Estonian taxes

Current Estonian Tax Legislation was mostly enacted during the first phase of the transition reforms. The existing Law on Taxation came into effect in 1994 and has since gone through several amendments. The new Law on Income Tax, passed on 15th of December 1999, is effective from 1st of January 2000. Anew Law on Social Tax came into effect in January 2001 and a new Law on VAT was passed in December 2003.

The Estonian tax system with its flat 21% rate individual taxation is one of the most liberal tax regimes in the world. Moreover, the new Law on Income Tax provides that undistributed profits of the companies are not subject to income taxation, regardless whether invested or merely retained.

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): 20%;
  • social tax (social security contributions – state pension and health insurance): 33%;
  • unemployment insurance tax: 2.8% employer +1.4% employee;
  • excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles, packages);
  • gambling tax;
  • land tax.

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

Local governments have the authority to impose local taxes, but effectively only few municipalities have introduced local taxes, in particular: land tax, up to 1% sales tax, tax on advertising and commercials, tax on closure of streets and roads, motor vehicle tax, boat tax and tax for keeping the animals.

National taxes 

Current Estonian Tax Legislation was mostly enacted during the first phase of the transition reforms. The existing Law on Taxation came into effect in 1994 and has since gone through several amendments. The new Law on Income Tax, passed on 15th of December 1999, is effective from 1st of January 2000. A new Law on Social Tax came into effect in January 2001 and a new Law on VAT was passed in December 2003.

The Estonian tax system with its flat 21% rate (which will be reduced to 20% by the year 2009) individual taxation is one of the most liberal tax regimes in the world. Moreover, the new Law on Income Tax provides that undistributed profits of the companies are not subject to income taxation, regardless whether invested or merely retained.

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): 20%
– 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

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

Local governments have the authority to impose local taxes, but effectively only few municipalities have introduced local taxes, in particular: land tax, up to 1% sales tax, tax on advertising and commercials, tax on closure of streets and roads, motor vehicle tax, boat tax and tax for keeping the animals.

Income Tax

The worldwide 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;
– fringe benefits;
– gifts, donations and representation expenses; and
– expenses and payments not related to business.

All distributions will be subject to income tax at the grossed-up 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 25% 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

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 20% (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 excess input VAT is refunded within 30 days from the due date of the VAT return. 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 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 (in Tallinn 1.5%). 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.A customs procedure fee is in most cases a flat state fee of EEK 100 on each customs declaration submitted by a legal person.

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 and if its the 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 EEK1,000,000.

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. The Accounting Law and the Commercial Code regulate general requirements concerning auditing. The Estonian Auditing Committee sanctions Estonian Auditing Standards 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, Germany, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Kazakhstan, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Sweden, Switzerland, Ukraine, United Kingdom, and 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.

Local taxes

In Estonian fiscal system, local taxes may consist of head tax, sales tax, boat tax, animal keeping tax, advertisement tax, road and street closure tax and the entertainment tax.

Local taxes put into effect by the City Council of Tallinn are the following: advertising and publishing tax,tax for closing streets and roads, sales tax and boat tax.

On 12.12.2002 Tallinn City Council enforced the Advertisement Tax Regulation with their regulation no 75. The within-named regulation entered into force on 01.01.2003 and fundamentally changed the existing advertisement rules.

According to the new rules the object of taxation is an advertisement, which is displayed in Tallinn in:
– public areas outside the interior premises of a building;
– on the outside of city-line buses, trams, trolley buses and taxis.

A taxpayer is the direct owner of a possession that displays the advertisement. In case of buses, trams and trolley buses it is the owner of the public transport license. In case of a taxi it is the owner of the taxi transport license.

From now on the city district does not issue the advertisement licenses but the taxpayer must submit a tax return regarding advertisement tax. Tax return must be submitted to the tax administrator in his office on the work day subsequent to first display at the latest or to send it by mail, mailing it on the work day subsequent to first display at the latest.

