Taxation of non-residents

 

 

The instructions are provided according to § 15 of the Estonian Taxation Act in order to explain taxation of income of non-residents in Estonia for the purpose of ensuring the uniform application of Acts concerning income tax. The explanations and instructions are not binding on taxable persons. The explanations and instructions are published on the website of the Estonian Tax and Customs Board.

2. Concept of residency

A resident is a person specified in § 6 of the Estonian Income Tax Act. Definition of a non-resident natural or legal person has not been provided by the Act.

A natural person is a resident if one of the following conditions is met:

  • his or her place of residence is in Estonia;
  • he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia;
  • Estonian diplomats who are in foreign service are also Estonian residents.

From 2011, there is a new form R which shall be submitted to the Estonian Tax and Customs Board for informing about changes in the natural persons residency.

A legal person is a resident if it is established pursuant to Estonian law. European Company (in Latin Societas Europaea, SE) and European Cooperative Society (in Latin Societas Cooperativa Europaea, SCE) are regarded to be residents if their place of establishment is registered in Estonia.

A non-resident is a natural or legal person not specified above.

If the residency prescribed on the basis of an international agreement differs from the residency prescribed pursuant to the Estonian Income Tax Act, the provisions of the international agreement apply.

Thus, where by reason of the provisions of agreement between two countries who have concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter tax treaty), a person is a resident of both contracting states, his status shall be determined according to article 4 of the tax treaty.

A person shall be deemed to be a resident as of the date of his or her arrival in Estonia. Thus, it is possible, that a person shall be deemed to be resident for one part of the period of taxation and non-resident for the other part of the period of taxation.

It is advisable to apply to the closest service bureau of the Estonian Tax and Customs Board in order to obtain more detailed information about the concept of residency.

3. Taxable income of non-residents in Estonia

Non-residents (natural and legal persons) have a limited tax liability in Estonia; only the Estonian-source income is taxed in Estonia.

Employers, who grant taxable fringe benefits, included employers who are natural persons and non-residents having a permanent establishment or operate as employers in Estonia pay income tax on fringe benefits.

A non-resident legal person which has a permanent establishment in Estonia has to pay income tax imposed on fringe benefits, gifts, donations and costs of entertaining guests, profit distributions, and expenses and payments not related to business made by a non-resident through a permanent establishment.

3.1. Application of tax incentives or exemptions prescribed by the tax treaty

If an international agreement prescribes more favourable conditions for taxation of the income of non-residents than those provided by law, the provisions of the international agreement apply.

In Estonia, the tax incentives or exemptions arising from tax treaties can be applied only if the recipient of the payment has certified his residence status to the tax authority. Tax relief or tax incentives prescribed by tax treaties may be granted to non-residents at the moment of payment. Please note that residency should be certified for the purpose and in the sense of the relevant tax treaty and not in the sense of the national law of a foreign country. The document need not be submitted if data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons. Otherwise non-resident has to submit a certificate approving the place of the residence issued by the competent tax authority of residence country. Form TM3 available on the website of the Estonian Tax and Customs Board http://www.emta.ee may be used for certifying the recipient of income and the residency of the recipient or a relevant form issued by the competent tax authority of the country of residence.

The list and the texts of tax treaties are available on the website of the Estonian Tax and Customs Board.

4. Non-residents whose income is not subject to income tax

Income tax is not charged on income received for the performance of official duties in Estonia by a foreign diplomatic or consular representative, a representative of a special mission or a member of a diplomatic delegation, a member of a representation of an international or intergovernmental organisation or co-operation programme, or a person employed by such representation, who is not a citizen or permanent resident of Estonia.

Persons specified in previous subsection, with the exception of members of representations of co-operation programmes, shall be registered with the Ministry of Foreign Affairs. Regulation No 1 of 5 January 2000, of the Minister of Foreign Affairs establishes the procedure for registration.

If an international agreement prescribes more favourable conditions for taxation of the income of non-residents than those provided by law, the provisions of the international agreement apply.

