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Taxation of income of non-residents

Content
 


1. Purpose of the guide


The instructions are provided according to § 15 of the Estonian Taxation Act in order to explain taxation of income of non-residents in Estonia for the purpose of ensuring the uniform application of Acts concerning income tax. The explanations and instructions are not binding on taxable persons. The explanations and instructions are published on the website of the Estonian Tax and Customs Board.
 

2. Concept of residency
 

A natural person is a resident if one of the following conditions is met:

  • his or her place of residence is in Estonia;
  • he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia;
  • Estonian diplomats who are in foreign service are also Estonian residents.

There is a Form R which shall be submitted to the Estonian Tax and Customs Board for informing about changes in the natural persons residency. If you leave or arrive at Estonia, we suggest you to ask help from the tax administration, in order to decide if your residency has changed.

A legal person is a resident if it is established pursuant to Estonian law. European Company (in Latin Societas Europaea, SE) and European Cooperative Society (in Latin Societas Cooperativa Europaea, SCE) are regarded to be residents if their place of establishment is registered in Estonia.

A non-resident is a natural or legal person not specified above.

Thus, where by reason of the provisions of agreement between two countries who have concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter tax treaty), a person is a resident of both contracting states, his status shall be determined according to article 4 of the tax treaty.

If the residency prescribed on the basis of an international agreement (for example tax treaty) differs from the residency prescribed pursuant to the Estonian Income Tax Act, the provisions of the international agreement apply.

That means that a person who is deemed to be resident of another country according to article 4 of the tax treaty,that person is deemed to be non-resident according to the Estonian domestic law.

As a person shall be deemed to be a resident as of the date of his or her arrival in Estonia, it is possible, that a person shall be deemed to be resident for one part of the period of taxation (calendar year) and non-resident for the other part of the period of taxation.

It is advisable to send an e-mail or apply to the closest service bureau of the Estonian Tax and Customs Board in order to obtain more detailed information about the concept of your residency.
 

3. Taxable income of non-residents in Estonia


Non-residents (natural and legal persons) have a limited tax liability in Estonia; only the Estonian-source income is taxed in Estonia.

Employers, who grant taxable fringe benefits, included employers who are natural persons and non-residents having a permanent establishment or operate as employers in Estonia pay income tax on fringe benefits.

A non-resident legal person which has a permanent establishment in Estonia has to pay income tax imposed on fringe benefits, gifts, donations and costs of entertaining guests, profit distributions, and expenses and payments not related to business made by a non-resident through a permanent establishment.
 

3.1. Application of tax incentives or exemptions prescribed by the tax treaty


If Estonia has concluded an agreement for the avoidance of double taxation and the prevention of fiscal evasion (hereinafter tax treaty) with the resident country of a non-resident, which prescribes more favourable conditions for the Estonian income taxation of the income of non-residents than those provided by the Estonian Income Tax Act, the provisions of the tax treaty apply.

In Estonia, the tax incentives or exemptions arising from tax treaties can be applied only if the recipient of the payment has certified his or her residence status to the tax authority by certificate of residency confirmed by tax administration of the residence country.

Tax relief or tax incentives prescribed by tax treaties may be granted to non-residents at the moment of payment.

Please note that residency should be certified for the purpose and in the sense of the relevant tax treaty and not in the sense of the national law of a foreign country.

The document need not be submitted if valid data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons of the Estonian tax administration. The validity of the certificate can be checked on-line via web-site of the Estonian tax administration here.

Otherwise non-resident has to submit a certificate approving the tax residence issued by the competent tax authority of the residence country. Form TM3 (547.39 KB, PDF) available on the website of the Estonian Tax and Customs Board www.emta.ee may be used for certifying the recipient of income and the residency of the recipient or a relevant form issued by the competent tax authority of the country of residence.

The list and the texts of tax treaties are available on the website of the Estonian Tax and Customs Board.
 

4. Non-residents whose income is not subject to income tax


Income tax is not charged on income received for the performance of official duties in Estonia by a foreign diplomatic or consular representative, a representative of a special mission or a member of a diplomatic delegation, a member of a representation of an international or intergovernmental organisation or a person employed by such representation, who is not a citizen or permanent resident of Estonia.

Persons specified in previous subsection shall be registered with the Ministry of Foreign Affairs.

