Doing business in Estonia
Table of contents
Part one: Estonia at a glance
3 1
Part two: Corporate tax system
Business climate
5
Corporate income tax
3 15 17
Permanent establishment
Part three: Personal taxes Income tax
Dividends
Income subject to tax
Interest
Employer-provided stock
Monetary policy
Royalties
options
Trading
Sale of real estate
Deductions
6
Rates
Transport and logistics Banking sector
Value added tax
Information and
VAT base
procedures
telecommunications
Non-established business
Electronic declaration
National support for businesses
VAT payers
19
Tax filing and payment
VAT rates
Visas, work and residence
Returns and payment
permits
Establishing a company
VAT refund
Visas
The main types of legal entities
VAT group registration
Residence permits
Starting a business
27
Definiton of a resident
Overview of the economy
Economy of Estonia
3 26
9
Registration process
Work permits
Accounting principles
Social security payments
Auditing
Social tax
21
Unemployment insurance payments Pension system Voluntary schemes Tax filing and payment procedures Non-resident employers Totalization agreements Other taxes
23
Land tax Heavy goods vehicle tax Local taxes Gambling tax Excises Customs Customs procedures Authorized Economic Operator (AEO) status
Doing business in Estonia
24
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1. Estonia at a glance
Doing business in Estonia
1
1. Estonia at a glance
Estonia’s economic freedom is rated as the 16th freest in 2012
According to the Index of Economic Freedom published by the Heritage Foundation in cooperation with The Wall Street Journal, Estonia is rated as the 16th freest in 2012.1 Estonia enjoys high levels of investment, financial freedom and property rights while the top income and corporate tax rates are relatively low, compared with other countries. According to the findings of Freedom House in its latest edition of Freedom in the World, the annual survey of global political rights and civil liberties, Estonia is ranked among the 47 freest countries in the world2 and one of the top countries in Central and Eastern Europe. The global financial market crisis that started in 2007 has affected the general economic growth in Estonia – economic expansion with gross domestic product (GDP) growth approximately 10% per year halted and the GDP decreased rapidly from 2008. However, the consistent and stable economic policy has helped to bring the economy out of recession, resulting in a national annual GDP growth of 7.6% in 2011.3 Another recent significant achievement for Estonia is that it managed to comply with Maastricht’s strict deficit rules and joined the Eurozone on 1 January 2011. The Estonian kroon was replaced with the euro (1 euro = 15.6466 kroons) on 1 January 2011. This accession has been a positive landmark for Estonia, which will further enhance trade and tourism. According to the Ernst & Young Eurozone Spring 2012 Forecast, Estonian economic growth was the fastest in the Eurozone in 2011. The forecasts show that, in 2012, there may be a slowdown in growth pace, nevertheless Estonia will remain the fastest-growing Eurozone economy in 2012.
Footnotes 1. 2012 Index of Economic Freedom, http://www.heritage.org/Index/Country/Estonia 2. Freedom House, http://www.freedomhouse.org 3. Statistics Estonia, 2012, http://www.stat.ee/57459
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Doing business in Estonia
1. Estonia at a glance
Estonia at a glance Estonia offers key opportunities for businesses in a number of economic sectors, some of which are widely renowned (e.g., ICT, wood processing, biotechnology). Estonia has effective trade ties especially with Finland, Sweden, Russia and Germany, and due to low labor costs, the services and manufacturing sectors have been prosperous.
Tallinn (392,000 inhabitants)
Tartu (98,000) Narva (65,000) Kohtla-Järve (43,000) Pärnu (43,000)
Major economic sectors in Estonia
Information and communications technologies (ICT) Electronics Machinery and metalwork Wood processing Logistics and transport Food Bio- and medical technology
Geography
Located in Eastern Europe and at the heart of the Baltic Sea Region
Capital
Other cities Area
Parliamentary Republic
Government
Population Timber, oil shale, phosphorite, peat, limestone, dolomite
Major natural resources Neighboring countries
Estonian; English, Russian and Finnish are also widely spoken
Low number of public holidays (12)
Public holidays
Helsinki 85km, Riga 307km, St. Petersburg 395km, Stockholm 405km, Vilnius 605km, Warsaw 1,000km
Distance from Tallinn
New York -7 Helsinki 0 Moscow +1 Beijing +5 Kyiv 0 London -2 Tel Aviv 0
1.29 million inhabitants
Finland Latvia Russia Sweden
Language
Memberships
Estonia is two hours ahead of Greenwich Mean Time (GMT +02); in summer GMT +03
45,227 km2
Time zone
Currency
Euro (EUR) 1 euro = 100 cents
Business hours
8:00-17:00 Offices of major banks are open until 18:00, sporadically until 21:00 (incl. weekends)
Hours ahead of or behind Estonia
Flight times
Doing business in Estonia
The United Nations, the European Union, NATO, World Trade Organization (WTO), World Health Organization (WHO), OECD. Estonia has signed the Kyoto Protocol and the Schengen Treaty
Helsinki 35 min, Stockholm 1h, Copenhagen 1h 30 min, Moscow 1h 40 min, Amsterdam 2h 20 min, London 2h 45 min
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1. Estonia at a glance
Estonia on the map of Europe
Estonia is a country situated in the Baltic Sea region. This small Eastern European country is 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 Russia. Besides these two neighboring countries, Estonia has close ties with Finland across the Gulf of Finland. Sweden is Estonia's western neighbor across the Baltic Sea.
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Doing business in Estonia
1. Estonia at a glance
Business climate The overall freedom to conduct business in Estonia is well protected under a transparent regulatory environment.
For example, starting a business takes an average 7 days,4 compared with the world average of 35 days. Foreign and domestic investments are both equally treated under the law, and this makes Estonia one of the leading countries in Central and Eastern Europe in terms of attracting foreign direct investments (FDI). The World Bank has ranked Estonia as 24th out of 183 countries on the ease of doing business.5 There is a growing number of industrial parks and supply of highquality commercial and office property. The establishment of free zones at Muuga Port, in Valga, Sillamäe and Paldiski has further enhanced Estonia's attractiveness to foreign investors. Many costs such as energy, labor, transport services, telecommunications and property expenses are considerably lower compared with other countries in the Baltic Sea region. Investors find that in Estonia they can achieve very high quality levels without having to pay heavy costs, evidenced by the Estonian leading position in Central and Eastern Europe in terms of FDI per capita. The FDI stock per capita was EUR9,669 as at 31 December 2011; in total EUR12.7 billion6 was invested in 2011 in Estonia.
Reasons to invest in Estonia:
Developed communication networks: business can be done remotely from any part of the world due to a wide range of internet-based services
Tax system supporting the holding structure without any need for separate and complicated tax accounting
Transparent regulatory environment
Excellent connection links with the Nordic markets as well as with Russia
Footnotes 4. Doing Business, http://www.doingbusiness.org/data/exploreeconomies/estonia 5. Doing Business, http://www.doingbusiness.org/rankings 6. Bank of Estonia 2012
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1. Estonia at a glance
Economy of Estonia Estonia, the European Union entrant state from 2004, has a modern market-based economy and one of the highest per capita income levels in Central Europe.