Taxpayer is liable to taxation from the first day of displaying the advertisement. The tax must be paid to Tallinn City Budget by non-cash payment. The term for paying the tax is the fifteenth day as of the day of becoming liable to taxation. The advertisement tax must be paid to the bank account of Tallinna Linnakantselei finantsteenistus (Tallinn City Office) no 10220077791015, SEB Pank. In case the tax return is not submitted in due time punishment shall be implemented pursuant to § 154 of the Taxation Act. 

The road and street closure tax has to be paid in case of full or partial closure of a public street. The level of taxation is differential, depending on the intensity of traffic, capacity of a road and traffic deviation caused by partial or entire road closure, time and day of closure and consequences due to unauthorized closure of roads. The closure tax varies between 200 to 6000 EEK per 24-hour period. However, the fee during night time (between 20 pm and 6 am) is 5 times cheaper. 

Sales tax is a tax that is charged on goods and services sold in Tallinn territory. Tax limit is set on 1%. Some goods and services are not taxed.

Boat tax is charged on having a 4-12m long boat, yacht, and speedboat. Tax limit is set on 500 EEK for every half a meter. Boat tax must be paid by 1st of May every year.

Official translations of different acts into English are available on the homepage of Estonian Legal Language Centre

Source: www.tallinn.ee

More information according to the Tax Office

Unemployment insurance premiums

In 2014, an unemployment insurance premium withheld is 2% of the gross salary of an employee. In addition to this, employers pay the unemployment insurance premium at a rate of 1% of the amount of gross salaries monthly.

From 1 August 2009 until 31 December 2012: an unemployment insurance premium withheld was 2,8% of the gross salary of an employee. Employers paid the unemployment insurance premium at a rate of 1,4% of the amount of gross salaries monthly.

From 1 June 2009 until 31 July 2009, an unemployment insurance premium was withheld at a rate of 2%, employers paid the unemployment insurance premium at a rate of 1%.

Until 31 May 2009, an unemployment insurance premium has been withheld at a rate of 0,6%, employers rate has been 0,3%.

Funded pension payment

From 2012, a rate of a funded pension payment is 2% of the gross salary of a resident employee. From 2014, a rate of funded pension payment withheld may be 3%, if the person has submitted such application.

In 2011, a rate of a funded pension payment depended on the employee´s decision in 2010. If an employee had decided to continue making payments in 2010, funded pension payments were withheld at a rate of 2% in 2011. In all other cases, funded pension payments were withheld at a rate of 1% of the gross salary of the resident employee in 2011.

From 1 January 2010 until 31 December 2010, a funded pension payment was withheld only if an employee had submitted an application for continuation of making payments in 2010.

Funded pension payments were not withheld from payments made from 1 June 2009 until 31 December 2009.

You can find further information about the Estonian system of pension payments on the website of AS Eesti Väärtpaberikeskus (Estonian CSD) http://www.pensionikeskus.ee/.

Social tax

Social tax is paid by employer in full and a general rate is  33% of the gross payment.  There  is always a minimum obligation for social tax to be paid, in 2014, it is  105,60 EUR monthly, even if there were no payments for salaried work for each employee who is entitled to 1/12 of the basic exemption with this particular employer. 

Examples of tax calculations for payments made from 1 January 2014 (according to the tax office)

The calculation is applicable to payments made from 1 January 2014.

