Estonia is the most advanced digital society in the world
Estonia is a country in the Baltic region of Northern Europe bordered to the north by the Gulf of Finland, to the west by the Baltic Sea, to the south by Latvia and to the east by Lake Peipus and Russia. Across the Baltic Sea lie Sweden and Finland.
Estonia’s economy continues to benefit from a transparent government and policies that sustain a high level of economic freedom, ranking 6th globally and 2nd in Europe. The rule of law remains strongly buttressed and enforced by an independent and efficient judicial system. A simplified tax system with flat rates and low indirect taxation, openness to foreign investment, and a liberal trade regime have supported the resilient and well-functioning economy. The 2017 Ease of Doing Business Index by the World Bank Group places the country 12th in the world, surpassing neighbouring Finland, Australia, Germany, Canada and Switzerland. The strong focus on the IT sector has led to much faster, simpler and efficient public services where for example filing a tax return takes less than five minutes and 98% of banking transactions are conducted through the internet. Even though being a former Soviet Union country, Estonia has the third lowest business bribery risk in the world, according to TRACE Matrix.
International rankings of Estonia
The following are links to international rankings of Estonia.
1st of 65
Freedom Hous Internet Freedom Index 2016
1st of 35
International Tax Competitiveness Index 2015
6th of 180
Index of Economic Freedom 2017
1st of 159
State of World Liberty Index 2006
12th of 190
Ease of Doing Business Index 2017
Estonian Tax System
e-Tax is an electronic tax filing system set up by the Estonian Tax and Customs Board. Each year, around 95% of all tax declarations in Estonia are filed electronically.
The system enables you to:
- file an enterprise’s declarations for income tax, social tax, unemployment insurance and contributions to the mandatory pension fund;
- request value-added tax returns;
- request alcohol excise, tobacco excise, fuel excise and packaging excise duty returns;
- file customs declarations;
- file personal income tax declarations.
Non-residents can choose a tax representative. The tax representative of a non-resident is a person to whom the Tax and Customs Board has issued a corresponding activity license authorised to represent the non-resident for the performance of obligations arising in Estonia.
Corporate income tax
There is no corporate income tax on retained and reinvested profits.
Estonian resident companies and the permanent establishments of foreign entities (including branches) are subject to 20% income tax only in respect to all distributed profits (both actual and deemed).
Distributed profits include:
- corporate profits distributed in the tax period;
- gifts, donations and representation expenses;
- expenses and payments not related to business;
- transfer of the assets of the permanent establishment to its head office or to other companies.
Starting from January 1, 2018 – the corporate income tax rate on regular profit distributions has been lowered from 20% to 14%*, but only in cases where dividends are paid to legal persons.
*please contact us directly for the exact terms of a reduced withholding tax rate
Fringe benefits are taxable at the level of the employer. The employer pays income tax and social tax on fringe benefits.
The rate of social tax is 33% (20% for social security and 13% for health insurance). Besides the social tax, unemployment insurance tax at a rate of 0.8% must be paid on the gross salary (an additional 1.6% is withheld from the employees’ salary).
Registered in Estonia employers (including the permanent establishments of foreign entities) must pay social tax on all payments made to employees, except on those specifically exempted by law. Fringe benefits and the income tax thereof are also included in the taxable base.
Value added tax (VAT)
The standard rate of VAT is 20%; the reduced rate is 9% and 0% in some cases.
VAT is charged on the supply of goods and services in the course of business activities and the self-supply of goods and services. A taxable person is an individual engaged in business and registered as a taxable person. The threshold for obligatory registration is 16,000 EUR. The threshold for a taxable person with limited liability in the case of the acquisition of goods is 10,000 EUR. There is no threshold in the case of the acquisition of services.
The taxable period is one calendar month, and VAT returns must be submitted to the tax authority by the 20th day of the month following the taxable period.
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 the 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.
The personal income tax is withheld from the employees’ gross salary every month and paid by the employer.
Non-residents pay personal income tax only on their income received from Estonian sources. Taxable income in Estonia includes:
- income from work under a labour contract or contractor’s agreement in Estonia;
- income from business carried out in Estonia;
- interest income received from Estonia (only if it is substantially higher than that of similar debt claims);
- income from the lease of assets located in Estonia;
- gains from disposal of assets located in Estonia;
- directors’ fees paid by Estonian enterprises;
- income of a sportsman or an artist from his or her activities in Estonia;
- pensions and scholarships.
Personal income tax declarations need to be filed once a year. Using a secure ID, a taxpayer logs onto the e-Tax system, reviews the data in pre-filled forms, makes any necessary changes, and approves the declaration form. The process typically takes three to five minutes. Even one-click tax returns are possible.