Legal persons (companies, non-profit associations, foundations, legal persons in public law and profit-making state agencies) pay income tax on fringe benefits, gifts and donations, costs of entertaining guests, distributed profit (dividends) and payments from the equity capital. All payments are taxed at the same rate of 20/80. In addition to income tax, fringe benefits are also taxed with social tax.
It is unique in the Estonian income tax system that tax liabilities of a company arise at the distribution of profit (at dividend payment). If the company does not distribute profit but invests it in the company, there is no tax liability. Dividends are taxed at a 20/80 rate, while regularly paid dividends are taxed at a reduced rate of 14/86.
You can find more details in the explanations below.
Changes to the Income Tax Act and Social Tax Act
From 1 January 2025
Tax rates
Valid from 01.01.2025:
- income tax rate 22% (instead of current 20%),
- income tax rate of a legal person 22/78 (instead of current 20/80),
- rate of advance payment of credit institutions’ income tax 18% (instead of current 14%).
The lower tax rate 14/86 on dividends and 7% withholding tax on dividends paid to natural persons will disappear. Thus, from 2025, dividends will be taxed only at a rate of 22/78.
The current § 501 of the Income Tax Act provides for more favourable taxation on regular profit distributions of a company. Namely, the income tax rate of 14% is applied to profit distributed in a calendar year, which is less or equal to the average distributed profit taxed in Estonia for the preceding three calendar years.
The repeal of § 501 of the Income Tax Act is due to the fact that, pursuant to the coalition agreement, a lower tax rate on regular profit distributions of companies will be abolished. From 2025 onwards, the distributed profits of the companies will be taxed at a rate of 22%.
As of 1 January 2024, most Member States of the European Union, as well as other countries such as the United Kingdom, Canada, Australia, Singapore and New Zealand, will be subject to a global minimum tax for groups with a turnover of more than 750 million euros. If the effective tax rate of members of the group in a particular jurisdiction is less than 15%, other countries are entitled to tax the undertaxed profits of the group. The abolition of the 14% rate gives Estonian companies the opportunity to achieve an effective 15% tax rate and avoid the taxation of profit earned in Estonia in other countries, e.g. in the country of the head office of the group, if it applies a minimum tax.
Since the 14% income tax rate will be abolished as from 2025, there will be no need to apply the 7% withholding tax on dividends paid to natural persons.
Pursuant to the current Act, dividends paid regularly to natural persons are taxed at a rate of 7% if, at the level of a company paying dividends on the distributed profit is taxed at a rate of 14% or based on the tonnage scheme. The amendment repeals subsection 13 of § 18, subsection 71 of § 29 and subsection 72 of § 41.
In the case of companies taxed under the tonnage scheme, the obligation to withhold income tax was added to the Act on the basis of feedback received from the European Commission on the Estonian state aid application, according to which the tax liability arising from dividend and profit distributions of a shareholder who is a natural person must be retained even if the income from the eligible activities of the company is taxed under the tonnage scheme. As the obligation to withhold income tax will be regularly abolished in the case of dividends distributed to a natural person, it will also be abolished for companies taxed under the tonnage scheme.
The wording of subsection 41 of § 54 of the Income Tax Act was amended and § 61 was supplemented by subsections 68–70.
Pursuant to the amendment of subsection 41 of § 54 of the Income Tax Act, the resident credit institution and the Estonian branch of a non-resident credit institution may deduct from the income tax payable under subsection 1 or 2 of § 50 or subsection 22 of § 50 or subsection 4 of § 53 the advance payments made in the previous calendar years and current calendar year as provided for in § 471. Upon calculation of income tax payable on the basis of subsection 22 of § 50, it is possible to claim the refund of overpaid advance payments. Advance payments can be deducted to an extent that has not been deducted before.
Unlike the current rule, where only advance payments made in previous calendar years can be deducted from the income tax payable on distributed profits, from 2025, advance payments made in the current calendar year can also be deducted. The amendment is necessary because, under the current regulation, in a situation where a bank distributes the profit earned in the previous calendar year to a significant extent, upon distribution of the dividends, the profit of the 4th quarter is subject to double taxation until the payment of dividends in the calendar year after next (both income tax on dividends and advance income tax on the profit of the 4th quarter of the previous calendar year must be paid).
It is important here that, according to the transitional provision, the amendment does not apply to the advance payment paid on the profits of the 4th quarter of 2024, which cannot be deducted from the income tax payable on distributed profits in 2025, but from the income tax payable on distributed profits in 2026.
Amendments of § 61 of the Income Tax Act
According to subsection 68, a resident company shall withhold income tax at the rate of 7% on dividends or other profit distributions paid to natural persons if this is exempt from income tax on the basis of subsection 11 of § 50 of the Income Tax Act and if the profit on which the dividend or other profit distribution is based was taxed pursuant to § 501 of the Income Tax Act in force until 31 December 2024.
This transitional provision is necessary to avoid the possibility of paying a dividend to a natural person at a rate of 14% without the obligation to withhold 7%. From 2025, both the 14% rate and the obligation to withhold 7% income tax on dividends paid to natural persons will be abolished. In a situation where an Estonian company has distributed profit to another Estonian company at a rate of 14%, the exemption method applies if the other company further distributes this profit to its shareholders. If another company distributes its profit in 2025, when the rates of 14% and 7% no longer apply, the natural person would receive only a dividend taxed at the rate of 14% in the absence of a transitional provision. This would allow tax evasion and motivate investors who are natural persons to set up a company before 2025 and transfer their holdings in other companies to it. Thus, a natural person could reduce the tax rate on dividends received from 20% (22%) to 14%. In order to prevent such abuse, a transitional provision is established which obliges a company to withhold income tax at a rate of 7% on a dividend paid to a natural person if the profit share on which the dividend is based was taxed at a rate of 14% and the exemption method applies at the level of the company distributing the profit. As the received dividends taxed at the rate of 14% are currently declared separately, the Estonian Tax and Customs Board already has data on the dividends taxed so far, from which 7% income tax should continually be withheld in the future.
Pursuant to subsection 69, a resident credit institution and an Estonian branch of a non-resident credit institution may also deduct from the income tax payable on the basis of subsection 1 or 2 of § 50 or subsection 4 of § 53 of the Income Tax Act advance payments made in previous calendar years on the basis of § 471 of the Income Tax Act in force until 31 December 2024.
The amendment specifies that credit institutions can also deduct from the income tax payable on distributed profits advance payments taxed at the rate of 14%.
According to subsection 70, a resident credit institution and an Estonian branch of a non-resident credit institution shall pay the advance payment provided for in § 471 of the Income Tax Act on the profit earned in the fourth quarter of 2024 at the rate of 14%.
The amendment is necessary to ensure that the advance payment for the fourth quarter of 2024, the due date of which is 10 March 2025, is taxed at the rate applicable in 2024. Advance payments made on profits made in the fourth quarter of 2024 cannot be deducted from the income tax payable on distributed profits in 2025.
Deductions from income of natural persons
As of 1 January 2025, a resident natural person has the right to deduct from their taxable income the basic exemption of 8400 euros per year (subsection 1 of § 23 of the Income Tax Act).
The amendment introduces a uniform basic exemption from 2025 of 700 euros per month, i.e. 8400 euros per year, except in the case of old-age pensioners whose basic exemption is equal to the average old-age pension. Tax-free income applies to all residents of Estonia and the European Economic Area (residents of the Member States of the European Union, Norway, Iceland, Liechtenstein) regardless of the amount of income earned by them.
Tax-free income does not apply to residents of a third country (e.g. residents of Ukraine, Belarus, Uzbekistan, Kazakhstan).
As tax-exempt income is entitled regardless of annual income, the person receives more money (monthly 700 × 22 % = 154 euros). The income tax rate will increase by 2%, but at the same time all people whose monthly gross income is up to 7700 euros will benefit from the change. According to simplified calculations, today the tax liability for 7700 euros is 1540 euros (7700 × 20 %) and, thanks to tax-free income, 1540 euros (7700 – 700 = 7000; 7000 × 22%) from 2025. In the case of higher gross income, the income tax liability is already increasing.
Tax-exempt income is an annual deduction. In this amount, tax-exempt income can also be used by a person who, for example, received taxable income only in one month of a year (in this case, the amount of the income may simply not be sufficient to take advantage of all the tax-free income).
The general objective of the Income Tax Act is to determine the tax liability in the correct amount immediately at the source of income, if possible, in order to reduce the need for a natural person to submit an income tax return. In order to calculate the basic exemption on an ongoing basis, a free-form application must be submitted to the person making the payment (subsection 1 of § 42 of the Income Tax Act). No more than one-twelfth of the basic exemption, i.e. 700 euros, can be deducted from the income in each calendar month (subsection 1 of § 42 of the Income Tax Act). If, for any reason, the basic exemption has not been taken into account in part or in full during the year, it shall automatically be taken into account upon submission of a natural person’s income tax return.
Pursuant to subsection 71 of § 61 of the Income Tax Act, the Ministry of Finance will analyse by 2027 at the latest the effects of repealing §§ 231, 234 and 25 of the Income Tax Act in force until 1 January 2024, and by 2028 at the latest the effects of amending §§ 4 and 23 and repealing § 501 of the Income Tax Act in force until 1 January 2024, and will submit a proposal to the Government of the Republic to amend the regulation if necessary.
From 1 January 2024
Deductions from income of natural persons
As of 1 January 2024, a natural person will no longer have the right to deduct from his or her taxable income:
- increased basic exemption upon provision of maintenance to child,
- increased basic exemption for spouse and
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housing loan interest.
This means that in the income tax return of a natural person:
- for the year 2023 submitted between February and May 2024, a person still has the right to make the deductions, but in the income tax return;
- for the year 2024 submitted between February and May 2025, the person will no longer have the right to make such deductions.
The right to deduct from taxable income the following will remain:
- training expenses and
- donations
limited to 1200 euros in total and to no more than 50 per cent of the taxpayer’s income taxable in Estonia (subsection 1 of § 282 of the Income Tax Act). In the event of insufficient income, the unused part of training expenses can be transferred to a spouse or registered partner if jointness of property was in force during the period of taxation as the proprietary relationship of spouses or registered partners (subsection 11 of § 282 and subsection 21 of § 44 of the Income Tax Act).
The right to deduct contributions to supplementary funded pension (third pillar) in the amount of up to 15 per cent of the taxable income but not more than 6000 euros per year from taxable income also remains.
The amendment repeals §§ 231, 234 and 25 of the Income Tax Act, i.e. the increased basic exemption upon provision of maintenance to child and the right to deduct unused basic exemption of a spouse, as well as housing loan interest. Natural person’s income tax incentives are considered to be tax expenses. International organisations (OECD, IMF) recommend reducing tax expenses if there are more effective ways to support target groups that benefit from tax incentives. The most effective way to support target groups is through needs-based benefits, e.g. family benefits.
The repealing of § 231 of the Income Tax Act abolishes increased basic exemption upon provision of maintenance to child. Under the current Act, the child’s parent, guardian or other person maintaining the child can use it if he or she has at least two children under the age of 17. With the amendment that entered into force on 1 January 2020, the amount of basic exemption was increased from the third child to 3048 euros per year. The amount of increased basic exemption for the second child is 1848 euros. At the time, the reason for the amendment was the desire to support families with many children. To date, it has become apparent that there are very few users of the incentive for more than three children, as people do not have an income taxable to the extent necessary, which is why this measure only supports families with many children that have higher income.
The most effective way is to help families with many children through benefits, in particular family benefits. The use of tax incentives depends on income and is of little benefit to poorer households. Benefits will reach more people in need, especially when it comes to targeted support.
A study commissioned by the Ministry of Finance titled "Distribution of the tax burden of Estonian households and analysis of the impact of the basic exemption reform (in Estonian)“ (2023) also points out that the basic exemption per number of children has decreased almost twice in the last ten years (it accounted for 1.78% of total gross income in 2010 and 0.99% in 2021). Support for working parents has therefore decreased through this measure (will be implemented in policy and replaced with universal family benefits).
By repealing § 234 of the Income Tax Act, the increased basic exemption for spouse is abolished. Under the Act in force, a resident natural person has the right to deduct from the income which he or she receives during the period of taxation an increased basic exemption of 2160 euros for the spouse if the resident natural person’s and his or her spouse’s income during the period of taxation in total does not exceed 50 400 euros. Increased basic exemption may be deducted in the part by which the spouse’s income during the period of taxation is smaller than the increased basic exemption. The deductible amount may not exceed the difference between 50 400 euros and the total taxable income of the spouses. The increased basic exemption for spouse is useful mainly in a situation where one spouse does not receive taxable income or his or her taxable income is so small that he or she cannot apply the basic exemption fully. As of 2024, the right to deduct increased basic exemption for spouse will be abolished. According to the 2021 income tax returns of natural persons, the transfer of the general basic exemption between spouses applied in approximately 8200 cases in the amount of 13.9 million euros. Here too, targeted needs-based support is a more effective way of supporting families.
By repealing § 25 of the Income Tax Act, the possibility of deducting housing loan interest from taxable income will be abolished. For some time, the right to deduct housing loan interest has not served its purpose. The interest tax incentive has already been limited significantly and today amounts to up to 300 euros per year. The state could use the funds released more efficiently.
The right to deduct housing loan interest was established in 1996 in order to facilitate access to housing loans and new housing. At the time, the current functioning housing loan market was not in place yet, which translated to very high interest rates compared to the so-called old EU countries. In addition, the repayment deadlines for housing loans were rather short. For example, in 1996 the deadlines were extended to 15–20 years, while in 2021 the maximum repayment period for housing loans is 30 years. In 1997, the average interest rate on housing loans was about 12–13%, while in February 2023 it was 4.9%, according to Eesti Pank’s data. It should also be kept in mind that at that time income amounts were much smaller and the cost of servicing loans accounted for a significantly higher share of income than today. Therefore, the initial State intervention in the housing loan market was necessary and justified because of the market failure but has now lost its original purpose.
Other amendments
As of 1 January 2024, income tax paid by resident natural persons, without taking into account the deductions provided for in Chapter 4, shall be paid into the budget of the local authority of the taxpayer’s residence as follows (subsection 1 of § 5 of the Income Tax Act):
- 2.5% of the state pension of a resident natural person;
- 11.89% of the other taxable income of a resident natural person, except mandatory and supplementary funded pension, dividend specified in subsection 13 of § 18 and gains received from transfer of assets.
The calculation of income tax received by local governments shall be amended in such a way that the income of state pensions shall also be taken into account upon distribution of income tax to local governments. In order to increase the public funding of the 24-hour general care service, the funds will be directed to local governments through income tax and the equalisation fund.
As of 2024, local governments will receive income tax of 1.88% on state pension income, excluding income tax deductions. Income tax deductions reduce the share of income received in the state budget and do not affect the distribution of income tax between local governments.
5% of the resources allocated to the measure will be channelled to the equalisation fund, which will help to smooth the uneven distribution of revenue and expenditure between local authorities. The equalisation fund divides over 65 years of age into two age groups: 65–84 years of age and 85 years of age and older, as the probability of entering a general care home is different in the respective age groups — in the 65–84 age group, 2% of people are in the care home, and in the age group of 85-year-olds and older, 9.5% of people are in a general care home. The distribution in two helps to take into account a situation where the higher share of over-85s will also have a higher cost need. During the transitional period in 2023, the funds allocated for the measure shall be distributed among local governments through the state budget support fund, also taking into account the distribution of persons aged 65–84 and persons aged 85 and over, and the higher need for expenditure over 85 years of age.
The local government decides on the use of the income tax and the funds of the equalisation fund. The accounting of 1.88% of the income tax received by local governments, which will enter into force from 2024, will also be applied in the following years.
The part of income tax exceeding the amount specified in the above provision and income tax not specified are paid into the state budget (subsection 3 of § 5 of the Income Tax Act).
From 1 January 2024, registered partners are included in the list of associated persons (§ 8 of the Income Tax Act) and in the fringe benefit taxation provision (subsection 6 of § 48 of the Income Tax Act).
The amendment also adds a registered partner to the list of associated persons, as close personal and economic relations and common economic interests can be assumed for registered partners.
A registered partner is also included in the relevant provisions of the Social Tax Act.
From 1 January 2024 income tax is not imposed on (subsection 3 of § 19 of the Income Tax Act):
- clause 31 – labour market support paid to natural persons from the funds of the European Union within the framework of labour market measures provided for in the Labour Market Measures Act for participation in labour market services and for facilitating participation in labour market services if it has been paid within the limit provided for in § 15 of the Labour Market Measures Act.
Clause 1 of § 15 of the Labour Market Measures Act provides that upon payment of labour market support for the period of participation, the daily rate of support established shall not exceed six times the minimum hourly wage established on the basis of subsection 5 of § 29 of the Employment Contracts Act, i.e. the allowance paid for participation in the labour market service shall be lower than the minimum wage received upon full-time employment.
Clause 2 provides that upon payment of labour market support for the distance travelled, the rate of support established per kilometre shall not exceed the limit established in clause 2 of subsection 3 of § 13 of the Income Tax Act per kilometre. The daily rate may not exceed ten times the minimum hourly wage established on the basis of subsection 5 of § 29 of the Employment Contracts Act. - clause 15 – to the extent of one-seventh of the utility network to be paid on the basis of § 154 of the Law of Property Act Implementation Act.
According to the current Act, the toleration payment is exempt from tax to the extent of 1/3 or to the extent that it is assumed to be land tax compensation. At the same time, the amount of the basic exemption does not depend on how much and whether the landowner pays for the land under the protection zone, as the payer of the toleration payment will not determine it. In subsection 1 of § 155 of the Law of Property Act Implementation Act, the rate of 7.5% is replaced by 3.5% (incl. 3% of income foregone and 0.5% of land tax). In future, the land tax compensation will therefore amount to one-seventh of the toleration fee. The amendment maintains the principle that toleration payment is not subject to income tax in respect of land tax compensation.
From 1 July 2024 income tax is not imposed on (subsection 3 of § 19 of the Income Tax Act):
- clause 12 – compensation or support paid on the basis of § 49 of the Civil Service Act, subsections 1 and 7 of § 196 of the Military Service Act, subsections 4–5 of § 61 of the Defence League Act, § 753 of the Police and Border Guard Act, § 242 of the Security Authorities Act, § 38 of the Assistant Police Officer Act, § 41 of the Rescue Act, § 29 of the Security Activities Act, § 44 of the Emergency Act and § 551 of the National Defence Act.
The amendment exempts from income tax compensation paid to security officers or other entitled persons in the event of partial or total loss of capacity for work or in the event of an attack, accident or death in the course of their duties. The amendment is related to the objective of harmonising the practice of tax exemption for similar social guarantees for persons ensuring security.
The rules for taxation of payments made on the basis of life insurance contracts with investment risk (subsection 3 of § 20 of the Income Tax Act) changed as of 1 January 2011. If the payment made at least 12 years after the conclusion of the contract was previously exempt from tax, the payments are now taxed in accordance with the general principles of securities income (the difference between payments and contributions), but the tax liability may be deferred by using an investment account or a pension investment account (§§ 171 and 172 of the Income Tax Act).
Tax-free payments may be made until the end of 2023 on the basis of contracts concluded before 1 August 2010.
Benefits paid under ordinary life insurance contracts (death and accident insurance) will continue to be exempt from tax.
As of 1 January 2024, the concept of a tax scheme has been specified (subsection 19 of § 546 of the Income Tax Act).
A tax scheme is a transaction or chain of transactions which presupposes the existence of a tax mismatch or which is designed to create a tax mismatch. A transaction or chain of transactions which fulfils these conditions shall not be regarded as a tax scheme if it is reasonable to assume that the parties to the transactions did not have to be aware of the inconsistency and did not receive a tax advantage resulting from the tax inconsistency.
In the first and second sentences of subsection 19 of § 546 of the Income Tax Act, the words ‘transaction chain’ were replaced by the words ‘transaction or transaction chain’ in order to bring the wording of the term ‘tax scheme’ into line with Article 2(11) of Directive 2016/1164 as inserted under Article 1(2)(c) of the ATAD2 Directive. The wording ‘transaction chain’ in the current Income Tax Act indicates that the tax scheme consists of several transactions. The wording of the ATAD2 Directive may also constitute a tax scheme for a single transaction.
As of 1 January 2024, the wording of subsection 1 of § 548 of the Income Tax Act has been specified.
A trust fund or the fund manager thereof shall pay income tax on income which would have been attributed to a partner of the trust fund in proportion to its share in the trust fund if such income is not subject to taxation pursuant to subsection 11 or 12 of § 29 or legislation of another jurisdiction and if at least one partner of the trust fund is a non-resident related company who directly or indirectly owns at least 50% of the holding of the trust fund and who is located in a jurisdiction which considers the trust fund to be liable to income tax.
The amendment clarifies that 50% of the trust fund’s shareholding should be held by all related undertakings in total in accordance with Article 9a(1) of Directive 2016/1164 as inserted under Article 1(5) of the ATAD2 Directive. According to the current wording of the Income Tax Act, 50% of the trust fund's shareholding should be held by a single affiliated company.
Application of the basic exemption to payments of non-resident natural persons
Effective from 2022, natural persons who are residents in members of the European Economic Area (EEA) (European Union Member States, Iceland, Liechtenstein, Norway) have the right, like Estonian residents, to submit a request to a payer for the application of the Estonian basic exemption (up to 500 euros) when a payment is made (Annex 2 to Form TSD) and the income tax withheld on his or her income subject to income tax in Estonia is calculated.
Whereas up to 2021 a natural person who was resident in a member of the EEA was entitled to file an annual income tax return for the application of the basic exemption in Estonia and thereby receive a refund of any excess income tax withheld in Estonia, now there is an additional option to apply the basic exemption already monthly upon receipt of a non-resident’s income (for residents of EEA members).
Therefore, if a non-resident submits:
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a request to a payer for the application of the Estonian basic exemption (up to 500 euros, it is a one-time request but it can be amended, depending on the income amount, as well as revoked in order to prevent the basic exemption from being applied) and
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valid proof of residency issued by the tax authority in the recipient’s country of residency,
such non-resident will have the Estonian basic exemption deducted from the income tax calculated to be withheld on income subject to income tax in Estonia according to Estonian rules.
A payer reports a non-resident’s income subject to taxation in Annex 2 to Form TSD. The basic exemption is also applied in the tax calculation there if proof of residency has been submitted. A non-resident’s basic exemption cannot be included in Annex 1 to Form TSD.
Payments made to the same non-resident in the same month are added up for the purposes of calculating the basic exemption.
A non-resident who is a resident of an EEA member is subject to the same rules for calculating the basic exemption as Estonian residents.
A payer must report payments made to non-residents in Annex 2 to Form TSD. The application of Estonian basic exemption is allowed only if valid proof of residency of the recipient certified by the tax authority in the recipient’s country of residency (EEA member) tax authority has been uploaded to the database of the Estonian Tax and Customs Board prior to the submission of Annex 2 to Form TSD.
Further information
Proof of residency does not need to be on Form TM3, it can be on a foreign country’s proof of residency form containing the same information, what is important is to include information from Parts I, III and V of Form TM3.
Proof of residency must be sent to the Estonian Tax and Customs Board, it cannot be uploaded by a non-resident or payer by themselves.
A proof of residency document is typically valid for 12 months unless otherwise specified on the document. If payments to the non-resident continue, a new proof of residency document must then be submitted to the Estonian Tax and Customs Board.
A non-resident natural person who is resident of another EEA member does not have to file an individual income tax return in Estonia if his or her income did not exceed the rate of basic exemption calculated pursuant to Estonian law or whose income for the taxable period is not subject to any further income tax.
Residents of third countries (such as Russia, Ukraine, United States, Canada, etc.) are not entitled to apply the Estonian basic exemption on payments in Annex 2 to Form TSD or the recipient’s income tax return.
Impact of tax treaty benefits on the application of the basic exemption
If
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there is a treaty for the avoidance of double taxation between Estonia and the recipient’s country of residence (tax treaty),
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as a result of which the non-resident’s income is not subject to income tax in Estonia (for example, service fees paid to German residents in Estonia if such activity has not resulted in a specific location in Estonia) and
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valid proof of residency of the recipient certified by a foreign country’s tax authority has been uploaded to the database of the Estonian Tax and Customs Board,
the basic exemption arising from the tax treaty will be applied to the payer.
If a payment is subject to tax exemption arising from a tax treaty, the basic exemption pursuant to Estonian law is not applicable.
Therefore, a non-resident does not have to submit a request for the application of the Estonian basic exemption to the calculation of income tax withheld in Estonia if the payment is already exempt from taxation pursuant to the tax treaty. Information on basic exemption requests is not gathered by the Estonian Tax and Customs Board.
Example 1
Finnish resident Päivi receives employment income of 1000 euros in March.
Pekka has submitted a request to the payer for the application of the basic exemption and the database of the Estonian Tax and Customs Board contains a valid proof of residency for the recipient certified by the tax agency of Finland.
TAX CALCULATION
March 2022
- Social tax 1000 x 33% = 330 euros
- Unemployment insurance premium withheld 1000 x 1.6% = 16 euros
- Employer’s unemployment insurance premium 1000 x 0.8% = 8 euros
- Income tax withheld (1000 – 16 – 500) x 20% = 96.80 euros
Example 2
Latvian resident Laima receives 1000 euros in March on the basis of a contract under the Law of Obligations Act. She only spends a week in Estonia to provide a service.
Laima’s valid proof of residency certified by the tax agency of Latvia has been uploaded to the database of the Estonian Tax and Customs Board.
TAX CALCULATION
March 2022
- Social tax 1000 x 33% = 330 euros
- Unemployment insurance premium withheld 1000 x 1.6% = 16 euros
- Employer’s unemployment insurance premium 1000 x 0.8% = 8 euros
- Income tax withheld 1000 x 0% = 0 euros
Non-cooperative jurisdiction for tax purposes
In the provisions of the Income Tax Act, low tax rate territory has been replaced with non-cooperative jurisdiction for tax purposes. In respect of the latter, the list adopted by the Council of the European Union is applicable, which does not depend on the tax rate within this territory or whether the business activities are real or fictitious.
Currently (since 20 February 2024) the list of non-cooperative jurisdictions for tax purposes is comprised of the following:
American Samoa, Anguilla, Antigua and Barbuda, Fiji, Guam, Palau, Panama, Russia, Samoa,Trinidad and Tobago, US Virgin Islands, Vanuatu.
The concept of a legal entity in a low tax rate territory has therefore become invalid in the application of income tax to payments made to non-resident legal entities or non-business-related expenses.
Income tax is withheld on the fees paid to a legal entity in a non-cooperative jurisdiction for tax purposes (and no longer in a low tax rate territory) for services rendered to an Estonian resident.
The application of income tax to non-business related payments is based on the list of non-cooperative jurisdictions for tax purposes.
As a result of the change pass-through dividends and profit attributable to permanent establishment of Estonian resident companies are not subject to income tax exemption if the dividend-paying company or permanent establishment are based in non-cooperative jurisdictions for tax purposes.
Income of a legal entity based in non-cooperative jurisdictions for tax purposes controlled by an Estonian resident natural person is taxed as individual income regardless of whether profit distributions have been made on the legal entity level.
The change in the low tax rate territory concept applies to non-resident payments with effect from 1 July 2021 and to Estonian resident natural person income related to the taxation of legal entity income based in a low tax rate territory from 1 January 2022.
Reference
Last updated: 11.03.2024