If an international agreement prescribes more favourable conditions for taxation of the income of non-residents than those provided by law, the provisions of the international agreement apply.
 

5. Non-resident's taxable income (according to the Estonian Income Tax Act)


Non-residents (natural and legal persons) have a limited tax liability in Estonia; their taxable income consists only of income from Estonian sources. Generally, there are different deductions and allowances available to non-residents than to residents.

The Estonian Income Tax Act exempts non-residents that have registered a permanent establishment in Estonia from payment of income tax on earned income, unless the income is distributed.

A non-resident taxpayer with no permanent establishment in Estonia shall pay income tax only on the following profit received from a source of revenue located in Estonia:

  • income derived from work or from the provision of services;
  • remuneration paid to a non-resident member of a management or controlling body;
  • business income;
  • gains derived from a transfer of property (limited);
  • income derived from a commercial lease or royalties;
  • interest (limited);
  • pensions, scholarships and grants, cultural, sports and scientific awards, benefits, gambling winnings and benefits paid on the basis of the Family Benefits Act, insurance indemnities, payments made to a non-resident from Estonian pension funds;
  • remuneration paid to a non-resident artist, sportsperson in connection with his or her performance or competition in Estonia.
     

5.1. Income derived from work or provision of services


Income tax is charged on income derived by a non-resident natural person from:

  • work under an employment contract;
  • work in public service;
  • activities engaged in on the basis of a contract for services, an authorisation agreement or a contract entered into for the provision of any other services under the law of debt

if the non-resident performed his or her duties or provided services in Estonia and the payment was made:

  • by an Estonian state or local government authority;
  • by an Estonian resident;
  • a non-resident operating in Estonia as an employer;
  • if the payment was made through the permanent establishment of a non-resident legal person registered in Estonia;
  • if the person has stayed in Estonia for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months.

If a non-resident receiving remuneration on the basis of the law of debt, has been entered into the commercial register in Estonia or has been registered as a sole proprietor in the regional tax and customs centre of the Estonian Tax and Customs Board, and the remuneration is business income, then the corresponding remuneration shall be taxable as business income.

Income tax is not charged on income derived by a non-resident natural person from work or activities if the non-resident performed his or her duties or provided the services outside Estonia. There is no need to file tax return on income of non-resident that is not taxable in Estonia. 

For example, if the Estonian employer pays wages to a non-resident long-distance driver, income tax is not withheld from the payment, as the work is done outside Estonia.

A withholding agent is required to withhold income tax on taxable payments. Income tax is withheld upon the making of a payment. Income tax withheld in accordance with the rates specified in the Estonian Income Tax Act or in foreign agreements is, for a non-resident recipient, the final income tax on income from Estonian sources.

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.

Income tax is not withheld but is paid by non-resident himself if the non-resident who receives remuneration on the basis of a contract under the law of obligations has been entered in the commercial register in Estonia or registered as a sole proprietor in another Contracting State of the European Economic Area and such remuneration is his or her business income.

Non-resident who derives such business income that is subject to taxation in Estonia is required to submit an income tax return concerning business income derived during the period of taxation.

Income tax is not charged on the following income of a non-resident:

  • compensation for official travel, accommodation and other expenses and daily allowances paid to a public servant, an employee or a member of the management or controlling body of a legal person under the conditions and within the limits established by the Government of the Republic, and compensation for expenses arising from appointment to a position located in another area;
  • compensation for service or employment related use of an automobile in the personal ownership of the taxpayer or used by the taxpayer on the basis of a leasing contract, paid to a public servant, an employee, or a member of the management board or a body substituting for the management board of a legal person, in accordance with the conditions and within the limits established by the Government of the Republic.
     

5.2. Remuneration paid to non-resident member of management or controlling body


Income tax is charged on remuneration  paid by a resident legal person or through or on behalf of the permanent establishment of a non-resident legal person in Estonia to a non-resident member of a management or controlling body.

From 1 January 2015, remuneration derived by a non-resident in the capacity as a member of a management or controlling body of the Estonian  resident company or a permanent establishment, is taxed even if the payment is not made by the Estonian resident or through the permanent establishment in Estonia.

