The profits of legal entities resident in Estonia are taxed at the rate of 25% (the rate is expressed to be 20%, but legislation forces grossing-up). Estonian corporate tax system is, however, different from those of most other countries in that the tax is to be paid upon distribution of profits rather than upon their earning. As long as the profits are kept within the company (or, possibly, indeed the downstream group), in general, no tax becomes due. Thus, profits are taxed upon their distribution, whether in the form of dividends, fringe benefits to employees, expenses unrelated to the main trade of the legal entity etc.
Profits distributed in a calendar year in an amount not exceeding the average distributed profits of the preceding three years are taxed at the rate of 14/86 (the rate is expressed to be 14%, but legislation forces grossing-up). However, when such distributions are received by Estonian-resident natural persons, they are taxed in the hands of those Estonian-resident natural persons at the rate of 7%; that amount is withheld by the legal entity making the distribution (in general, no economic double taxation of profits exists in Estonia, i.e., in general, distributed profits are not then taxed in the hands of the recipient). Distributed profits exceeding the average distributed profits of the preceding three years are taxed according to the general rule described in the preceding paragraph.
The situation is similar for Estonian permanent establishments of foreign companies: the tax rate is likewise 25% (the rate is expressed to be 20%, but legislation forces grossing-up), and the tax becomes due upon the profits being “extracted” from the permanent establishment.
As an exception from that system, profits of credit institutions are, in addition to the standard Estonian corporate tax, subject to a classical system of corporate taxation at the rate of 14%: corporate tax becomes due on the 10th day of each quarter for the profits earned in the preceding quarter. Losses may be carried forward for 20 quarters. Any such “classical” corporate tax paid may be deducted from the liability to corporate tax which arises upon distribution of profits.
Transfer-pricing rules do exist and constitute one of the exceptions from the general rules on the moment of taxation: should they become applicable the tax on the profits (which would have been earned) or on the expenses (which would not have been borne) becomes payable when the transaction, to which transfer-pricing rules are applied, is performed.
While Estonia has no separate thin capitalisation rules, general anti-avoidance rules, which may be applied to similar effect depending on the situation, do exist. Controlled foreign companies rules do exist, but being targeted at natural persons are not always apt to apply to legal entities (even if the profits were to be attributed to a legal entity resident in Estonia, they still need to be distributed by that legal entity in some form before they may be taxed).
Estonia has no “black list” of low tax jurisdictions, but an official “white list” of jurisdictions which will not be considered low tax exists. Whether a jurisdiction is low tax is determined on the basis of criteria set forth in legislation.
Specific anti-avoidance rules target
- “artificial corporate structures” by excluding – pursuant to article 1 of directive 2011/96 – from relief from double taxation arrangements having tax advantages as one of their main objectives, and
- certain intra-group loans (other than those granted to subsidiaries) as constituting so-called “hidden distributions of profits”.
Various EU directives and double taxation conventions may apply to avoid double taxation.
Estonian payroll taxes may be divided into two groups: those which the employer must withhold and those which the employer must bear (i.e. which constitute the employer’s expense in economic terms).
The first group comprises the compulsory pensions contribution (2% of the gross salary), the compulsory unemployment insurance contribution (1.6% of the gross salary at the time of writing, but it may vary between 0.5% and 2.8%) and the income tax (the tax rate is a flat 20% of the gross salary less the general exemption and the foregoing two contributions). These sums are to be withheld by the employer from the gross salary of each employee.
The second group comprises the compulsory unemployment insurance contribution (0.8% of the gross salary at the time of writing, but it may vary between 0.25% and 1.4%) and the social tax (the tax rate is a flat 33% of the gross salary). These sums are to be paid by the employer effectively on top of the gross salary (in other words the taxes which the employer withholds form an employee’s salary form part of the tax base of the social tax and the employer’s unemployment insurance contribution).
The specifics may, however, vary considerably depending on the situation (e.g. residence or age of the employee etc.).
Furthermore, 2018 marks the first year of operation in Estonia of a progressive payroll tax system. That is achieved by making the general exemption dependent on the income of a natural person. The maximum amount of the general exemption is 6,000 € per year, and it gradually decreased to nil by the time the annual income of the natural person reaches 25,200 €.
Value added tax
As all EU countries Estonia applies value added tax. There are three rates: 20% (full rate), 9% (reduced rate) and 0% (exemption with deduction).