A. In case an employee is a non-resident

A gross payment of 1000 EUR is agreed upon

  • an unemployment insurance premium of 10 EUR (1%) is to be paid by the employer
  • the amount of social tax of 330 EUR (33%) is to be paid by employer
  • a total cost to employer is 1340 EUR
  • an unemployment insurance premium of 20 EUR (2%) is withheld
  • an income tax of 205.80 EUR is withheld, calculated as 21% x (1000 – 20) = 205.80
  • a total net result received by the employee is 774.20 EUR, calculated as 1000 – 20 – 205.80 = 774.20

B. In case an employee is a resident

A gross payment of 1000 EUR is agreed upon

  • an unemployment insurance premium of 10 EUR is to be paid by the employer (1%)
  • the amount of social tax of 330 EUR (33%) is to be paid by employer
  • a total cost to employer is 1340 EUR
  • an unemployment insurance premium of 20 EUR is withheld (2%)
  • the amount of a funded pension payment withheld 20 EUR (2% of 1000 EUR)
  • an income tax of 171.36 EUR is withheld, calculated as 21% x (1000 – 144 – 20 – 20)
  • 144 EUR is 1/12 of the annual basic exemption 1 728 EUR of income tax
  • a total net result received by the employee is 788.64 EUR, calculated as 1000 – 171.36 – 20 – 20 = 788.64

7 Responses

  1. You can calculate Estonian wage and taxes here: http://www.calkoo.com/?lang=3&page=1

  2. Read also http://fin.ee/?id=3814

    Estonian tax system consists of state taxes provided and imposed by tax Acts and local taxes imposed by a rural municipality or city council in its administrative territory pursuant to law. Tax is a single or periodic financial obligation which is imposed on taxpayers by an Act or a rural municipality or city council regulation issued pursuant to an Act for the performance of the public law functions of the state or local governments or to obtain revenue required therefor and which is subject to performance pursuant to the procedure, in the amount and within the terms prescribed by an Act or a regulation, without direct compensation to taxpayers therefor.

    State taxes are: income tax, social tax, land tax, gambling tax, value added tax, customs duty, excise duties, heavy goods vehicle tax.

    Local taxes are: sales tax, boat tax, advertisement tax, road and street closure tax, motor vehicle tax, animal tax, entertainment tax, parking charge.

  3. ! Government decided company and personal income tax will not drop to 20% next year, but will stay at 21% and will decline again by one percent starting from 2010.
    Quote from: http://rmp.ee/uudised/maksud/7683

  4. Paying Estonian taxes from outside Estonia– now nearly impossible ?

    Each year the Maksu-Ja Tolliamet (Estonian Tax Office in Tallin) sends me a property tax bill for land I inherited.
    For many years I’ve simply mailed them an international money order in US$ from the US to pay the taxes.

    This year, however, the check was returned to me. They no longer accept checks of any kind. All taxes must be paid directly to their account at Swedbank or SEB
    Pank.

    Swedbank and SEB refuse to open an account for me, a US/Estonian citizen who does not reside in Sweden or Estonia.

    My tax bill is only about $200. My US bank charges $40 to transfer money internationally and will not do so in EEK, therefore an additional currency conversion charge.

    $ can be sent via Western Union but someone has to pick it up at a Western Union Office. I can send money via paypal.com but only to someone’s e-mail address. The other ways involve someone getting a credit card and putting it into an ATM to withdraw funds.

    The practice of paying bills online by transfer from an account which is common all over Europe, is not done as much in the US, and not allowed at all to foreign banks.

  5. During the year 2010 has VAT changed also from 18% to 20%.

  6. C Soond – for some reason yes, US and some other banks rob so much money for transfers. Inside Estonia the payments are done almost with a moment and cost few cents as you probably know.

    I wonder why was you not able to open bank account in Estonia?? As already long time ago my friend from philipines was able to open up bank account in Estonia (took 15-20 minutes with standing in line) and she received telephone bank, Internet bank access codes + international VISA bank card of course, for free.
    You must be IN Estonia to open account as i cant see why should banks who want to stay trustworthy allow opening up bank accounts over Internet. You can paypall the money from your US to Estonia bank account and it does not cost a lot.

    I my self do not use SEB or Swedbank but i heard Swedbank should be pretty good. There is many more banks in Estonia and you do not have to have certain bank account to pay for taxes but you just need to pay it to their account, with today’s world it should not be hard to make bank transfer, at least in here.

    Opening up bank accounts & receiving all the cards & things is free last time i checked

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