The withholding of income tax is one method of settlement of the tax liability.
Income tax is withheld from the income subject to taxation on the gross principle: remuneration or service fees paid on the basis of a contract for services, authorisation agreement or any other contract under the law of obligations, rent from a commercial or residential lease, royalties, interest payments, insurance indemnities, pensions, payments from a pension fund, grants, prizes received from gambling (except the prizes received from gambling organised on the basis of an operating permit or registration), benefits received on the basis of the Family Benefits Act, payments to a non-resident for services provided in Estonia, payments to a legal person located in a low tax rate territory for services provided to an Estonian resident and from other income that meets the concept of income by its economic content.
Since 2019, income tax is withheld from dividends taxed at a reduced rate 14/86 in the hands of the payer company paid to a natural person (resident or non-resident).
Income tax withholding is not applicable to types of income taxed on the basis of the net principle (business income, gain on sale of assets). Taxation is typically on the basis of income tax returns.
The withholding entities for income tax are all resident legal entities, as well as state and local government agencies and employers that are natural persons and non-residents. An income tax withholding entity must withhold income tax on distributions taxed on the basis of the gross principle, transfer the income tax withheld to the bank account of the Estonian Tax and Customs Board by the 10th day of the month following the month that the distribution occurred and file the tax return by the aforementioned date on Form TSD.
If a person making a distribution as an income tax withholding entity failed to comply with obligations and failed to declare and transfer the income tax withheld to Estonian Tax and Customs Board, the income tax will be recovered from the person making the distribution. For example, if an employer has withheld income tax on a salary but failed to declare and transfer it to the Estonian Tax and Customs Board, the income tax will be recovered from the employer. In such case, the employee must report the salary distributions and income tax withheld to the Estonian Tax and Customs Board and provide evidence in the form of documentation (employment contract, wage slips, bank account statement or other). Employees can report information on income tax that is withheld but not declared or transferred to Estonian Tax and Customs Board at the address email@example.com.
However, if the employer violated their obligations by paying undeclared wages and the employee was aware of this, the employer and employee will bear joint and several liability for the payment of income tax. The employee must report their salary as income in their income tax return and pay the income tax on the basis of their income tax return.
If income is received from a person that is not subject to the obligation to withhold income tax pursuant to the Income Tax Act (for instance, the renting of an apartment from one private individual to another), the recipient of income must declare their income and pay their own income tax.