May 2020
The Estonian tax system in a nutshell
Estonia is known for its corporate tax system which does not tax retained earnings, instead the distribution of corporate profits, including hidden profit distributions (e.g. fringe benefits, non-business related expenses), are subject to income tax. The company is required to submit the tax return and pay tax by the 10th day of the calendar month following the month the payment was made.
The profit distribution is subject to the income tax of 20% of the gross amount (distributable amount + income tax). This corresponds to 25% (20/80) of the net amount of the distribution. Since the dividends are subject to tax on the level of the company, received dividends are tax exempt in the hands of the shareholder. Nevertheless, the received dividends are included in the calculation of personal annual allowance of the shareholder.
If the company distributes profits regularly, the tax rate could be reduced up to 14% (net tax rate 14/86, i.e. 16.28%). The lower rate applies to the amount which is smaller than or equal to the average distributed profit of the previous three calendar years on which the company has paid income tax. If dividends subject to 14% are distributed to a resident or non-resident individual, the recipient is subject to an additional 7% withholding tax, unless the tax treaty provides lower tax rate. In case the recipient of the dividends is a company, there is no withholding tax and the final tax on dividends in Estonia would be 14%.
Estonian resident individuals are subject to tax on their worldwide income. The tax rate is 20% and the taxpayer is entitled to deduct annual allowance (EUR 6,000 per year), housing loan interests, educational expenses, certain gifts and donations, unemployment insurance contributions and pension contributions. The deductions are limited to EUR 1,200, including housing loan interest deduction up to EUR 300. Furthermore, the taxpayer is allowed to deduct 20% of its rental income received from the rental of a dwelling.
The taxable period for individuals is the calendar year. The tax return must be submitted by 30th April of the year following the tax year and the income tax is due by 1 October.
The profit distribution is subject to the income tax of 20% of the gross amount (distributable amount + income tax). This corresponds to 25% (20/80) of the net amount of the distribution. Since the dividends are subject to tax on the level of the company, received dividends are tax exempt in the hands of the shareholder. Nevertheless, the received dividends are included in the calculation of personal annual allowance of the shareholder.
If the company distributes profits regularly, the tax rate could be reduced up to 14% (net tax rate 14/86, i.e. 16.28%). The lower rate applies to the amount which is smaller than or equal to the average distributed profit of the previous three calendar years on which the company has paid income tax. If dividends subject to 14% are distributed to a resident or non-resident individual, the recipient is subject to an additional 7% withholding tax, unless the tax treaty provides lower tax rate. In case the recipient of the dividends is a company, there is no withholding tax and the final tax on dividends in Estonia would be 14%.
Estonian resident individuals are subject to tax on their worldwide income. The tax rate is 20% and the taxpayer is entitled to deduct annual allowance (EUR 6,000 per year), housing loan interests, educational expenses, certain gifts and donations, unemployment insurance contributions and pension contributions. The deductions are limited to EUR 1,200, including housing loan interest deduction up to EUR 300. Furthermore, the taxpayer is allowed to deduct 20% of its rental income received from the rental of a dwelling.
The taxable period for individuals is the calendar year. The tax return must be submitted by 30th April of the year following the tax year and the income tax is due by 1 October.
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The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
