Income tax changes for non-residents
Main income tax changes for non-residents from 1 January 2011
1. Taxation of income of non-residents
- A new form R is established to notify the Estonian Tax and Customs Board of the changes in residency of natural persons.
- In accordance with § 41 of the Income Tax Act, before withholding income tax, the unemployment insurance premium withheld on the basis of the Unemployment Insurance Act, shall be deducted from the payment made to a non-resident.
For example, from payment in the amount of EUR 1000, from which the unemployment insurance premium in the amount of EUR 28 (2.8%) is deducted, the income tax to be withheld shall be calculated as follows:
EUR 204.12 = (1000 – 28) x 0,21.
Until 2011, income tax to be withheld from the payments made to non-residents was always calculated without making deductions.
- Income tax is charged on remuneration to a non-resident member of a management or controlling body, if the payment was made through or on behalf of the permanent establishment of a non-resident legal person in Estonia.
- Other income is taxable for a non-resident also in case the payment is made through or on behalf of the permanent establishment of a non-resident in Estonia.
- Maintenance support and amounts paid to satisfy claims for support shall not be taxable income of the recipients from 1 January 2011.
- Gains from transfer of property are not subject to income tax if the property has been used by the non-resident taxpayer as his or her place of residence under conditions specified in § 15 (5) and (6) of the Income Tax Act.
- Sickness benefits paid by employers shall be taxable for non-resident recipients.
- Income tax shall not be withheld on payments made to sole proprietors entered in the commercial register of the member state of the European Economic Area and if the payment is business income of the recipient. Recipients are obligated to declare on form E1 their business income subject to taxation in Estonia.
- When submitting an income tax return of a resident natural person of Estonia, a resident of another Contracting Party to the EEA Agreement can make deductions available to Estonian residents in proportion to income subject to taxation in Estonia, if during the period of taxation he or she:
- derived at least 75 per cent of his or her taxable income in Estonia, or
- derived less than 75 per cent of his or her taxable income in Estonia but he or she proves that he or she could not make the deductions allowed for residents outside Estonia.
2. Taxation of permanent establishments of non-residents in Estonia
- Permanent establishment is established as a result of geographically specified or mobile business activity in Estonia, or as a result of a business activity of a representative authorised to conclude contracts in the name of a non-resident in Estonia.
- In Estonia, profit earned through a permanent establishment of a non-resident is subject to taxation, but the moment of taxation is carried forward until the moment of distribution of profit or the moment of taking the profit out of a permanent establishment. This is laid down in the Income Tax Act in force from 2011, whereas earlier, only the cost of property taken out of the permanent establishment exceeding the cost of property brought in, was subject to taxation.
Unlike from the provision in force until 2011, taxation of the profit a non-resident earned through a permanent establishment does not depend on registration of a permanent establishment; however, the registration is still compulsory.
Taxable profit taken out of permanent establishment shall be declared in Annex 6 of form TSD.
- A non-resident legal person with a permanent establishment in Estonia is required to submit a tax return on form INF 1 concerning the amount and the recipients of payments made during the period of taxation. The tax return on form INF 11 shall also be submitted concerning the received income which distribution is exempted from income tax in Estonia. Annex 6 of form TSD and forms INF 1 and INF 11 shall be submitted by the tenth day of the calendar month following the date of making of the payment.
3. Transfer pricing taxation
From 2011, the concept of “associated persons” has been changed. Persons are deemed to be associated if they have common economic interest or one has control of another person (even if they are not included in the list of associated persons).
4. Taxation of fringe benefits
- Fringe benefits granted by an employer are the benefits made by a person belonging to the same group with an employer.
- Provisions of the Income Tax Act in force from 2011 specify taxation of options granted by employers as fringe benefits.
5. Investment account
From 2011, resident natural persons are permitted to carry forward their income tax liabilities concerning financial assets. This is possible by depositing the financial assets on a special investment account. Income shall be taxable at the moment of drawing the amounts out of the investment account, provided that they are not used for acquisition of financial assets.
The Act amending the Income Tax Act and the Related Acts of 20.10.2010 is available in RT I 18.11.2010 I (in Estonian).
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