5. Non-resident’s taxable income (according to the Estonian Income Tax Act)

Non-residents (natural and legal persons) have a limited tax liability in Estonia; their taxable income consists only of income from Estonian sources. Non-residents may not claim the same deductions and allowances as available to residents. The Estonian Income Tax Act exempts non-residents that have registered a permanent establishment in Estonia from payment of income tax on earned income, unless the income is distributed.

A non-resident taxpayer who has not registered permanent establishment in Estonia shall pay income tax only on the following profit received from a source of revenue located in Estonia:

  • income derived from work or from the provision of services;
  • remuneration paid to a non-resident member of a management or controlling body;
  • business income;
  • gains derived from a transfer of property (limited);
  • income derived from a commercial lease or royalties;
  • interest (limited);
  • pensions, scholarships and grants, cultural, sports and scientific awards, benefits, gambling winnings and benefits paid on the basis of the Parental Benefit Act, insurance indemnities, payments made to a non-resident from Estonian pension funds;
  • remuneration paid to a non-resident artist, sportsperson in connection with his or her performance or competition in Estonia.

5.1. Income derived from work or provision of services

Income tax is charged on income derived by a non-resident natural person from:

  • work under an employment contract;
  • work in public service;
  • activities engaged in on the basis of a contract for services, an authorisation agreement or a contract entered into for the provision of any other services under the law of debt

if the non-resident performed his or her duties or provided services in Estonia and the payment was made:

  • by an Estonian state or local government authority;
  • by an Estonian resident;
  • a non-resident operating in Estonia as an employer;
  • if the payment was made through the permanent establishment of a non-resident legal person registered in Estonia;
  • if the person has stayed in Estonia for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months.

If a non-resident receiving remuneration on the basis of the law of debt, has been entered into the commercial register in Estonia or has been registered as a sole proprietor in the regional tax and customs centre of the Estonian Tax and Customs Board, and the remuneration is business income, then the corresponding remuneration shall be taxable as business income.

Income tax is not charged on income derived by a non-resident natural person from work or activities if the non-resident performed his or her duties or provided the services outside Estonia. There is no need to file tax return on income of non-resident that is not taxable in Estonia.  For example, if the Estonian employer pays wages to a non-resident long-distance driver, income tax is not withheld from the payment, as the work is done outside Estonia.

A withholding agent is required to withhold income tax on taxable payments. Income tax is withheld upon the making of a payment. Income tax withheld in accordance with the rates specified in the Estonian Income Tax Act or in foreign agreements is, for a non-resident recipient, the final income tax on income from Estonian sources.

Before withholding income tax, the unemployment insurance premium withheld on the basis of the Unemployment Insurance Act, shall be deducted from the payment made to a non-resident, from 1 January 2011.
Income tax is not withheld but is paid by non-resident himself if the non-resident who receives remuneration on the basis of a contract under the law of obligations has been entered in the commercial register in Estonia or registered as a sole proprietor in another Contracting State of the European Economic Area and such remuneration is his or her business income.

Non-resident who derives such business income that is subject to taxation in Estonia is required to submit an income tax return concerning business income derived during the period of taxation.

Income tax is not charged on the following income of a non-resident:

  • compensation for official travel, accommodation and other expenses and daily allowances paid to a public servant, an employee or a member of the management or controlling body of a legal person under the conditions and within the limits established by the Government of the Republic, and compensation for expenses arising from appointment to a position located in another area;
  • compensation for service or employment related use of an automobile in the personal ownership of the taxpayer or used by the taxpayer on the basis of a leasing contract, paid to a public servant, an employee, or a member of the management board or a body substituting for the management board of a legal person, in accordance with the conditions and within the limits established by the Government of the Republic.

5.2. Remuneration paid to non-resident member of management or controlling body

Income tax is charged on remuneration paid by a resident legal person or through or on behalf of the permanent establishment of a non-resident legal person in Estonia to a non-resident member of a management or controlling body.

A management or controlling body of a legal person is any authorised body or person who, pursuant to an Act governing the legal person, a partnership agreement, the articles of association or any other legislation regulating the activities of the legal person, has the right to participate in managing the activities of the legal person or in controlling the activities of the management body of the legal person.