Key factors of 2011 GDP per capita EUR15,972
GDP growth 7.6%
Public debt 5.8% of GDP
Exports EUR12 billion
Imports EUR12.6 billion
Inflation 5.1%
Labor force 704,400
Unemployment 12.5%
Sources: Statistics Estonia 2012, http://www.stat.ee/29958 Bank of Estonia 2012, http://statistika.eestipank.ee “The World Factbook”, Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/en.html
Overview of the economy Successive policies of governments have pursued a free market, a pro-business economic agenda and have wavered little in their commitment to pro-market reforms. The priority has been to sustain high GDP growth rates – on an average 8% per year from 2003-07. The economy benefits from the strong electronics and telecommunications sectors as well as the close trade ties with Finland, Sweden and Germany. The current government has pursued sound fiscal policies, resulting in balanced budgets and low public debt.7 Estonia's economy slowed down noticeably and fell into recession in the middle of 2008, primarily as the result of an investment and consumption slump, following the burst of the real estate market bubble.7 A modest recovery began in 2010, leading to fast economic growth in the first quarter of 2011.
Footnotes 7. “The World Factbook”, Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/geos/en.html
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Doing business in Estonia
1. Estonia at a glance
Monetary policy
Banking sector
As from January 2011, Estonia joined the Eurozone. Estonia's accession to the Economic and Monetary Union provides the stability and low inflation level of the currency in circulation. The accession to the Eurozone gives Estonia the opportunity to participate in the European monetary policy decision-making process.
The banking system in Estonia, with its Scandinavian connections, is modern and efficient, encompassing the major banks in the region. Commercial banks provide domestic and international services, including internet and telephone banking, at very competitive rates. Estonia has highly advanced electronic channels: 98% of total payment transactions are made via internet banking systems. 8
Trading
Information and telecommunications
Estonia's main export partners are Finland, Sweden, Russia, other Baltic countries, Germany and the USA. The main partners for imported goods and services are Finland, Russia, Sweden and Germany. Estonia's major export articles are machinery and equipment, mineral products, wood and wood products. Estonia's main imports are machinery and appliances, mineral products and transport equipment. The 2012 Global Enabling Trade Report by the World Economic Forum, ranked Estonia as the twelfth (out of 132 countries) in their customs services index and rated Estonia highly in the efficiency of import and export procedures.
Transport and logistics Estonia's excellent transportation links and geographic location make it a good base for production and distribution. Estonia has a considerable share of transit trade through the Baltic Sea with the deepwater port and free zone of Muuga, which has created advanced communication links in the region. The newly established multifunctional port with the free zone at Sillamäe is the most eastern port of the European Union. It is capable of handling all cargo groups from oil products and dry bulk to containerized cargo, and has access to the most cost-effective transit corridors in the region. Paldiski Northern Port and free zone in northwest Estonia is a rapidly developing private-owned port, which specializes in handling rolling cargo, including new cars, containers, general cargo and oversized project cargo. Estonian ports are ice free and easily navigable all year round.
Foreign investors have made considerable investments into high technology and communication networks in order to modernize the infrastructure of IT communications in Estonia. As a result, the Estonian information and telecommunications sector is one of the most developed in Central and Eastern Europe. Consequently, a wide range of high-quality voice, data and internet services are available throughout the country. Due to the fact that internet services are widely available, schools, libraries and other public places are connected to the internet. Seventy-six percent of the population aged 16 to 74 are internet users.9 A large percentage of the population files income tax returns online (92% of personal tax returns in 2010); and online voting was used for the first time in the local elections of 2005. Estonia has also made progress in implementing IT services in the medical sector — the state's Health Information System and digital prescriptions have been implemented. Most shops, restaurants and other service providers accept bank or credit cards for payment. Also, it is common that public places offer free internet via wireless. Estonia is also characterized by a large number of telephone connections both via fixed landline and mobile telephones (117 mobile subscriptions per 100 inhabitants).9
Freight and passenger links enable sea crossings across the Baltic Sea, and air connections provide easy access to Tallinn from the major European cities. Estonian railways use the same gauge as throughout Russia, making Estonia an attractive center for bulk shipment of goods from the Eastern area.
Footnotes 8. Estonia.eu, Economy & IT 9. Statistics Estonia, 2010
Doing business in Estonia
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1. Estonia at a glance
National support for businesses Besides offering a favorable business environment for attracting FDI, Estonia also presents a range of national support schemes. Enterprise Estonia (EAS) is one of the largest institutions within the national support system for entrepreneurship, providing financial assistance, advisory, cooperation opportunities and training for entrepreneurs, research establishments, public and the third sector. Pursuant to the accession of Estonia to the European Union, EAS became one of the implementing units of the European Union structural funds in Estonia. Today, most of the EAS programs and grants offered are co-financed from the EU structural funds. EAS has foreign representative offices in Hamburg, Helsinki, Kyiv, London, Moscow, Shanghai, Silicon Valley, Stockholm, St. Petersburg and Tokyo. Businesses can also get support from the Credit and Export Guarantee Fund KredEx in Estonia. The support schemes are, for example, a start-up loan to finance investments and working capital of starting businesses; a business loan guarantee for companies whose collateral property value or self-financing is not sufficient for getting a bank loan or who do not have a long history of operation; and a subordinated loan for sustainable companies oriented on growth that the banks are not ready to finance due to insufficient self-financing and collaterals.
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Doing business in Estonia
1. Estonia at a glance
Starting a business The formation and regulation of business entities in Estonia are determined by the Commercial Code. The most common forms of business entities in Estonia are private limited companies, public limited companies and branches of foreign entities. General and limited partnerships are rarely formed. Establishing a company All enterprises are required to be entered in the Commercial Register. The Commercial Register is a public register, which means that everyone is entitled to examine the register and the business files and to obtain copies of registry cards and documents in the business files.
To enter a company in the Commercial Register, the founders must submit the memorandum of association, which includes the following information: The business name and official address The names and residences or seats of the founders The proposed amount of share capital The number and nominal value of shares and, upon issue of more than one class of shares, the rights attached to the shares and the division of shares among the founders The amount to be paid for shares, the procedure, time and place of payment In case a share is paid for by a non-monetary contribution, the item of the non-monetary contribution and its valuation method Information on the members of the Management Board, the Supervisory Board and the auditor Information on procurators (authorized persons), if appointed The projected costs of foundation and the procedure for payment thereof With the conclusion of the memorandum of association, the founders shall also approve the articles of association of the limited liability company as an annex to the memorandum of association. The memorandum of association and the articles of association approved thereby shall be notarized and signed by all founders.
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1. Estonia at a glance
The main types of legal entites
Limited liability companies Limited liability companies are liable for their obligations only to the extent covered by their assets. Shareholders are liable up to the issue price, which is to be paid for all the shares that they have subscribed for. Shareholders are not personally liable for the obligations of the company. If the members of the Supervisory Board or Management Board cause any damage to the company, the company can claim compensation for damages from the latter.
Full liability companies
Private limited liability companies (osaühing, OÜ)
Public limited liability companies (aktsiaselts, AS)
The minimum share capital of an OÜ is EUR2,500. If the intended share capital of an OÜ does not exceed EUR25,000 when establishing the company, the shareholders may prescribe in the memorandum of association that payment for shares by the founders is not needed; however, the payment is necessary at a later date. This regulation only applies when the founders are natural persons. The minimum number of shareholders is one. The transfer of shares must be confirmed by a notary, except if the shares are registered in the Central Register of Securities. In this case, the transfer of shares may be executed by transfer from one securities account to another, e.g., by using internet banking services.
The minimum share capital of an AS is EUR25,000. The minimum number of shareholders is one. There is no maximum number of shareholders. The shares of an AS must be registered in the Central Register of Securities. Registered shares may be freely transferred. The articles of association may prescribe that, upon transfer of shares to third persons, other shareholders have a pre-emptive right that applies to each transfer of shares for a payment.
