Tax system and administration

Considerations for the investor:

  • Main principles of Estonian tax policy: simple tax system, broad tax base and low rates.
  • The aim of the Estonian Government is to shift the tax burden from labour to consumption.
  • Flat income tax rate since 1994 (flat income tax rate at 21% applies to both individuals and companies).
  • Unique corporate tax system since 2000: all undistributed corporate profits are tax-exempt.
  • Local taxes play an insignificant role in the Estonian tax system.
  • Estonia operates a self-assessment system.
  • The Government's intention is to improve tax administration (electronic tax administration is well established).
  • Estonia has no thin capitalisation or CFC rules for corporate taxpayers.
  • Estonian VAT legislation is based on the EC VAT Directive (2006/112/EEC).
  • The standard VAT rate is 20% from 1 July 2009 and the reduced rate is 9%.
  • Estonia applies an extended reverse charge mechanism.
  • An option to tax is available in respect of certain exempt supplies.

Principal taxes

The system of taxation is described in the Law on Taxation.

The existing state taxes are:

  • income tax (corporate & personal): flat 21% rate for individuals;
  • value added tax (VAT): 20% from 1 July 2009 (some goods and services 9%);
  • social tax: 33% (20% for social security contributions - state pension and 13 % for health insurance);
  • unemployment insurance tax: 0.3% employer + 0.6% employee (since 01.07.2009 - 0.5% employer + 1.0% employee;
  • excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles, packages);
  • gambling tax;
  • land tax.

 

Corporate Income tax

  • New approach – corporate income tax is not paid for the period of income generation, instead upon profit distribution. 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.
  • Profit retained in the company is taxed 0%.
  • Any profit distribution and similar disbursement is recognized as taxable event (income tax is paid when profit is taken out of the company).
  • No tax avoidance, only tax deferral on company’s level. Estonia does not impose any estate taxes. Various transactions may be subject to payment of state fees (stamp duties).
  • Due to EU accession-treaty changes in taxing dividend payments between mother-daughter companies since 2009, but the principles remain the same. 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 on closure of streets and roads, motor vehicle tax, entertainment tax, tax for keeping the animals and parking charge.

Taxation Act is a basic act for all other tax Acts. It specifies Estonian tax system, requirements for tax Acts, rights, duties and liability of taxpayers, withholding agents, guarantors and tax authorities, and procedure for resolution of tax disputes and main definitions used in all tax acts. Taxation Act provides precise regulation of carrying out administrative procedures of tax authorities and creates stronger sense of reliability for taxpayers.

Tax authority for state taxes is the Tax and Customs Board. It is government agency which operates within the area of government of the Ministry of Finance. Tax administrators are required to verify the correctness of tax payments, assess amounts of tax and interest due in the cases provided by law, collect tax arrears and implement sanctions against persons who violate tax Acts.

More Information on Taxes: