Personal Income Tax
Residents pay tax on their worldwide income. Taxable income includes, in particular, income from employment (salaries, wages, bonuses and other remuneration); business income; interest, royalties, rental income; capital gains; pensions and scholarships (except scholarships financed from state budget or paid on the basis of law). Taxable income does not include dividends paid by Estonian or foreign companies when the underlying profits have already been taxed.
Non-residents pay income tax on their income from Estonian sources as listed in the Income Tax Act. Income taxable in Estonia includes subject to certain conditions income from employment or government services provided in Estonia; directors' fees; business income; income from provision of services; income derived from commercial lease; royalties; certain types of capital gains; gains from disposal of assets registered in Estonia; interest received from the holding in a contractual investment fund (when more than 50 per cent of its assets consist of immovables situated in Estonia); income of a sportsman or an artiste from his activities in Estonia; pensions, scholarships and insurance indemnities.
Unilateral relief for double taxation in respect of income derived from abroad is available in the form of ordinary tax credit with per country limitation. The credit is limited to the Estonian tax computed on the item of income. Moreover, double taxation of employment income is avoided by way of exemption method if all the following conditions are fulfilled:
- the person has stayed in the foreign state for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months;
- the specified income has been the taxable income of the person in the foreign state and if this is certified and the amount of income tax is indicated on the certificate (even if the amount is zero).
Annual basic exemption (non-taxable amount) for resident individuals is up to 6000 EUR per year, but decreasing depending on the total income amount. When taxable income per year exceeds 14 400€ the following formula for calculating the non-taxable amount applies: 6000-6000/10800x(amount of income – 14 400). If total amount of all income is 25 200 EUR in a year or more, there is no right to basic exemption at all.
On a monthly basis the basic allowance is 500 EUR if taxable income does not exceed 1200 EUR per month. It is reduced linearly and reaches 0 EUR when taxable monthly income is more than 2100 EUR.
There is also an increased basic exemption available for raising children (1848 euros starting with the second child). Taxpayers can also deduct their mortgage interest, training expenses and certain charitable gifts and donations (up to 1200 euros per year but not more than 50% of taxable income). Contributions to supplementary funded pension system are deductible as well (up to 6000 euros or 15% of taxable income). Mandatory social security contributions are fully deductible.
The same deductions are available for certain non-resident individuals deriving most of their taxable income in Estonia.
Certain categories of income of resident and non-resident individuals are not subject to tax, such as scholarships paid on the basis of law; fringe benefits (taxable at the level of employer); child allowances and other subsidies and benefits paid from the State, local, or Social Insurance budgets; per diem and accommodation reimbursements for business trips; compensation for the use of private vehicles; insurance proceeds and other payments received under insurance contracts; inheritances and gifts received; gains from the alienation of movables in personal use and from the alienation of taxpayer's main home; lottery winnings; expropriation payments and compensation received for expropriation.
Income of the following persons is not subject to tax in Estonia: foreign diplomatic representatives, consular representatives, special or diplomatic missions, representatives of international or intergovernmental organizations and co-operation programs exercising their official functions in Estonia, plus persons employed with them who are not citizens or permanent inhabitants of Estonia. The above-mentioned persons, with the exception of the members of representations of co-operation programs, must be registered in the Ministry of Foreign Affairs.
Taxable income derived by a self-employed person from the realisation of self-produced, unprocessed agricultural products up to the amount of 2877 euros is not subject to income tax.
Tax rate is 20% of the taxable income (from 2015). The withholding tax rate for certain pensions and certain payments made to non-residents is 10%. Employment income is subject to a withholding tax at the general rate of 20%. Dividends taxable at corporate level at 14% tax rate are subject to withholding tax at a rate of 7%.
The period of taxation is a calendar year and tax returns are due by March 31 of the year following the period of taxation.
Local governments receive 11,93 per cent of resident natural persons’ taxable income (without taking into account the deductions available) according to the taxpayer’s place of residence. All other receipts of income tax are received by the state.
Corporate Income Tax
In Estonia profits are not subject to tax when they are earned, but the moment of taxation is deferred until the distribution of profits. . Estonia levies corporate income tax on profits that are distributed as dividends, share buy-backs, capital reductions, liquidation proceeds or deemed profit distributions (such as transfer pricing adjustments, expenses and payments not related to business, gifts, donations and entertainment expenses).
Fringe benefits are taxable at the level of employer. Employer pays income tax and social tax on fringe benefits.
Dividends distributed by Estonian companies are exempt from corporate income tax (‘participation exemption’) if these are paid out of:
- dividends received from Estonian, EU, EEA (European Economic Area) and Swiss tax resident companies in which the Estonian company has at least a 10% shareholding;
- profits derived through a permanent establishment (“PE”) in the EU, EEA or Switzerland;
- dividends received from all other foreign companies in which the Estonian company has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or foreign income tax was withheld from dividends received;
- profits derived through a foreign PE in all other countries, provided that such profits have been subject to tax in the country of the PE; or
- liquidation proceeds, payments upon share buy-backs or capital reductions, which have been subject to taxation by the distributor of such income.
Distributed profits are generally subject to a 20% corporate income tax (20/80 on the net amount of profit distribution). As the tax period of corporate entities is a month, the income tax shall be returned and paid monthly by the 10th day of the following month.
As of January 1 2019, the reduced corporate income tax rate of 14% is applicable to regular profit distributions. Namely, the reduced tax rate is applicable to the profit distributed in a calendar year, which is smaller than or equal to the average distributed profit of the previous three calendar years on which a resident company has paid income tax. Dividends, which are taxed at a rate of 14% and paid to individuals, are subject to withholding tax at a rate of 7%.
There is a transition period for the years 2019 and 2020 and in these years 14% tax rate applies as follows:
1) in the year 2019 to the 1/3 of the profit distributed in the year 2018 on which a resident company has paid corporate income tax;
2) in the year 2020 to the 1/3 of the profit distributed in the years 2018 and 2019 on which a resident company has paid corporate income tax.
Rules Against Tax Avoidance
As of January 1, 2019 Estonia has implemented several rules against tax avoidance from the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
Firstly, there is a Genral Anti-Avoidance Rule (GAAR) applicable to both individuals and companies. According to this rule, no account shall be taken of a transaction or chain of transactions the principal purpose or one of the principal purposes of which is to obtain a tax advantage which is contrary to the content or purpose of the applicable tax law or international agreement and which is not genuine having regard to all the relevant circumstances. A chain of transactions may consist of more than one intermediate stage or part. A transaction or chain of transactions shall not be considered genuine unless it is made for real vital or commercial reasons, which reflect the actual economic substance of the transaction.
In case of compnies, income tax is charged on the amount that a resident company would have received as income, or on the amount that a resident company would not have incurred as a cost if transaction or chain of transactions corresponding to the above-mentioned features had been absent.
Secondly, as of January 1, 2019 corporate income tax is levied on the exceeding borrowing costs which exceed:
1) EUR 3 000 000;
2) 30% of the taxpayer’s EBITDA and
3) the losses of the taxpayer.
There is no CIT liability on exceeding borrowing costs in case of
- a standalone entity;
- financial undertakings;
- loans used to fund a long-term public infrastructure project where the project operator, borrowing costs, assets and income are all in the European Union.
If a company is a member of a consolidated group for financial accounting purposes, it can choose between two exceptions applicable to consolidated groups.
In case of exceeding borrowing costs the taxable period is a financial year. The tax return has to be submitted and the income tax paid by the 10th day of the ninth calendar month of the next financial year at the latest.
As of January 1, 2019 corporate income tax is also levied on the non-distributed income of a controlled foreign company (CFC) arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. This rule is not applicable in case the CFC’s accounting profits do not exceed EUR 750 000, and non-trading income does not exceed EUR 75 000.
The taxpayer is required to declare CFC’s profits subject to tax in Estonia and to pay tax on CFC’s profits no later than by the 10th calendar month of the next financial year of the foreign controlled company.
As of January 1, 2019 a non-resident who has a permanent establishment in Estonia is required to declare the assets brought to Estonia for the permanent establishment. The assets brought to Estonia for the permanent establishment and not returned by 31 December 2018 shall be declared by 10 February 2019.
Value-added tax is charged on supplies of goods and services in the course of business activities and self-supply of goods and services.
Goods are things, livestock, gas, electric power, heat and refrigeration. Services means the provision, in the course of business activities, of benefits or transfer of rights, including securities, which are not goods. Obligation to refrain from economic activity, to waive the exercise of right or to tolerate a situation for charge are regarded also as services.
According to the VAT Act export of goods means dispatching of Community goods from the Community customs territory. Import of goods means the entry into the Community of the goods from third countries.
Intra-Community acquisition of goods means trading activities between Member States. Intra-Community supply of goods is taxable transaction, which must contain transfer of goods to a taxable person from one Member State to another and the taxable person must be registered. Place of supply of goods is Member State where goods are dispatched and the VAT rate is 0%. The acquirer will pay VAT in the country of destination.
Requirements of invoices are harmonized in the European Union.
Taxable person is a person engaged in business who is registered as taxable person. Taxable person shall add of the amount of VAT to the taxable value of the goods transferred or services provided, calculate the amount of VAT due pursuant to pay, pay VAT, preserve documents and maintain records and issue invoices in accordance with requirements.
Taxable person with limited liability is a person, except a natural person not engaged in business or registered taxable person, who is registered or required to register as a taxable person with limited liability.
The threshold for obligatory registration as a taxable person is 40 000 euros. The threshold for taxable person with limited liability is 10 000 euros in case of acquisition of goods, there is no threshold in case of acquisition of services.
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.
The standard rate of VAT is 20%, the reduced rate is 9% and 0% in some cases. VAT rate is 9 per cent for:
- books (excluding books for education);
- medicinal products, contraceptive preparations, sanitary and toiletry products, and medical equipment or medical devices intended for the personal use of disabled persons within the meaning of the Social Welfare Act and specified in the list established by a regulation of the Minister of Social Affairs
- accommodation services or accommodation services with breakfast;
- periodical publications.
The VAT rate is zero for:
- Intra-Community supply;
- sea-going vessels and aircrafts used in international routes, equipment, spare parts and fuel used on such vessels or aircrafts and the repair, maintenance, chartering and hiring of or establishment of a usufruct of such vessels or aircrafts;
- goods and services supplied to passengers for consumption on board of vessels and aircrafts moving on international routes; the provision of port services to meet the direct needs of vessels navigating in international waters and the provision of navigation services and airport services to meet the direct needs of aircraft used mostly on international routes;
- goods transferred and transported to another Member State to a diplomatic representative, consular agent (except honorary consul), a representative or representation of a special mission or an international organisation or consular post of a foreign state, a special mission or Community institution or to Member State of NATO intended either for the use of the forces of other NATO Member States or of the civilian staff accompanying them, or for supplying their messes or canteens when such forces take part in the common defence effort;
non-Community goods placed in a free zone or free warehouse under customs procedures;
- Community goods placed under tax warehousing arrangements.
In case of VAT exempted goods or services, input VAT is not deductible.
Exempted goods and services are:
- postal services
- health services
- social services
- insurance services
- services for the protection of children
- transportation of sick, injured or disabled persons
- supply of immovables
- the leasing and letting of immovables
Employers pay social tax on payments in cash and in kind made to natural persons. Sole proprietors pay tax on their business income. Employers and sole proprietors are both obliged to pay social tax not less than the amount calculated from the monthly rate provided for in § 2¹ of the Social Tax Act (in 2019, the minimum monthly basis for social tax is 500 euros). Sole proprietors also have an upper limit- the maximum basis for social tax is the amount calculated from ten-fold minimum wage (in 2019 the minimum wage is 540 euros per month and the maximum basis for social tax payable by sole proprietors is thus 10*12 months*540 euros).
The law enacts several special cases of paying social tax when the tax is paid by the state and the rural municipality or city, e.g. for persons receiving unemployment benefits or child care allowances.
Social tax rate is generally 33 per cent, in particular special cases 13 per cent of the taxable amount. Taxes are due monthly and the remittance of tax is made congruent with the remittance of withholding tax; the tax is paid by the 10th day of the following month. Taxable period for business income of sole proprietors is a calendar year, whereas quarterly advance payments of tax are due.
The social tax is personalized and the amounts paid will be taken into account when making pension payments. Tax accrues to the budget of state health insurance fund (13%) and pension insurance fund (20%; 16% + 4% in case of persons who have joined the second pillar of the pension insurance system).
National land tax is paid on all land except:
(1) where economic activity is prohibited;
(2) land attached to buildings of diplomatic or consular missions of foreign countries;
(3) cemeteries and land under churches and temples of congregations;
(4) land used by foreign country or international organisation;
(5) land in the use of the headquarters of allied forces. In addition, local land tax is not paid on land in municipal ownership or land in public use based on the decision of the local authority.
Taxable value is determined by Law on Land Value.
There are exemptions, which are following:
- rate of land tax for areas under cultivation used for the production of agricultural products and for natural grassland is 0,1 to 2,0 per cent of the assessed value of the land annually.
- recipients of pensions and persons who were repressed by Soviet authorities may be exempted from the obligation to pay land tax on up to 0,3 hectares in cities and 1,0 hectare in rural municipalities on the condition that the applicant for the tax exemption uses the land for living and does not receive rent on the basis of the right of use of land.
- local municipalities have a right to exempt tax payers from obligation to pay tax on up to 0,3 hectares in cities and 1,0 hectare in rural municipalities on land in residential use. It’s required that the tax payer actually uses that property for living according to national registry and does not receive rent on the basis of the right of use of land.
Home owners land tax exemtion. Land owners or land users specified in § 10 of Land Tax Act shall be exempt from the obligation to pay land tax on residential land or profit-yielding land in the ownership or use of such persons in the part of the land use type of yard land to the extent of 0.15 hectares in cities, cities without municipal status, towns, small towns and areas designated densely populated areas by a comprehensive plan by a local government or a county plan by a county governor and to the extent of 2.0 hectares elsewhere if the person's residence is in the building located on this land pursuant to the residence data entered in the population register.
Land tax rate is 0,1 - 2,5% of taxable value. Land where economic activity is restricted by law is either exempted from tax completely or by 50% of the standard tax rate, depending on the nature of restriction. Tax is paid twice a year on March 31 and October 1.
Tax accrues wholly to local budgets of thecities and rural municipalities. The tax is administered by the Estonian Tax and Customs Board.
Gambling tax is imposed on amounts received from lottery, promotional lottery, toto (totalisator + betting), remote gambling and tournament of game of chance. Tax is charged also on gambling table and machine used for game of chance and game of skills located on licensed premises.
Gambling tax is imposed on:
- gambling table and gambling machine used for organising games of chance and gambling machine used for organising games of skills;
- amount received from sale of lottery tickets;
- amount received from winning fund of promotional lottery in case the winning fund is more than 10 000 euros;
- total amount of bets, less the winnings in the event of organising a toto;
- total amount of bets, less the winnings in the event of organising an online game of chance or game of skill;
- amount received from participation fee, less the portion of the prize pool in the tournament of game of chance taking place as a tournament;
- amount received from participation fee in the tournament of game of chance taking place as a ring game.
Tax is paid by authorised operators, tax period is one calendar month.
The taxable period for the promotional lottery shall be the period during which the promotional lottery is organised, starting on the first day set out in the rules of the game for placing stakes and ending on the last day set out in the rules of the game for awarding prizes.
The taxable period for the tournament of game of chances shall be the period during which the tournament of game of chance is organised, starting on the first day set out in the rules of game for passing participation fee and ending on the last day set out in the rules of game for passing participation fee.
Tax rate for one gambling table is 1278,23 euros and 31,95 euros per one machine for organising games of skill. The rate for organising games of chance is 300 euros per gaming machine and 10% of the total bets made on the gaming operator’s gambling machines of games of chance, less the winnings. The rate for lottery and promotional lottery is 18%. The rate for organising a toto, remote gambling and tournament of game of chance is 5%.
Gambling tax is paid into the state budget. Of the amount of gambling tax paid into the state budget 47,8% shall be transferred to the Cultural Endowment of Estonia, 12.7% shall be allocated for regional investment aid programme, 10,1% for projects related to science, education, children and young people, 15,3% for projects related to families, medicine, welfare, elderly persons, disabled persons and people with gambling addiction, 14,1% for projects related to culture, sports and Olympic preparation.
Tax is administered by the Estonian Tax and Customs Board.
Heavy Goods Vehicle Tax
Heavy goods vehicle tax is paid for following classes of vehicles which are intended for the carriage of goods:
(1) lorries with a maximum authorised weight or gross laden weight of not less than 12 tons;
(2) road trains composed of trucks and trailers with a maximum authorised weight or gross laden weight of not less than 12 tons.
Heavy goods vehicles of the Defence Forces, National Defence League, Border Guard, police authorities, also state and local government agencies of the fire and rescue services are exempt from the heavy goods vehicle tax.
The lorries and road trains are taxed pursuant to the tax rate set out in the Appendix of Heavy Vehicle Tax Act according to:
(1) the maximum authorised weight or gross laden weight, number of axles and the type of suspension of the driving axle of the lorry or truck,
(2) the maximum authorised weight or gross laden weight of a road train on the basis of the characteristics concerning lorries and trucks, the number of axles of a trailer used in the composition of the road train and the maximum weight of the trailer.
A customs union means the absence of customs duties and quotas at internal borders between Member States, and the establishment of common customs duties on imports from third countries.
Although internal borders were abolished, goods entering Member States from outside the customs territory of the EU are subject to customs controls and payment of any customs duties before they are released for free circulation within the EU.
Duty rates can be based on a percentage of the value of the goods being imported (ad valorem rate) or the rate can be a certain amount of money e.g. based on the number, weight or volume of the goods (specific rate). There are also combinations of ad valorem and specific rates referred to as compound rates. However, the majority of countries primarily use ad valorem rates.
TARIC, the integrated Tariff of the European Union, is a multilingual database integrating all measures relating to EU customs tariff, commercial and agricultural legislation.
Main categories of measures:
- Tariff measures
- "Third country duty”, customs duty applicable to all imports originating in a non-EU country, as defined in the Combined Nomenclature
- Tariff preferences
- Autonomous suspensions of duties
- Tariff quotas
- Customs Unions
- Agricultural measures
- Agricultural components
- Additional duties on sugar, on sugar content and on flour content
- Representative prices for poultry
- Standard Import Values and Unit Prices for fruits and vegetables
- Refunds for export of basic and processed agricultural products
- Trade Defence instruments: antidumping duties and countervailing duties
- Prohibitions and restrictions to import and export
- Quantitative liimits
- Import and/or export controls of certain categories of goods (e.g. products subject to CITES, luxury goods, cultural goods, products and equipment containing fluorinated greenhouse gases, dual use goods, veterinary controls on animals and food, etc.)
When importing goods into Estonia, declarants and customs officials are guided by the Estonian Customs Tariff (ETT). It includes, in addition to TARIC measures, national measures, including excise duties on imports (alcohol, tobacco, fuel) and VAT.
Tax is paid quarterly into the state budget and the tax authority is the Tax Board.