General partnerships (täisühing, TÜ)
Limited partnerships (usaldusühing, UÜ)
General partnership is a legal person and its shareholders’ liability for the company’s obligations is unlimited. A partnership is established on the basis of a joint activity agreement by the partners who are jointly liable for the obligations of the general partnership with all their assets. Partners can be both legal and natural persons.
Limited partnership has both general and limited liability members. The liability of general liability members is unlimited. The liability of limited liability members is limited to their share property. A limited liability partner does not have the right to manage the limited partnership but can participate as a general partner in the decision-making process.
Branches of foreign companies (filiaal)
If a foreign company wants to permanently offer goods or services in its own name in Estonia, it can enter a branch in the Commercial Register. A branch is not a legal person. The main company shall be liable for the obligations arising from the activities of the branch. As a rule, the branches registered in Estonia are considered as permanent establishments for taxation purposes.
Personal enterprise or sole proprietorship (füüsilisest isikust ettevõtja, FIE)
A sole proprietor can be entered in the Commercial Register and has unlimited liability for its obligations. The sole proprietorship cannot be regarded as a private company. Sole proprietorships are widely used by individuals for smaller-scale entrepreneurial businesses.
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Doing business in Estonia
1. Estonia at a glance
Comparison Branch of foreign entity
Private limited company
Minimum capital N/A
EUR2,500
A foreign company is liable for the obligations of the branch.
A foreign company shall appoint a director or directors for the branch. At least one director has to be a resident of Estonia, another EEA Member State or Switzerland.
Not required.
Not required.
Not required.
Not regulated.
Public limited company
Minimum capital EUR25,000
Liability A company is liable with all of its assets.
Management board (MB) MB may have one or several members, who need not be shareholder(s).
Supervisory board (SB) Required if prescribed by the articles of association.
Auditing The annual report must be audited if, at the balance sheet date of the accounting year, the limits of at least two of the following criteria have been exceeded: see "Auditing" section p.14. Reserve capital If the formation of the reserve capital is prescribed by the articles of association, it shall not be less than 1/10 of the share capital. At least 1/20 of net profit of the financial year shall be entered in the reserve capital until it has reached the amount provided by the articles of association.
At least three members, who need not be shareholders. A member of the MB shall not be a member of the SB.
Required.
The amount of the reserve capital is prescribed by the articles of association and it shall not be less than 1/10 of the share capital of the financial year. At least 1/20 of net profit of the financial year shall be entered in the reserve capital until it has reached the amount provided by the articles of association.
Decrease of assets If the net assets are less than half of the share capital or less than the minimum capital requirement of EUR2,500 regarding private limited liability companies and EUR250,000 regarding public limited liability companies, the shareholders must decide on: (1) The implementation of measures as a result of which the net assets would form at least half of the share capital and minimum capital requirement Or (2) Dissolution, merger, division, transformation of the company Or (3) Submission of a bankruptcy petition
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1. Estonia at a glance
Branch of foreign entity
Not regulated.
Private limited company
Public limited company
Prohibited loans A company shall not grant or guarantee a loan to: (1) One of its shareholders whose share represents more than 5% of share capital (2) A shareholder or member of its parent company whose share represents more than 5% of the parent company's share capital (3) A person to acquire its shares (4) A member of its MB or SB or procurator (authorized person)
A company shall not grant or guarantee a loan to: (1) One of its shareholders whose shares represent more than 1% of share capital (2) A shareholder or member of its parent company whose share represents more than 1% of parent company's share capital (3) A person to acquire its shares (4) A member of its MB or SB or procurator (authorized person)
A subsidiary may grant or guarantee a loan to its parent undertaking or a member of the same group if this does not harm the financial status of the company or the interests of creditors.
Not regulated.
A foreign company must maintain separate accounts concerning the branch. An unattested copy of the audited and approved annual report of the foreign company must be submitted to the Commercial Register of the location of the branch not later than one month after the approval of the annual report or seven months after the end of the financial year. Exceptions apply to companies of the states, which are parties to the EEA Agreement.
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A subsidiary may grant or guarantee a loan to its parent undertaking or a member of the same group if this does not harm the financial status of the company or the interests of creditors.
Prohibition on competition Without the consent of shareholders or SB, a member of the MB or SB shall not: (1) Be a sole proprietor in the area of activity of the company (2) Be a partner of a general partnership or a general partner of a limited partnership that operates in the same area of activity as the company (3) Be a member of the managerial body of a company, which operates in the same area of activity, except if the companies belong to one group Reporting at the end of the financial year A company is required to prepare the annual report that consists of the annual account (balance sheet, income statement, cash flow statement, statement of changes in owner’s equity and accompanying notes), the management report, the auditor’s report (if required) and the profit distribution proposal. Within six months after the end of the financial year, the company is required to submit a signed copy of the entity’s annual report together with the auditor’s report, if applicable, the profit distribution proposal and the list of shareholders (in public limited company shareholders owning over 10%) electronically to the Commercial Register for permanent retention.
Doing business in Estonia
1. Estonia at a glance
Registration process
Accounting principles
As a rule, the registration of an entity into the Commercial Register of Estonia takes five working days.
The generally accepted accounting principles (GAAP) of Estonia are based on the internationally accepted accounting and reporting principles, the main requirements of which have been stipulated in the Accounting Act of the Republic of Estonia. These have been supplemented by the guidelines issued by the Estonian Accounting Standards Board.
The owners of an ID card in Estonia, Finland, Belgium, Portugal and the mobile ID owners in Lithuania can use the internet for: Registering a new legal entity Changing the registry information of an already existing legal entity Filing annual reports All documents shall be provided via the e-portal of the Commercial Register and there is no need to execute any notarization proceedings. A private limited company can be created within two hours via the internet, without notarization, in an accelerated procedure. Additional information regarding operating in the Commercial Register via ID card or mobile ID is available at http://ariregister.rik.ee.
Estonian legislation allows entities to prepare their financial reports in accordance with the IFRS. In general, there are no significant differences between the Estonian GAAP and the IFRS, except for: Annual reports prepared in accordance with the IFRS are more detailed, because those standards require considerably more information to be disclosed Unlike the IFRS, the Estonian GAAP does not allow using the revaluation method for fixed assets The IFRS does not allow entities to choose whether they will capitalize loan interests, but the Estonian GAAP does allow it (to capitalize or record in the income statement) The Estonian GAAP does not describe deferred tax accounting in detail Unlike the IFRS, the Estonian GAAP describes the transactions (business combinations) under common control There are also some minor differences. If an entity prepares its financial reports according to the Estonian GAAP and it has an accounting issue that is not described in the Estonian Accounting Standards Board regulations (RTJ), the IFRS framework should be followed.
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1. Estonia at a glance
Auditing Generally, all companies subject to audit are required to submit their audited financial statements to the Commercial Register within six months of the end of the financial year. A few specific types of companies such as banks, insurance companies and investment funds have particular reporting requirements. Auditing is obligatory for public limited companies (AS). Other entities need to be audited if, at the balance sheet date of the accounting year, the accounting entity exceeds the limits of at least two of the three following criteria: Sales revenue (net turnover) in the case of a company, or income in the case of other accounting entities — EUR2m Total assets as of the balance sheet date — EUR1m Average number of employees — 30 Or if one of the three following criteria is exceeded: Sales revenue — EUR6m Total assets as of the balance sheet date — EUR3m Average number of employees — 90
Doing business in Estonia
According to the Auditors Activities Act, smaller companies are subject to audit if two of the three following indicators are exceeded: Sales revenue or income — EUR1m Total assets as of the balance sheet date — EUR0.5m Average number of employees — 15 Or if one of the three following indicators are exceeded: Sales revenue or income — EUR3m Total assets as of the balance sheet date — EUR1.5m Average number of employees — 45 The auditing process in Estonia is regulated by the Estonian Auditing Standards, which are based on the International Standards of Auditing issued by the International Federation of Accountants.
2. Corporate tax system
Doing business in Estonia
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2. Corporate tax system
The cost-based Estonian tax system with its flat rate of 21% is considered one of the most unique and simple tax regimes in the world. Deferral of taxation shifts the time of taxation from the moment of earning the profits to that of their distribution. Thus, undistributed profits are not subject to income taxation, regardless of whether these are reinvested or merely retained. Corporate income tax is not based on accrual accounting, but on payments and expenses on a cash basis calculation. There are neither thin capitalization nor interest cap rules. Participation exemption is applied for dividends from subsidiaries to parent companies and for profit from permanent establishment (both from the EU and third countries). Estonia has few withholding taxes and can therefore be a favorable holding jurisdiction.
Estonia has effective agreements on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital with 49 countries: Albania Armenia Austria Azerbaijan Belarus Belgium Bulgaria Canada China Croatia Czech Republic Denmark Finland France Georgia Germany Greece Hungary
Iceland Ireland Isle of Man Israel Italy Jersey Kazakhstan Latvia Lithuania Luxembourg Macedonia Malta Moldova The Netherlands Norway Poland Portugal Romania
Serbia Singapore Slovakia Slovenia Spain South Korea Sweden Switzerland Turkey Ukraine United Arab Emirates United Kingdom United States
The agreements on the avoidance of double taxation have been signed but are not yet in force with the following countries: Bahrain, Bosnia and Herzegovina, Cyprus, India, Indonesia, Mexico, Morocco, Russia, Oman, South Africa, Thailand, Turkmenistan and Uzbekistan.
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Doing business in Estonia
Tax rates:
Corporate income tax on profit distribution 21% (21/79 net)
Capital gains tax(paid upon distribution) 21%
Branch tax 21% (21/79 net)
Withholding tax on: Interest 0%; 21%* Royalty 0%; 5%; 10% Dividends 0% Service fees** 0%; 10%; 21%
Land tax 0.1%—2.5%
VAT 20%; 9%; 0%
Personal income tax 21%
Social security tax 33%
Obligatory funded pension 2%
Unemployment insurance 1.4% (employer) 2.8% (employee)
* 21% withholding tax applies to interest paid to non-residents on the amount exceeding the fair market interest. ** 10% withholding tax applies on service fee payments to non-residents if services were provided in Estonia and no double tax treaty applies. 21% withholding tax applies on service fee payments to legal persons located in a low tax rate territory, irrespective of where the services were provided or used.
2. Corporate tax system
Corporate income tax There is no traditional corporate income tax system in Estonia. The profit of an Estonian entity will not be taxed until distribution.
Estonian companies do not have to pay income tax on the profit derived from their business on an earnings basis. Instead of taxation on the profit earned by resident companies, actual and deemed profit distributions (usually in the form of dividends) are taxed at the rate of 21% on the gross amount of distribution. The transfer of profits from a permanent establishment to its head office or to other non-residents is also treated as a taxable distribution. Capital contributions to the equity of an Estonian company (upon formation or increase of share capital) may be repaid free of Estonian tax. The assets attributed to the Estonian branch by the headquarters are treated equally for tax purposes with the capital contributions to the equity of a limited liability company.
A company's tax liability arises at the moment when it makes distributions, not the moment when the profits are earned. Therefore, the main feature of the Estonian corporate income tax system different from the tax systems in other countries is the timing of tax liability. Certain costs that, under a traditional corporate income tax system would be non-deductible for tax purposes, are subject to corporate tax in Estonia. For example: 1)Fringe benefits 2)Gifts 3)Donations 4)Representation expenses (e.g., cost of entertaining guests) 5)Expenses and payments not related to the business Corporate income tax at the rate of 21/79 is applied on the net amount of the above-mentioned payments, i.e., 21% of gross amount. Estonia's simple system is based on a cash-basis tax calculation, and therefore, there is no need for tax depreciation rules. The period of taxation in the case of corporate entities is a calendar month; the income tax return must be submitted and the income tax paid by the 10th day of the following month.
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2. Corporate tax system
Permanent establishment
Interest
A foreign enterprise is considered to have a permanent establishment in Estonia if:
As a rule, interest paid to non-residents is not subject to withholding tax. An exception applies to the portion of interest that significantly exceeds the market interest rate — a tax rate of 21% is applied to the amount exceeding fair market interest.
It has an economic unit through which the economic activity of a non-resident is permanently carried out in Estonia The economic activity is carried out within certain geographical boundaries or such activity is mobile in nature A representative of a non-resident operates in Estonia and is authorized to carry out, and repeatedly carries out, transactions in the name of the non-resident Taxation principles for a permanent establishment are the same as for a resident legal person in Estonia.
For resident private individuals, interest paid from loans, securities, leases or other debt obligations, including the amounts calculated on the basis of debt obligations by which the initial debt obligations are increased, is subject to the standard income tax rate of 21%. Interest paid by credit institutions in relation to a deposit account is tax exempt. No thin capitalization or interest cap or debt-to-equity rules are applicable in Estonia.
Royalties
Dividends Companies distributing dividends must pay corporate income tax at the rate of 21% on the gross amount of dividends paid. This income tax is treated as a payment of income tax by the distributing company and not as a tax withheld from the payment to the recipient of dividends. If an Estonian company is paying the received dividends forward (except for dividends from companies located in a low-tax jurisdiction), the dividends distributed are exempt from corporate income tax if these were received from a taxable subsidiary resident in the EEA or Switzerland, or where the following conditions are satisfied: Foreign tax has been paid or withheld from the profit from which the dividends were paid The Estonian company paying dividends owned at least 10% of the shares or votes of the foreign company when the dividends were received The following payments are also taxable as deemed dividends: the decrease of share capital, the redemption of shares and the payment of liquidation proceeds in the amount which exceeds monetary and non-monetary payments made to equity.
Royalties paid to non-residents are subject to 10% tax at source. No tax is withheld if royalties are paid to a related party from another EU Member State or Switzerland (either directly or via its permanent establishment), and at least one of the following requirements is met: The company receiving payments owns and has owned 25% of the share capital of the company paying the fee for at least two years The company paying royalties owns and has owned 25% of the share capital of the company receiving payments for at least two years The company situated in the EU or Switzerland owns and has owned 25% of the share capital of both companies A standard withholding tax rate of 21% applies to the royalties paid to resident private individuals.
Sale of real estate The gain from the sale of real property by a non-resident in Estonia is subject to 21% income tax. Furthermore, the gain from the sale of shares in a real estate company is subject to 21% income tax. A non-resident must hold at least 10% of the shares and at least 50% of the assets must consist of Estonian real estate (not necessarily at the time of the sale but at any point during the two preceding years) for the company to qualify as a real estate company. The same applies for contractual investment funds and other pool of assets.
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Doing business in Estonia
2. Corporate tax system
Value added tax
VAT base
Non-established business
The following activities are subject to VAT:
A “non-established business” is a business that has no fixed establishment in the territory of Estonia. A non-established business must register for VAT if it makes taxable supplies of goods or services regardless of the amount of supply. A registered branch, fixed establishment of a foreign company or a resident legal person must be registered for VAT purposes if making taxable supplies in Estonia of more than EUR16,000 per calendar year.
The supply of goods or services made in Estonia by a taxable person The supply of services for which the place of supply is not in Estonia (that is, services that are provided through a seat or fixed establishment located in Estonia to a person who is registered as a taxable person or taxable person with limited liability in the EU or who is a non-EU country person engaged in business) Reverse-charge services received by a taxable person in Estonia (that is, services for which the recipient is liable to pay VAT)
A foreign taxable person can make transactions that do not relate to its Estonian fixed establishment. In this case, the rules for a non-established business apply.
The intra-Community acquisition of goods The importation of goods into Estonia (except VAT-exempt import), regardless of the status of the importer
Doing business in Estonia
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2. Corporate tax system
VAT payers If an Estonian entity (including the fixed establishment of a foreign entity) makes taxable supplies in Estonia over the current VAT registration threshold of EUR16,000, the entity is required to register and account for the Estonian VAT. The registration obligation does not arise if an entity is engaged in supplies, which are taxed with 0% VAT rate, unless the supplies are treated as intraCommunity supplies of goods or if services are provided to a taxable person of another Member State. When a foreign entity without any fixed establishment in Estonia makes taxable supply in Estonia that is not subject to the Estonian reverse charge, the foreign entity must register for VAT purposes from the date when the taxable supply was made. In this case, no registration threshold applies (see below). Different rules apply in the case of distance sales and e-commerce. If a business is not registered for VAT purposes in Estonia but sells and delivers goods from another EU Member State to customers in Estonia who are not VAT registered (distance sales), and where the value of those sales exceeds a threshold of EUR35,000, the business is required to register and account for VAT in Estonia. If the taxable value of intra-Community acquisitions acquired by a non-taxable person exceeds EUR10,000 from the beginning of the calendar year, the obligation to register as a taxable person with limited liability arises from the date when the threshold was exceeded. A company does not have to register for VAT purposes in Estonia if all supplies go through the free zone or a customs warehouse in Estonia.
VAT rates The standard rate of VAT is 20%. On some goods and services, such as books, periodicals, accommodation services and medicinal products, the rate of VAT is 9%. VAT at the rate of 0% is applied on goods under export procedure and non-Community goods placed in the free zone, a VAT warehouse, excise warehouse or a customs warehouse. VAT at the rate of 0% is also applied to international transport services, as well as some other services where the place of supply is not Estonia. The supply of certain goods and services of a social nature (e.g., health and welfare services, education, postal services and stamps) is exempt from VAT. In addition, some other goods and services are exempt from VAT; for example, securities, investment gold and gambling, including lotteries and lottery tickets.
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Doing business in Estonia
The supply of certain financial and insurance services, sale of real estate (except a new building), and leasing or letting of immovable property or parts thereof are generally exempt from VAT. However, VAT payers have the possibility to opt for the application of VAT on the above transactions if the tax authorities are informed in advance. Taxable persons who have opted to charge VAT on the lease of real estate or some financial services should charge VAT on all the respective transactions for at least two years. As from 1 January 2011, the domestic reverse charge applies on the supply of immovables and waste metal by the recipient if both transaction parties are taxable persons and the transaction is considered a taxable supply.
Returns and payment The taxable period is one calendar month. Monthly VAT returns must be submitted and VAT shall be paid to the tax authorities by the 20th day of the month following the taxable period.
VAT refund Estonia refunds VAT incurred by a business activity that is neither established in Estonia nor registered for VAT in Estonia. VAT is refunded if the taxable person is required to pay VAT in the country of residence and does not have a fixed establishment through which the economic activity is carried out in Estonia. VAT is refundable to another state's taxable persons on the condition that the Estonian taxable person may deduct VAT under the same circumstances on the import of goods and on the acquisition of goods or receipt of services. For EU taxable persons, the refund request must be at least EUR50 for a year or EUR400 for a period longer than three months but shorter than the calendar year. For a non-EU taxable person, the refund request must be at least EUR320 for a year.
VAT group registration A parent company and its subsidiaries may apply to register as a VAT group. One VAT registration number is provided to all members of the VAT group. The effect of grouping is that no VAT is charged on supplies between group members if the person who acquired the goods or services as a result of the transaction uses them entirely for the purposes of that person's taxable supplies. Group members are jointly and severally liable for all VAT liabilities.
2. Corporate tax system
Social security payments
Social tax Social tax is imposed on employers to fund pension insurance and health insurance. Social tax is applied on wages and other remuneration paid to employees, public servants and members of boards, business income of sole proprietors, remuneration paid to natural persons on the basis of contracts for services and fringe benefits. The flat tax rate is 33% (in certain instances, 13%). The minimum monthly tax base for salaries on which social tax is calculated is not less than EUR278.02 in 2011, i.e., the minimum social tax to be paid monthly is EUR91.78 in 2011. However, there are exceptions and special advantageous rules when the employee has been unemployed previously for six months or if the employee has two or more employers at the same time. No ceiling applies to the amount of salary subject to social tax. Self-employed persons must pay social tax at the rate of 33% on their net business income, restricted to a maximum tax base of 15 times the sum of the minimum monthly wages for the taxable period (EUR50,042.82 in 2011). In addition, self-employed persons are required to pay social tax for the current quarter during the taxable period as advance payments to the bank account of the Tax and Customs Board by the 15th day of the 3rd month of each quarter in the amount of EUR275.24 (EUR1,101.33 in a calendar year)in 2012.
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2. Corporate tax system
Unemployment insurance payments
Tax filing and payment procedures
Unemployment insurance payment is an obligatory payment withheld from the insured person's (employee's) income and paid by an employer from the gross income. The rate of payment can be changed annually within the established range: 0.5%—2.8% (for employee) and 0.25%—1.4% (for employer). In 2012, the rates are 2.8% for the insured and 1.4% for the employer, but these are planned to be decreased in the future.
An employer is obliged to declare the social security contributions withheld and the social tax payable by submitting a monthly tax return by the 10th day following the month of payment. Any taxes payable shall also be transferred to the tax authority's bank account by the same date.
Pension system The pension system in Estonia is divided into three pillars — state pension, mandatory funded pension and supplementary funded pension. The state pension insurance provides income in the case of old age, disability or loss of provider. In Estonia, there are two types of state pensions: pensions depending on the labor input (old-age pension, disability pension and survivor's pension) and the minimum national pension. Funded pension is based on prepaid finance — employees pay 2% from their gross income to a pension fund, and the state adds 4% from the employee's salary. Subscription to the funded pension is mandatory for persons born in 1983 or later. Prior to October 2010, for those born in 1942—1983 the funded pension was not mandatory, yet the voluntary subscription is no longer possible.
Voluntary schemes The third pillar of the Estonian pension system covers a voluntary supplementary pension scheme; contributions to this scheme are tax deductible for the employee. Starting from 2012, the employer can make contributions exempt from income tax to the voluntary private pension system on behalf of the employee (still having the obligation to pay social tax). The tax-exempt limit is 15% of the taxable income of employee but not over EUR6,000 per year, and it applies collectively to the contributions made by the employee and employer. The Health Insurance Fund also offers voluntary insurance. Voluntary registration with the Health Insurance Fund is possible for those who have no other insurance coverage. The insurance premium for one calendar month in 2012 is EUR103, the quarterly payment is EUR309 and the annual payment is EUR1,236.
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Non-resident employers If a non-resident entity has employees performing their activity in Estonia, it is required to register itself in the regional tax center of the Tax and Customs Board within 10 days of the date on which the tax liability arises. Registering is necessary in order to declare and pay taxes applied on the payments made to the employees. In order to register as a non-resident employer in Estonia, an application and other documents stipulated by Estonian legislation must be submitted to the regional tax and customs center of the Estonian Tax and Customs Board. If a non-resident entity receives payments in Estonia that are subject to income or social tax, unemployment insurance premiums or funded pension payments, the payer of such income is required to submit an application to the regional tax and customs center in order to receive a specific identification number for the non-resident entity.
Totalization agreements The Estonian social security legislation follows the rules provided by the European Council Regulation No. 883/2004. To provide relief from double social security taxes and to maintain relevant benefit coverage, Estonia has concluded several totalization agreements. These kinds of agreements have been concluded with Canada, Ukraine and Moldova. Certain agreements regarding pensions have also been made with Russia.
2. Corporate tax system
Other taxes
Land tax
Gambling tax
Land tax is applied on the assessed value of land. The annual rate of land tax varies between 0.1% and 2.5% of the taxable value of land. The tax is paid by the owners of real estate, building leaseholders or beneficial owners.
Gambling tax in Estonia is levied on the organizer of the gambling, i.e., a person who organizes betting, lotteries, totalizators, games of skill or games of chance. Gambling tax is imposed on:
Heavy goods vehicle tax
Gambling tables and gambling machines used for organizing games of chance (EUR1,278.23 per gambling table and EUR447.38 per gambling machine) and gambling machines used for games of skill (EUR31.96 per machine)
Trucks and road trains are subject to tax based on the maximum authorized weight, the number of axles, the type of suspension of the driving axle of truck and the maximum authorized weight or gross laden weight of a road train.
Amounts received from the sale of lottery tickets when lotteries are organized (18%) The winning fund of the commercial lottery when lotteries are organized and the winning fund is more than EUR10,000 (18%)
Local taxes Local taxes are imposed by a rural municipality or city council regulation in compliance with the conditions provided by the Local Taxes Act. Those taxes allowed are: advertisement tax, road and street closure tax, motor vehicle tax, animal tax, entertainment tax and parking charge. The Local Taxes Amendment Act of 2012 abolished the local municipalities' right to establish sales and boat taxes in their administrative area. The amendment has been made in order to avoid indirect price increases in other regions of Estonia, which is triggered by the tax obligation in one local municipality, thus adversely affecting the overall business environment in the state.
Amounts received as the stakes made when totalizators are organized, from which the winning amounts have been deducted (5%) Amounts received as the stakes made when games of chance or games of skill are organized as distance gambling, from which the winning amounts have been deducted (5%) Participation stakes received when organizing a gambling tournament (5%)
Excises The products that are subject to excise tax are fuel, electricity, packaging (bottles, cases etc.), tobacco and alcohol.
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2. Corporate tax system
Customs
Estonia has directly applied the EU Community’s customs legislation, common customs tariffs and customs preferences on the basis of free trade agreements concluded by the EU or granted unilaterally. Hence, national legislation assists in the application of the EU Community customs legislation.
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2. Corporate tax system
Customs procedures
Authorized Economic Operator (AEO) status
The EU Community customs legislation provides the chance to suspend or ease the customs payment obligation if certain conditions are met. The suspensions or reductions in customs procedures are as follows:
Entities requesting access to simplified customs procedures have to verify their activities are compliant with customs laws by achieving Authorized Economic Operator (AEO) status.
Inward processing with suspension or drawback
As from 1 January 2008, entities wishing to obtain AEO status must have met the following criteria during the previous three years:
Customs warehousing
Appropriate record of compliance with customs requirements
Transit procedure
Satisfactory system of managing commercial and transport records, allowing appropriate customs controls
Temporary importation Proven financial solvency and fulfillment of customs and tax payment liabilities
Processing under customs control Outward processing
Once AEO status is obtained, it is provided until withdrawal.
These procedures are subject to the approval of the customs authority and a customs guarantee is generally needed. Upon notifying the tax authority in writing in advance, a taxable person may declare VAT calculated on the import of goods in the VAT return, provided that the following conditions are met: The applicant must have been registered for VAT in Estonia for at least one year. The applicant must have filed its Estonian VAT returns electronically for the last year. At least 50% of the supplies made by the applicant must be zerorated. The applicant must have a good tax compliance history.
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3. Personal taxes
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Doing business in Estonia
3. Personal taxes
Income tax Residents of Estonia are subject to income tax on their worldwide income regardless of the source of income. Non-residents are taxable on the income from Estonian sources only. However, tax treaty provisions override the domestic legislation.
Definition of a resident In Estonia, a natural person shall be regarded as a resident if their place of residence is in Estonia or if they stay in Estonia for at least 183 days over the course of 12 consecutive calendar months. However, if there is an applicable double tax treaty, the provisions of the treaty shall prevail. Natural persons are obliged to inform the tax authorities about the formation or change of their Estonian residency via a special form. A person shall be deemed to be a resident as of the date of their arrival in Estonia if they stay in Estonia at least 183 days during 12 consecutive calendar months. It is not limited to a calendar year, consequently, the number of days spent in Estonia during any 12 consecutive calendar months is decisive in determining tax residence.
Income subject to tax Income for tax purposes is the income derived from all sources, including salaries, wages, pensions, scholarships, grants, gambling prizes, directors' fees, insurance indemnities, payments from pension funds, rent payments, royalties, interest accrued from loans, securities, leases or other debt obligations, and other payments made for services rendered under the contracts governed by the Law of Obligations Act. Individuals acting independently in their own name and at their own risk are also subject to income tax on the income derived from self-employment or entrepreneurial activities. Any revenue received by an individual should be classified on the basis of the relationship between the provider and the recipient, third parties of the provider and the recipient and the actual circumstances of receiving the income.
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3. Personal taxes
Taxation of resident persons
Resident persons are taxable on their worldwide income. In general, the following items are excluded from the taxable income of residents (within limits if applicable): Inheritances Gifts Insurance proceeds Indemnification payments Dividends that have been subject to corporate income tax or foreign withholding tax Income from the exchange of a holding in the course of a merger, division, or transformation of companies or non-profit associations Income from the increase or acquisition of a holding in a company through a non-monetary contribution Income from the exchange of units of an EU investment fund Interest received from credit institutions (EEA), with exceptions of deposit and settlement account interests Income from transfers of movable property used for personal purposes Gains from transfers of domicile Gains from transfers of summer cottages or garden houses Per diem allowances and accommodation costs of business trips, and compensation for business use of a private car according to limits Childbirth allowances In-service training and retraining of employees Payments for the treatment of damage caused to the health of an employee Lottery winnings State pensions and scholarships Also, any compensation for certified expenses incurred for the benefit of another person or any compensation for direct property damage is not deemed to be taxable income of a resident (if received other than as a result of entrepreneurial activities).