Management or controlling bodies include management boards, supervisory boards, partners authorised to represent general or limited partnerships, procurators, founders until registration of the legal person, liquidators, trustees in bankruptcy, auditors, controllers and internal audit committees. Directors of branches of foreign companies and managers of permanent establishments registered at service bureaus of the Tax and Customs Board are also deemed to be management bodies.

5.3. Business income 

Income tax is charged on business income derived by a non-resident in Estonia if the service is provided in Estonia. If the non-resident is a legal person located in a low tax rate territory, income tax is charged on all income derived by the non-resident from the provision of services to Estonian residents, irrespective of where the services were provided or used.

A non-resident sole proprietor may additionally deduct up to 2877 EUR during a period of taxation from his or her income derived from the sale of unprocessed self-produced agricultural products and from transfer of timber derived from own immovable property after all certified deductions related to business described in Income Tax Act have been made.

Business is a person’s independent economic or professional activity (including the professional activity of a notary, a bailiff or, in specific cases a sworn translator), the aim of which is to derive income from production, sale or intermediation of goods, provision of services, or other activities, including creative or scientific activity.

Sole proprietors entered in the commercial register in Estonia may make the deductions, allowed under Chapter 6 of the Estonian Income Tax Act, from their business income.

5.4. Gains derived from transfer of property

Income tax is charged on gains derived by a non-resident from transfer of property if:

  • the sold or exchanged immovable is located in Estonia;
  • the movable was subject to entry in an Estonian register prior to the transfer;
  • the transferred real right or the right of claim is related to an immovable or a structure as a movable, which is located in Estonia;
  • the transferred holding is a holding of a person who at the time of transfer owned at least 10 per cent in a company, investment fund or pool of assets of whose property, at the time of transfer or during certain period within two years immediately preceding the transfer, more than 50 per cent was directly or indirectly made up of immovable or structures as movables, which are located in Estonia.

The gains or loss derived from the sale of property is the difference between the acquisition cost and the selling price of the sold property. The gains or loss derived from the exchange of property is the difference between the acquisition cost of the property subject to exchange and the market price of the property received as a result of the exchange. A taxpayer has the right to deduct certified expenses directly related to the sale or exchange of property from the taxpayer’s gain or to add such expenses to the taxpayer’s loss.

Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company will generally be subject to corporate income tax in the hands of the payer: the Estonian company. Non-resident shareholders do not pay income tax on the amount already taxed in the hands of the Estonian company.

Income tax is not charged on the following income of a non-resident:

  • accepted succession;
  • property returned in the course of ownership reform;
  • expropriation payments and compensation paid upon expropriation;
  • income from transfer of movable property in personal use.

Non-residents may not claim tax allowances available to residents prescribed by § 15 (4) of the Estonian Income Tax Act. For example, there is no tax exemption on gains from the transfer of land returned in the course of ownership reform.

Gains from transfer of property are not subject to income tax if the property has been used by the non-resident taxpayer as his or her place of residence under conditions specified in § 15(5) and (6) of the Income Tax Act.
Non-residents who have received gain from a transfer of property have to submit an income tax return and pay income tax, because in this case income tax is not withheld upon making the payment.

5.5. Income derived from commercial lease or royalties

Income tax is charged on income derived by a non-resident from a commercial lease if:

  • the immovable subject to a commercial or residential lease or encumbered with limited real rights is located in Estonia;
  • the movable subject to a commercial or residential lease or encumbered with limited real rights is entered or is subject to entry in an Estonian register;
  • the payment for royalties (the right to use a copyright of a literary, artistic or scientific work (including cinematographic films or videos, recordings of radio or television programmes or computer programs), and for the right to use a patent, trade mark, industrial design or utility model, plan, secret formula or process, or consideration for transfer of the right to use the above (hereinafter royalties) is made by the Estonian state, a local government or a resident, or by a non-resident through or on account of its permanent establishment in Estonia;
  • the payment for industrial, commercial or scientific equipment or know-how is made by the Estonian state, a local government or a resident, or by a non-resident through or on account of its permanent establishment in Estonia.

Royalty payments between associated companies arising in Estonia are exempt from withholding tax in Estonia if the beneficial owner is a company of another EU member state or Switzerland or a permanent establishment situated in another EU member state or Switzerland. “Associated companies” are companies with a minimum direct holding of 25% within a period of the last 2 consecutive years.

Royalties are exempted from taxation only in case if the taxpayer uses the values of transactions similar to those applied by non-associated independent persons under similar conditions.

A tax treaty in many cases prescribes for lower rates of a withholding income tax. Lower rates will be applied if the withholding agent submits a document certifying the recipient of income and the residency of the recipient of income to the regional tax and customs centre of the Tax and Customs Board together with the tax return. The document needs not to be submitted if data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons.

5.6. Interest

Income tax is genrally not charged on interest received by a non-resident.

From 2014, income tax is charged on interest received from the holding in a contractual investment fund or other pool of assets of whose property, at the time of the transfer or during a period within two years before transfer, more than 50 per cent was directly or indirectly made up of immovables or structures as movables located in Estonia and in which the non-resident had a holding of at least 10 per cent at the time of transfer.
Until the end of year 2013, if the value of any interest received did differ from the value of similar interest paid under market conditions upon beginning of the debt instrument or upon making the payment of the interest, the interest surplus has been taxable to the non-resident recipient.  From 2014, such amount is taxed according to transfer pricing rules by corporate income tax in the hands of the payer.

5.7. Dividends

No income tax is charged on dividend payment received by a non-resident, no matter if the recipient is a legal or a natural person and in spite of the amount in a share capital of the resident company distributing the dividends. Dividends are subject to corporate income tax in the hands of the payer: the Estonian company.

5.8. Other Income 

Income tax is charged on all pensions, scholarships and grants, cultural, sports and scientific awards, benefits, gambling winnings and benefits paid on the basis of the Parental Benefit Act which are paid to a non-resident by the Estonian state, a local government, a resident or through or on behalf of the permanent establishment of a non-resident legal person in Estonia. Income tax is also charged on insurance indemnities paid to a non-resident by the Estonian Health Insurance Fund, the Estonian Unemployment Fund or a resident insurance company and on payments made to a non-resident from Estonian pension funds.

Maintenance support and amounts paid to satisfy claims for support shall not be taxable income of the recipients from 1 January 2011.

5.9. Remuneration paid to non-resident artiste, sportsman or sportswoman

Income tax is charged on remuneration paid to a non-resident artist, sportsman or sportswoman in connection with his or her performance or competition in Estonia or the presentation of his or her works in Estonia. Income tax is also charged on remuneration paid to a non-resident third person in connection with the activities of a resident or non-resident artist, sportsman or sportswoman in Estonia.

6. Non-resident’s income not subject to income tax

Non-residents (natural and legal persons) have a limited tax liability in Estonia; they are taxed on Estonian-source income only.

Income tax is not charged on the following income of a non-resident:

  • accepted succession;
  • property returned in the course of ownership reform;
  • expropriation payments and compensation paid upon expropriation;
  • income from transfer of movable property in personal use;
  • interest paid to a natural person by a credit institution resident in a contracting state of the European Economic Area or a branch of a non-resident credit institution situated in a contracting state of the European Economic Area;
  • scholarships and grants paid pursuant to law or from the state budget, and benefits paid pursuant to law, except for scholarships, grants and benefits which are paid in connection with business or an employment or service relationship or with membership of the management or controlling body of a legal person;
  • international and state cultural and scientific awards and sports awards granted by the Government of the Republic;
  • scholarships and grants which are granted for study or research or for artistic or sports activities and which meet the conditions established by the Government of Estonia;
  • royalty payments between associated companies arising in Estonia are exempt from tax if the beneficial owner is a company of another EU member state or Switzerland or a permanent establishment situated in another EU member state or Switzerland. “Associated companies” are companies with a minimum direct holding of 25% within a period of the last 2 consecutive years
  • gains from transfer of property if the property has been used by the non-resident taxpayer as his or her place of residence under conditions specified in § 15(5) and (6) of the Income Tax Act.

Non-residents cannot claim the same deductions and allowances as available to residents.

December 2013

Source: Estonian Tax and Customs Board

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