Withholding income tax
Income tax at the rate of 20% is withheld from the income subject to taxation on the gross principle: from remuneration paid under the contract of employment or remuneration paid for the provision of other services under the law of obligations; rent, royalties; interest; benefits, grants and scholarships; pensions and other income.
Income tax is not withheld from the types of income taxed on the basis of the net principle: from business income and gains from transfer of property. These income types are taxed on the basis of the income tax return of a resident natural person.
The withholding agents are all resident legal persons, as well as state or local government authorities, and employers who are natural persons or non-residents. The withholding agent is obliged to withhold income tax on income taxable on the so-called gross principle, transfer it to the bank account of the Estonian Tax and Customs Board and submit a tax return form TSD at the latest by the 10th day of the month following the month in which the payment is made.
If a person receives income from a person who is not a withholding agent (e.g. when renting a dwelling from a private individual to a another private individual), the person must declare the income received in the income tax return of a resident natural person and pay income tax on the basis of the income tax return.
Calculation of basic exemption
Read more from the web page "Calculation of basic exemption".
Since 1 January 2023 the minimum hourly wage rate is 4,30 euros per hour. The minimum monthly wage in the case of full-time working time is 725 euros.
| From | Minimum wage per hour | Minimum monthly wage in the case of full-time work | Basis |
|---|---|---|---|
| 01.01.2023 | 4,30 euros | 725 euros | Government of the Republic Regulation No 124 of 09.12.2022 |
| 01.01.2022 | 3,86 euros | 654 euros | Government of the Republic Regulation No 116 of 09.12.2021 |
| 01.01.2021 | 3,48 euros | 584 euros | Government of the Republic Regulation No 115 of 19.12.2019 |
| 01.01.2020 | 3,48 euros | 584 euros | Government of the Republic Regulation No 115 of 19.12.2019 |
| 01.01.2019 | 3,21 euros | 540 euros | Government of the Republic Regulation No 117 of 13.12.2018 |
| 01.01.2018 | 2,97 euros | 500 euros | Government of the Republic Regulation No 189 of 21.12.2017 |
| 01.01.2017 | 2,78 euros | 470 euros | Government of the Republic Regulation No 139 of 18.12.2015 |
| 01.01.2016 | 2,54 euros | 430 euros | Government of the Republic Regulation No 139 of 18.12.2015 |
| 01.01.2015 | 2,34 euros | 390 euros | Government of the Republic Regulation No 166 of 28.11.2013 |
| 01.01.2014 | 2,13 euros | 355 euros | Government of the Republic Regulation No 166 of 28.11.2013 |
| 01.01.2013 | 1,90 euros | 320 euros | Government of the Republic Regulation No 6 of 10.01.2013 |
| 01.01.2012 | 1,80 euros | 290 euros | Government of the Republic Regulation No 169 of 22.12.2011 |
| 01.01.2011 | 1,73 euros | 278,02 euros | Government of the Republic Regulation No 118 of 23.08.2010 § 81 |
| 01.01.2008 | 27 kroons | 4350 kroons | Government of the Republic Regulation No 90 of 11 June 2009 Government of the Republic Regulation No 254 of 20 December 2007 |
| 01.01.2007 | 21 kroons 50 cents | 3600 kroons | Government of the Republic Regulation No 273 of 21 December 2006 |
| 01.01.2006 | 17 kroons 80 cents | 3000 kroons | Government of the Republic Regulation No 328 of 22 December 2005 |
| 01.01.2005 | 15 kroons 90 cents | 2690 kroons | Government of the Republic Regulation No 374 of 23 December 2004 |
| 01.01.2004 | 14 kroons 60 cents | 2480 kroons | Government of the Republic Regulation No 323 of 18 December 2003 |
| 01.01.2003 | 12 kroons 90 cents | 2160 kroons | Government of the Republic Regulation No 366 of 3 December 2002 |
| 01.01.2002 | 10 kroons 95 cents | 1850 kroons | Government of the Republic Regulation No 396 of 18 December 2001 |
| 01.01.2001 | 9 kroons 40 cents | 1600 kroons | Government of the Republic Regulation No 428 of 19 December 2000 |
| 01.01.2000 | 8 kroons 25 cents | 1400 kroons | Government of the Republic Regulation No 360 of 23 November 1999 |
| 01.01.1999 | 7 kroons 35 cents | 1250 kroons | Government of the Republic Regulation No 270 of 8 December 1998 |
| 01.01.1998 | 6 kroons 50 cents | 1100 kroons | Government of the Republic Regulation No 245 of 18 December 1997 |
| 01.02.1997 | 5 kroons | 845 kroons | Government of the Republic Regulation No 52 of 6 March 1997 |
| 01.01.1996 | 4 kroons | 680 kroons | Government of the Republic Regulation No 14 of 16 January 1996 |
As of 1 July 2023, an employer must pay to an employee for the 4th until the 8th calendar day of sickness, injury or quarantine. According to § 122 of the Occupational Health and Safety Act, an employer must pay to an employee, for the 4th until the 8th calendar day of sickness, benefit of 70 per cent of the employee’s average wages for the last six months. From the 9th day of illness, injury or quarantine, the Health Insurance Fund pays the employee the sickness benefit. More information on benefits for incapacity for work can be found on the website of the Health Insurance Fund.
The sickness benefit paid by the employer is subject to income tax in full extent (subsection 1 of § 13 of the Income Tax Act), but to a certain extent is exempt from social tax.
Social tax
An employer can pay the employee a sickness benefit only subject to income tax for the 2nd to 8th day of sick leave up to 100% of the employee’s average wages. Sickness benefit paid on the basis of § 122 of the Occupational Health and Safety Act for the 2nd to 8th day of sickness, injury or quarantine of an employee is not subject to social tax, unemployment insurance and funded pension contributions (clause 3 of § 3 of the Social Tax Act, § 40 (2) 4 of the Unemployment Insurance Act, subsection 2 of § 7 of the Funded Pensions Act).
The procedure for payment of sickness benefit provided for in the Occupational Health and Safety Act also extends to a member of the management board or a management body replacing the board of a legal person. Pursuant to the Social Tax Act, sickness benefit payable on the basis of § 122 of the Occupational Health and Safety Act is exempt from tax to a certain extent, therefore the sickness benefit paid to the member of management board pursuant to clause 3 of § 3 of the Social Tax Act is exempt from tax within the average fee.
The social tax exemption applies if the employer pays sickness benefit based on a duly drawn up sick leave.
In the case of employment based on other contracts arising from the Law of Obligations Act (contract for services, authorisation agreement), employers are not obliged to pay sickness benefit. The disbursement is normally taxed on all labour taxes.
Sickness benefit for a pregnant woman who has fallen ill
If an employer wishes, it is possible to maintain the average wages for a pregnant employee during the period of her illness. Beginning from 1 December 2023, according to clause 31 of § 3 of the Social Tax Act, it is possible for an employer to pay to a pregnant employee for the second to eighth day a sickness benefit which does not exceed 30% of the amount of average wages of the previous six months. The employer taxes the sickness benefit only with withheld income tax.
According to the laws previously in force, an employer could not pay sickness benefit to a pregnant employee at the same time as the Health Insurance Fund. The amendment equated a pregnant employee with an ordinary employee, which means that a pregnant employee can receive a sickness benefit of up to 100% of the average wages (Health Insurance Fund 70% + employer 30%).
The tax scheme for sick leaves is the same regardless of whether a sick leave is issued for illness, injury or quarantine. Pursuant to clause 3 of § 3 of the Social Tax Act, the amounts are not taxed if the employer has paid sickness benefit to the employee based on a quarantine leave according to § 122 of the Occupational Health and Safety Act. The amount of benefit in excess of the average wages of the employee (member of the management board) is generally taxed on all labour taxes payable to the employee or member of the management board.
Sickness benefit paid by the employer for the 2nd to 8th day of sickness is declared within the limit (only income tax) in Annex 1 to the tax return TSD under payment type 24. The part in excess of the limit is taxed on all labour taxes according to the type of payment (types of payment 10, 11, 12, 13, 21, 22 or 23).
In the case of a non-resident employee, sickness benefit within the limit is declared in Annex 2 to the tax return TSD under payment type 129, the part in excess of the limit under payment type 120, 121 or 122; in the case of a non-resident public servant, under payment type 130, in the case of a non-resident member of the management board within the limit under payment type 157 and in excess of the limit – payment type 156.
examples
- If the employer pays sickness benefit 70% of the average wages, it is required to withhold only income tax 20% and in the tax return TSD, the type of payment is 24.
- If the employer pays sickness benefit 100% of the average wages, the benefit is subject to income tax only and payment type is 24.
- If an employer compensates a pregnant employee for 30% of the average wages, it is required to withhold only income tax 20% and in the tax return TSD, the type of payment is 24.
- If the employer pays sickness benefit 130% of the employee’s average wages, the benefit of 100% is declared under payment type 24 and income tax must be withheld. The part in excess of the tax-exempt limit (30%) is declared under payment type 10, like wages, and taxed on all labour taxes.
- If the employer voluntarily pays the benefit to the employee for the first day of sickness, the first day benefit is taxed on all labour taxes and declared under payment type 10.
Taxation of profits in Estonia
The system of corporate earnings taxation in force currently in Estonia is a unique system, which shifts the moment of corporate taxation from the moment of earning the profits to the moment of their distribution.
There are two types of profit distribution possible – an implicit and an explicit way. The explicit way stands for dividends and other profit distributions.
Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company are generally subject to corporate income tax in the hands of the payer at the moment of distribution.
The resident legal person and the non-resident legal person acting through its permanent establishment registered in Estonia carrying out profit distribution has to pay income tax of the amount of profits distributed.
The Estonian company pays corporate income tax at the moment of payment, while tax rate is calculated from net amount, 20/80 of the payment.
The company income tax rate is the rate of 20% as in the provisions for the taxation of salaried work payments. The difference is that 20% is applied to gross payments and 20/80 is applied to net payments.
No income tax is withheld from income of the dividend recipient generally.
A reduced tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly. The natural person receiving such dividends taxed at a reduced rate (14/86) in the hands of the Estonian company or a permanent establishment of a non-resident company, has to pay income tax at a rate of 7% in addition. It has to be withheld by the payer.
A non-resident natural person has to pay income tax on dividends received from the Estonian company in the resident country also and he or she cannot take into account the corporate income tax (20/80 or 14/86) paid in Estonia by the Estonian resident company to avoid double taxation of the recipient. Only the income tax withheld at a rate of 7% may qualify to avoid double taxation of the natural person recipient.
The implicit way to distribute profits is to do that through fringe benefits, gifts and donations, as well as expenses and payments unrelated to business activity.
All of these profit distributions are taxed at a rate of 20/80.
Hence, there is no obligation to submit a tax return annually by the Estonian company or a permanent establishment of a non-resident, regardless of profits or losses. Income tax is assessed monthly (Form TSD with Annexes), thus taxable amount must be declared monthly (10th day of the month following the payment) whenever profits are distributed or other taxable expenses are incurred.
- An Estonian resident legal person pays 10,000 euros of (not regular) dividends to a natural person. The corporate income tax of 2,500 euros (10,000 × 20/80) has to be paid by the Estonian resident legal person (total cost 12,500 euros). The natural person receives 10,000 euros.
In case of regular dividends paid, corporate income tax of 1627.91 euros (10,000 × 14/86) has to be paid by the legal person. If the recipient of such regular dividend is a natural person (resident or non-resident), the income tax at a rate of 7%, i.e 700 euros (10,000 × 7%), has to be withheld from income of the recipient in addition. Thus, the natural person receives 9,300 euros. - An Estonian resident legal person pays 10,000 euros of dividends to a non-resident legal person who owns less than 10% of the profit-distributing entity. The corporate income tax of 2,500 euros (10,000 × 20/80) has to be paid by the Estonian resident legal person.
In case of regular dividends paid, the corporate income tax is 1627.91 euros (10,000 × 14/86). Income tax is not withheld from the income of the non-resident legal person (dividend recipient) in Estonia. - An Estonian resident legal person A pays 10,000 euros of dividends to an Estonian resident legal person B, who owns less than 10% share in the profit-distributing entity A.
The Estonian resident legal person A pays the corporate income tax of 2,500 euros (10,000 × 20/80).
In case of regular dividends paid, the income tax of the legal person A is 1627.91 euros (10,000 × 14/86). As the recipient is the Estonian legal person, no income tax at the rate of 7% is withheld from the payment in either case.
Since the legal person B owns less than 10% of the legal person A, the legal person B cannot use the exemption method, i.e. when the Estonian resident legal person B in turn pays out dividends received from A further to its partners/shareholders, the corporate income tax 20/80 or 14/86 from regular dividends accordingly has to be paid by the legal person B. - An Estonian resident legal person C pays 10,000 euros of dividends to another Estonian resident legal person D, who owns at least 10% share in the profit-distributing entity C.
The Estonian resident legal person C pays the corporate income tax of 2,500 euros (10,000 × 20/80).
In case of regular dividends paid, the income tax of the legal person C is 1627.91 euros (10,000 × 14/86). As the recipient is the Estonian legal person, no income tax at the rate of 7% is withheld from the payment.
Since the legal person D owns at least 10% of the legal person C, the legal person D can use the exemption method, i.e. when the Estonian resident legal person D in turn pays out dividends received from the legal person C to its legal entity partners/shareholders, the payment is tax-free. When dividends are distributed to a natural person, the income tax at the rate of 7% has still to be withheld.
Last updated: 14.02.2024