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Employment income
Taxable gross employment income includes all compensation, such as salary, vacation payments or advance payments. In general, fringe benefits, including a company car, housing, lunch vouchers and similar items, are not treated as taxable income. Instead, the company pays income tax on fringe benefits. However, foreign employees working in Estonia, who are paid solely by a foreign company and do not have an employer in Estonia, must pay income tax on fringe benefits received from the foreign company. Income from foreign employment is generally taxed in the same way as income from Estonian employment (any income tax paid abroad is creditable against the Estonian income tax obligation). Income for the work performed or services provided abroad is not subject to income tax in Estonia if the period of stay in the foreign state exceeds 183 days during a 12-month period and the income was considered taxable abroad. It is not relevant whether any actual tax was paid, the fact that income was included in the individual’s taxable income is sufficient.
3. Personal taxes
Taxation of non-resident persons
Generally, foreign individuals are taxed on wages, salaries, bonuses, allowances and other remuneration for the work or services performed in Estonia. Income tax is charged on the income derived by a non-resident natural person from work under an employment contract 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, or the payment is made by an Estonian employer. Non-resident individuals are taxed on the following types of income derived from Estonian sources: Salary, wages and other employment income for the work performed in Estonia if there are more than 183 days spent in this country or if paid by a resident or non-resident registered in Estonia Income from the transfer or lease of assets registered in Estonia Interest received from the state of Estonia, the residents of Estonia and non-residents with a permanent establishment registered in Estonia, to the extent that the interest received significantly exceeds the amount of interest payable on a similar debt obligation under the market conditions Royalties and income from the sales or licenses of patents, copyrights, trademarks, software, know-how and other information received from an Estonian person Liquidation distributions and payments related to a company’s reduction of its share capital to the extent that the amount received exceeds the acquisition cost of the shares, except for the portion of the received payment that has been taxed at the level of the company making the payments
Doing business in Estonia
Income from self-employment
All income attributable to self-employment or entrepreneurship is subject to income tax. The individual receiving income from selfemployment or entrepreneurship is entitled to deduct verified costs, which were necessary for their business and are recognized by personal income tax law. Losses from entrepreneurship, except for the losses incurred on the sale of securities and receivables, may be offset against the income derived from other sources. Losses may generally be carried forward for seven years.
Directors' fees
Directors' fees are regarded as employment income and are subject to tax in the same way.
Other income
Gifts received from non-resident entities are taxed at the rate of 21% if income tax is not paid in a foreign country or if the gifts have not been taxed as fringe benefits by the employer.
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3. Personal taxes
Investment income
The dividends received by residents from resident companies are exempt from tax. Residents are taxed on all dividends and other profit distributions received from foreign companies unless income tax was paid on the profit out of which the dividends were paid or unless income tax on the dividends was withheld in a foreign country. Effective from 1 January 2009, the dividends paid to nonresident shareholders are not subject to withholding tax. Starting from 1 January 2011, there is a special private investment tax exemption regime applicable in the form of an investment account. Capital gains transferred to the investment account for reinvestment shall not be taxed until taken out of the investment account. The interest received by individuals from resident credit institutions, EEA resident credit institutions and branches of non-resident credit institutions located in the EEA is exempt from tax. This tax exemption does not apply to interest deposits where the rate of return is dependant on the value of underlying asset and interest from an investment account. Rental payments and royalties received by resident individuals are subject to withholding tax at the rate of 21%.
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Capital gain
Generally, capital gains derived from the sale of property or securities are taxable under income tax rules. There are, however, some exemptions; for example, the capital gains derived by resident individuals from the sale of their home are not subject to income tax (applies only to one transaction within a two-year period). Losses incurred on the sale of securities in previous periods may be offset against the gain received from the sale of securities. The losses incurred may be carried forward indefinitely. Non-resident individuals are taxed on the gains derived from the sale of property located in Estonia, excluding securities issued by companies registered in Estonia. However, this exclusion does not apply if the transferred holding is a holding in a company, a contractual investment fund or other pool of assets, and if both of the following circumstances apply: At the time of the transfer or during the two-year period before the transfer, more than 50% of the property of the company, fund or pool of assets was directly or indirectly made up of the immovables or the buildings that are movables located in Estonia At the time of transfer, the non-resident had a holding of at least 10% in the company, fund or pool of assets.
3. Personal taxes
Employer-provided stock options
Deductions
As from 1 January 2011, employer-provided stock options are taxed as fringe benefits at the moment of exercising the options, not at the moment of granting them. The taxable value of a fringe benefit is the difference between the fair market value of the securities and the purchase price. However, stock options with at least a three-year period between the grant and exercise of the option are considered exempted from fringe benefit taxes.
When determining taxable income, certain tax deductions and exemptions can be taken into account by resident or non-resident persons who are EEA residents with at least 75% of their worldwide taxable income received in Estonia. If the person has not been a tax resident in Estonia during the whole tax period, the deductions and exemptions can be taken into account in proportion to the period of Estonian residence. Tax deductions can be received by submitting an Estonian resident tax return by 31 March following the end of the taxable period (calendar year end 31 December).
No tax obligations are imposed on employees with respect to the receipt of non-monetary benefits from Estonian employers. However, employees are subject to tax on the capital gains derived from the disposal of shares. A taxable capital gain represents the sales price reduced by the acquisition price and by the taxable value of the fringe benefit.
For self-employment income, expenses related to the actual performance of business are also deductible if supported by proper documentation. The basic tax exemption is EUR1,728 per calendar year. There are also additional basic exemptions for parents with two or more children, for retirement allowances and for work accident or occupational illness compensation. Additional deductions are available (within applicable limits)for the following items: housing loan interest paid to an EEA credit institution, educational expenses, gifts to registered non-profit organizations and similar institutions of the EEA, obligatory social security payments paid in Estonia or abroad (if paid from the income taxable in Estonia), and payments to voluntary pension funds. Business deductions Only documented expenses directly related to entrepreneurial or selfemployment activities, including expenses for work-related advanced training and retraining of employees, and losses incurred on the disposal of assets (except for losses incurred on the sale of securities), are deductible (with some limits applicable). If certain expenses are only partly related to the entrepreneurial or selfemployment activities, only the part directly related to those activities is deductible.
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3. Personal taxes
Rates
For a non-resident
Estonian and foreign individuals are, as a rule, subject to personal income tax at a flat rate of 21%.
A non-resident person must file an income tax return if they derive income or capital gains subject to taxation in Estonia from which income tax has not been withheld or would like to claim deductions available to non-residents with at least 75% of their worldwide income received in Estonia. The tax return must be submitted by 31 March following the year of taxation. Exceptionally, in the case of the transfer of an immovable, the income tax return shall be submitted during one month after receiving the gain; also, a nonresident who derives 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) within six months following the period of taxation. If the business is terminated before the end of the period of taxation, the income tax return shall be submitted within two months following the termination of activities. Any additional amount of tax due shall be paid into the bank account of the Tax and Customs Board within three months after the due date for submitting the income tax return.
Income tax at the rate of 10% is applied on certain payments made by an insurer to a policyholder, on the payments made from a voluntary pension fund and also on certain payments paid to nonresidents (payments for services rendered in Estonia, payments to athletes and artists).
Tax filing and payment procedures The period of taxation is a calendar year. Estonian employers must withhold the proper amount of income tax from employees' salaries. Individual tax liability is determined by deducting the taxes withheld and creditable amounts of foreign taxes paid from the computed amount of income tax. For a resident
Electronic declaration
A resident person must file an income tax return if their annual income exceeds EUR1,728 (for 2012), and if they would be required to pay additional income tax based on the income tax return or would like to claim available deductions. Individual income tax returns must be filed by 31 March of the year following the tax year. Individuals must pay income tax due by 1 July of the year following the tax year. Resident individuals who declare business income or gains from the transfer of property are required to pay any additional amount of tax by 1 October of the year following the tax year. Spouses may file a joint income tax return and are then taxed jointly. Most of the tax returns are submitted electronically.
