Corporate Taxation in Estonia
There are many statutory preferential business opportunities in Estonia. Here is one of them, which is unique in its financial and legal nature in comparison with other EU countries. According to the Estonian legislation, at the time of the company establishment there is no need to contribute its share capital (from 2,500 EUR). The articles of incorporation determine the period for the authorised capital to be contributed, which can be set from a year up to a date of payment of dividends. It should be taken into account that while the share capital is not contributed, the owner (founder) is personally liable with their unauthorised funds in the share capital.
Taxation in Estonia
In case of establishment of an Estonian company in another country, the taxation will be subject to the law of that respective country. If the principal activity of an Estonian company takes place in another country, a company becomes a tax resident of that respective country.
Corporate income taxes
- Income tax – Corporate income tax in Estonia doesn’t apply to profits held and reinvested within the company.
- Value added tax (VAT) – 20% is applicable if a company is taxable, i.e., a VAT payer.
- Tax on dividends – 25% dividends can be paid from the net profit.
Taxation of corporate income
A special feature of corporate income tax in Estonia is that only the distribution of profits in the form of dividends or wages is taxed (14-20%). The profits and funds of the company held and reinvested within the company are not taxed.
Interestingly, if these distributed profits originate from dividends received from a foreign subsidiary or a permanent establishment in another country, they are exempt from taxation.
This tax structure is especially advantageous for enterprises with ambitions of swift global expansion. It allows you to allocate the resources that would otherwise be directed towards government taxes into innovative endeavors.
Payment of Dividends (23% – 25%)
The tax on the payment of dividends tax in 2020 is 20/80. Dividends paid on a regular basis are subject to the lower tax rate of 14/86. When paying dividends to an individual (resident or non-resident in Estonia) with a reduced tax rate, an additional income tax of 7% is withheld.
The tax period is a calendar month, and the income tax return (TSD) must be submitted to the Tax and Customs Board by the 10th day of the following month. The declaration can be submitted electronically at the e-Tax and Customs Board (e-MTA), or by contacting the regional tax office of the Tax and Customs Board.
If payment is made in one month:
How to calculate taxes when paying out dividends
Example: an Estonian company pays a dividend of 10,000 EUR to a shareholder.
- 2,500 EUR (10,000 x 20/80) in taxes must be declared and paid by the Estonian company to the Estonian Tax & Customs Board.
- If the Estonian company pays regular dividends to the shareholder, taxes will be 1,627.91 EU (10,000 x 14/86).
Value Added Tax (VAT) – 20%
Value Added Tax – VAT, levied on goods and services sold in the course of business activity, imports of goods from non-EU countries, and purchases of goods from countries of the EU. Value added tax is paid by the final consumer.
Registration as a VAT payer
If the taxable annual turnover of a company exceeds 40,000 EUR within the territory of Estonia, it must be registered with the Tax and Customs Board as a VAT payer. If the turnover is below this limit, registration is not required.
The VAT payer undertakes:
- To add VAT to the price of the sale of goods or the provision of services in Estonia.
- To keep records of value added tax.
- To calculate and pay the VAT amount.
- To store documents related to transactions and issue invoices as required.
It is possible to deduct from taxable supply the input value added tax paid upon the purchase of a goods or service used for business.
The general VAT rate is 20% of the taxable value of goods or services. A tax rate of 9% applies to certain goods and services including accommodation services, medicine, books, periodicals, health and hygiene products (determined by the Ministry of Social Affairs), and medical equipment for the disabled.
The 0% VAT rate applies to a range of goods, including exported goods, and consulting services provided to VAT payers in another EU Member State, as well as for ships and aircraft used in international traffic. The 0% VAT rate is also applied to services provided outside Estonia, as well as to a number of services related to water and air transport and the carriage of goods. The postage, insurance, and health care i.e., social services are tax exempt.
Declaration and payment of VAT
The period for VAT taxation is a calendar month. You can file a value added tax return and pay VAT to the Tax and Customs Board by the 20th of the month following the taxation period. The declaration can be submitted electronically at the e-Tax and Customs Board (e-MTA), if you have been a VAT payer for at least 12 months, or by contacting the regional tax center of the Tax and Customs Board.
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