the corporate entities are exempt from income tax on undistributed profits, regardless of whether these are reinvested or merely retained.

As there is no annual net taxation of corporate profits, the corporate entities are also not subject to tax depreciation rules.
Capital gains realised by a resident corporate entity (including non-resident permanent establishment) are not taxed until the actual or hidden distributions, which are subject to 21/79 income tax on a monthly basis. Estonia does not have any thin capitalisation rules.

Value Added Tax (please see fin.ee for updates since 1.07.2009)

The principal mechanism for collecting the VAT requires the VAT registered person to charge VAT on the goods or services supplied, to take credit for VAT paid on business expenditure and pay the net VAT over to the authorities. Input VAT is recoverable to Estonian VAT registered entities and in certain cases also to foreign legal entities that do not have a permanent establishment in Estonia.

VAT is charged at the rate of 18% (reduced rates of 0% and 5% apply to certain goods and services) unless the goods or services are outside the scope of VAT or exempt from VAT. The tax rate for exports is zero. However, the VAT treatment for the export of services is subject to the restricted list of services established by the Ministry of Finance.

The taxable period is one calendar month and value added tax returns shall be submitted to the tax authority by the twentieth day of the month following the taxable period. Taxable persons are individuals and legal entities having a taxable supply as a result of conducting business. With respect to importation, an importer is a taxable person, whether or not he is engaged in a business. Special procedures apply to the temporary importation of goods. Taxpayers with annual supplies of less than EEK 250,000 (EUR 15,975) are not required to register for VAT purposes.

Under certain conditions, temporary importation procedure may be applied with the consent of the Customs Authorities. In such a case, the import VAT is not applied to the goods imported temporarily, which must be processed and exported in due time from Estonia. The processing of such goods under written service agreement is generally subject to zero-rated VAT.

Foreign legal entities are generally not registered for VAT purposes. However, the permanent establishments of foreign entities must register in the same manner as local legal entities. Provided that the foreign country grants reciprocal rights to Estonian residents, under certain conditions Estonian VAT is refunded to non-resident legal entities, which have incurred input VAT in relation to purchasing goods or services in Estonia.

Social Tax

Employers registered in Estonia (including permanent establishments of the foreign entities) must pay social tax on all payments made to employees, except on those specifically exempted by law. In case of an individual engaged in business and registered as such with the Tax Authorities, social tax liability lies with the individual. Fringe benefits and the income tax thereof are also included in the taxable base. Currently only employers and individuals engaged in business are liable to make social tax contributions. Employees are not required to pay social tax.

The rate of social tax is 33% (20% for social security and 13% for health insurance).

Other Taxes

Land Tax is levied on the taxable value of all land (other than that, which is specifically exempt) based on an official valuation. The owners of the land are liable to land tax. The annual land tax rate varies between 0.1% and 2.5% of the assessed value of the land. The council of the local authority is authorised to establish the rate of land tax.

Excise Duties are levied on tobacco, alcoholic beverages, motor fuel, motor vehicles and packages.

Gambling Tax is imposed on amounts received from operating games of skill, totalisator, betting and lotteries. Tax is charged also on gambling tables and machines used for games of chance located on licensed premises.

Accounting Principles

The Law on Accounting (valid from 1 January 2003) regulates basic accounting functions in all business entities registered in Estonia. It does not regulate accounting for taxes, which are regulated by other laws and acts. The essence of the law is framed in compliance with International Accounting Standards (IAS). With a few exceptions, the use of IAS was acceptable prior to 1 January 1995.

Compared with International Accounting Standards the major differences are: 1) no consolidation is required (equity method is used to account for subsidiaries); 2) notes to financial statements are usually fewer.

In addition to the Law on Accounting there are a number of regulations issued by the Estonian Accounting Committee which interpret and amend the law. Each business entity may also establish additional rules regulating some aspects of its own accounting and reporting.

A fiscal year is twelve months long. A business entity can choose a fiscal year ending on 31 March, 30 June, 30 September or 31 December. If a company wishes to use any other fiscal year, permission from the Ministry of Finance is required. The law also prescribes that a parent company and its subsidiary should have the same financial year, which may also be a fiscal year.

All accounting records should be maintained for seven years. Contracts, business plans and other documents, necessary for reconstructing business transactions should be maintained for ten years.

Auditing Standards

All companies registered in Estonia are required to submit their audited financial statements to the authorities within 6 months of the end of the fiscal year.

An audit is not required for a private limited company if its share capital is less than EEK 400,000 (EUR 25,560) and if its net sales in the previous fiscal year did not exceed four times the mandatory VAT registration limit set in the Law on Value Added Tax. This currently equals EEK 1,000,000 (EUR 63,900).

An audit is not required for sole proprietorships or for partnerships, provided the partners are neither public nor private limited companies nor business cooperatives.

The auditing process is regulated by Estonian Standards of Auditing. General requirements concerning auditing are regulated by the Accounting Law and the Commercial Code. Estonian Auditing Standards are sanctioned by the Estonian Auditing Committee on September 1994.

Estonian Auditing Standards are composed in accordance with generally accepted auditing standards and are based on the standards of the International Federation of Accountants (IFAC), International Standards on Auditing (ISA) as well as on the standards of the American Institute of Certified Public Accountants (AICPA). Currently, all major international accounting firms are present in Estonia.

Tax Treaties

Estonia has effective tax treaties with Armenia, Austria, Belarus, Belgium, Canada, China, Croatia, Czech Republic, Denmark, Finland, France, Georgia, Germany, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Kazakhstan, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Romania, Singapore, Slovak, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, USA.

Under the double tax treaties a significant reduction of withholding taxes on various payments to non-residents is available. In order to apply the lower tax treaty rates, the residence certificate of the recipient of income must be submitted to the Tax Authorities by the 10th day of the month following the payment.

Text compiled by PricewaterhouseCoopers Ltd, updated by Enterprise Estonia

 

 

Source: Estonian Investment and Trade Agency http://investinestonia.com

Read also:

Corporate income tax 2009 http://fin.ee/doc.php?79850
Estonian taxes  http://fin.ee/doc.php?80497

Slideshow – Estonian Taxes and Corporate Income Tax 2009 (Min. of Finance)