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Tax returns may be submitted electronically. This service is available on the Tax and Customs Board's website www.emta.ee, and also in Russian and English. In order to submit tax returns electronically, a taxpayer must make an authentication and an e-services agreement with the Tax and Customs Board, via local internet-bank or via the internet by using an ID card or mobile ID. To do this, a valid identification document must be presented by the person. Representatives of legal persons must present a power of attorney to the Tax and Customs Board.
3. Personal taxes
Visas, work and residence permits According to the Estonian Aliens Act, permits are required for non-EU foreign nationals in order to enter, stay or work in Estonia. Estonian National Opera
Visa-free entry
Nationals of the Member States of EU and EEA — Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Germany, Greece, Finland, France, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. The basis for their stay in Estonia is regulated by the Citizen of European Union Act. Schengen States — Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Portugal, Poland, Slovakia, Slovenia, Spain, Sweden and Switzerland.
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3. Personal taxes
Visa-free entry
Categories of visas
The holders of passports of the following countries do not need any visa to enter Estonia for stays of no more than three months within a six-month period: Albania (for biometrical passport holders only), Andorra, Antigua and Barbuda, Argentina, Australia, Bahamas, Barbados, Bosnia and Herzegovina (for biometrical passport holders only), Brazil, Brunei, Canada, Chile, Costa Rica, Croatia, El Salvador, Guatemala, Holy See, Honduras, Hong Kong Special Administrative Region, Israel, Japan, Macao Special Administrative Region, Macedonia (for biometrical passport holders only), Malaysia, Mauritius, Mexico, Monaco, Montenegro (for biometrical passport holders only), New Zealand, Nicaragua, Panama, Paraguay, San Marino, Serbia (for biometrical passport holders only), Seychelles, Singapore, South Korea, St Kitts-Nevis, Taiwan (passports issued by Taiwan that include an identity card number), the United States of America, Uruguay, Vatican City and Venezuela.
Airport transit visa (A-type) authorizes entry and stay in the international zone of an airport until departure of the flight headed for the required destination.
A family member of an EU/EEA/EFTA national who, in addition to the valid passport of the country of their nationality, presents a residence card, which has been issued pursuant to the Directive 2004/38/EC bearing the text "Residence Card of a Family Member of an EEA National," may enter Estonia without a visa if the family member is traveling together with the EU/EEA/EFTA national or traveling to see the EU/EEA/EFTA national. This Directive shall apply to EU/EEA/EFTA nationals, who move to or reside in a Member State other than that of which they are a national. The holders of diplomatic passports of Albania, Armenia, Azerbaijan, Bosnia and Herzegovina, Georgia, Kazakhstan, Montenegro, Russia and Serbia may stay visafree in Estonia for up to 90 days within 6 months. The holders of diplomatic and service passports of Bolivia, Macedonia, Morocco, Peru, Philippines and Ukraine may stay visa-free in Estonia for up to 90 days within 6 months. The holders of diplomatic, service and special passports of Turkey may stay visa-free in Estonia for up to 90 days within a 6-month period. The holders of Laissez-Passer issued by the United Nations may stay visa-free in Estonia for up to 90 days within a 6-month period. The holders of the diplomatic and official passports of Moldova may stay visa-free in Estonia for up to 90 days within a six month period.
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Short-stay visa (C-type) authorizes single or multiple entries within 6 months and a maximum stay of 90 days. Long-stay visa (D-type) authorizes multiple entries and stay between 90 days and 1 year for the purpose specified within.
3. Personal taxes
Residence permits Citizens of the EU, EEA or Switzerland have the right to stay in Estonia on the basis of a valid travel document or identity document. As a result, these individuals are not subject to the rules regarding residence permits. Residence permits are either temporary residence permits issued for a period of up to five years, or long-term residence permits. As of 1 June 2006, foreign nationals holding a permanent residence permit shall automatically be deemed as holding the long-term residence permit and they are not required to submit an application for a long-term residence permit or pass the language proficiency examination. A temporary residence permit shall be extended following an application for such an extension if the basis for the issue of the residence permit has not ceased to exist, there is no reason to refuse to extend the permit and if it is justified. The temporary residence permit may be issued to a foreign national: For employment For business For studies in an educational institution based on the application of the educational institution In order to settle with a close relative who is permanently residing in Estonia Whose permanent legal income ensures their subsistence in Estonia In case of substantial public interest Whose application for a residence permit is based on an international agreement Who is married to a person with permanent residence in Estonia As an additional condition for the extension of residence permits and issue of long-term residence permits, foreign nationals are required to enter their residence in Estonia in the population register.
Work permits In order to work in Estonia, foreign nationals must hold a work permit. A citizen of the EU is not subject to the rules regarding work permits. Activities as a sole proprietor, employment with an employment contract or any other contract, or any activity that may result in gaining profit or any other benefit irrespective of the type or form of the contract, or the location or place of residence of the other party to the contract shall be deemed to be employment, unless an international agreement stipulates otherwise. The period of validity of a work permit cannot exceed the period of validity of a residence permit.
The following persons do not require a work permit in order to work in Estonia: Foreign nationals with long-term residence permits Foreign nationals who have residence permits for employment Foreign nationals who have residence permits for business (only for executing directing functions in the company specified in the residence permit) Foreign nationals who have applied for a residence permit before 12 July 1995 and who have obtained such a permit Imprisoned persons during their stay in prison Members of locomotive crews Staff serving on locomotives and trains Drivers for taking passengers or cargo over state borders Foreign nationals who hold a residence permit for settling with a close relative who is residing permanently in Estonia: - Foreign nationals who hold a residence permit for settling with a spouse - Foreign nationals who hold a residence permit issued on the basis of an international agreement - Foreign nationals who hold a residence permit issued on the basis of substantial public interest - Foreign nationals who hold a residence permit that is based on an international agreement A work permit shall not be issued to a foreign national to whom a residence permit has been issued on the condition that their legal income ensures their subsistence in Estonia. The application for a work permit may be submitted personally to the Service Office of the Citizenship and Migration Board of the Prefecture or by post. A foreign national who has been issued a residence permit for study may take employment in Estonia without a work permit in order to participate in practical training pursuant to the curriculum. Otherwise, they may take employment in Estonia only on the basis of a work permit and only outside of school hours, on condition that such an employment does not interfere with their studies. A work permit can be extended if a person holds a valid residence permit, or if the residence permit is extended and the person has an employer at the time of extension of the work permit. If a person holds a valid residence permit, the Citizenship and Migration Board shall make a decision as to whether to issue a work permit during a period of one month from the date of registration and starting processing of the application. If a person applies for a work permit concurrently with a residence permit, the Citizenship and Migration Board shall make a decision as to whether to issue a work permit at the same time as making the decision as to whether to issue a residence permit. If a person wishes to extend the work permit, they have to submit an application for the extension of the work permit at the latest two months before the valid work permit expires. The term for the extension of a temporary residence permit shall not be restored if the residence permit has expired.
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Contacts
For further information please contact:
Ranno Tingas Partner Tax Services Ernst & Young Baltic AS
[email protected]
Ivar Kiigemägi Partner Assurance Services Ernst & Young Baltic AS
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Siim Aben Senior Manager Advisory Services Ernst & Young Baltic AS
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Lili Kirikal Senior Manager Transaction Advisory Services Ernst & Young Baltic AS
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