A management or controlling body of a legal person is any authorised body or person who, pursuant to an Act governing the legal person, a partnership agreement, the articles of association or any other legislation regulating the activities of the legal person, has the right to participate in managing the activities of the legal person or in controlling the activities of the management body of the legal person.

Management or controlling bodies include management boards, supervisory boards, partners authorised to represent general or limited partnerships, procurators, founders until registration of the legal person, liquidators, trustees in bankruptcy, auditors and internal audit committees. Directors of branches of foreign companies and managers of permanent establishments registered at service bureaus of the Tax and Customs Board are also deemed to be management bodies.
 

5.3. Business income


Income tax is charged on business income derived by a non-resident in Estonia if the service is provided in Estonia. If the non-resident is a legal person located in a low tax rate territory, income tax is charged on all income derived by the non-resident from the provision of services to Estonian residents, irrespective of where the services were provided or used.

A non-resident sole proprietor may additionally deduct up to 2877 euros during a period of taxation from his or her income derived from the sale of unprocessed self-produced agricultural products and from transfer of timber derived from own immovable property after all certified deductions related to business described in Income Tax Act have been made.

Business is a person's independent economic or professional activity (including the professional activity of a notary, a bailiff or, in specific cases a sworn translator), the aim of which is to derive income from production, sale or intermediation of goods, provision of services, or other activities, including creative or scientific activity.

Sole proprietors entered in the commercial register in Estonia may make the deductions, allowed under Chapter 6 of the Estonian Income Tax Act, from their business income.
 

5.4. Gains derived from transfer of property


Income tax is charged on gains derived by a non-resident from transfer of property if:

  • the sold or exchanged immovable is located in Estonia;
  • the movable was subject to entry in an Estonian register prior to the transfer;
  • the transferred real right or the right of claim is related to an immovable or a structure as a movable, which is located in Estonia;
  • the transferred holding is a holding of a person who at the time of transfer owned at least 10 per cent in a company, investment fund or pool of assets of whose property, at the time of transfer or during certain period within two years immediately preceding the transfer, more than 50 per cent was directly or indirectly made up of immovable or structures as movables, which are located in Estonia
  • the transferred timber from the immovable property situated in Estonia.

The gains or loss derived from the sale of property is the difference between the acquisition cost and the selling price of the sold property. The gains or loss derived from the exchange of property is the difference between the acquisition cost of the property subject to exchange and the market price of the property received as a result of the exchange. A taxpayer has the right to deduct certified expenses directly related to the sale or exchange of property from the taxpayer’s gain or to add such expenses to the taxpayer’s loss.

Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company will generally be subject to corporate income tax in the hands of the payer: the Estonian company. Non-resident shareholders do not pay income tax on the amount already taxed in the hands of the Estonian company.

Income tax is not charged on the following income of a non-resident:

  • accepted succession;
  • property returned in the course of ownership reform;
  • expropriation payments and compensation paid upon expropriation;
  • income from transfer of movable property in personal use.

Non-residents may not claim tax allowances available to residents prescribed by § 15 (4) of the Estonian Income Tax Act. For example, there is no tax exemption on gains from the transfer of land returned in the course of ownership reform.

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.

Non-residents who have received gain from a transfer of property have to submit an income tax return and pay income tax, because in this case income tax is not withheld upon making the payment.
 

5.5. Income derived from commercial lease or royalties


Income tax is charged on income derived by a non-resident from a commercial lease if:

  • the immovable subject to a commercial or residential lease or encumbered with limited real rights is located in Estonia;
  • the movable subject to a commercial or residential lease or encumbered with limited real rights is entered or is subject to entry in an Estonian register;
  • the payment for royalties (the right to use a copyright of a literary, artistic or scientific work (including cinematographic films or videos, recordings of radio or television programmes or computer programs), and for the right to use a patent, trade mark, industrial design or utility model, plan, secret formula or process, or consideration for transfer of the right to use the above (hereinafter royalties) is made by the Estonian state, a local government or a resident, or by a non-resident through or on account of its permanent establishment in Estonia;
  • the payment for industrial, commercial or scientific equipment or know-how is made by the Estonian state, a local government or a resident, or by a non-resident through or on account of its permanent establishment in Estonia.

Royalty payments between associated companies arising in Estonia are exempt from withholding tax in Estonia if the beneficial owner is a company of another EU member state or Switzerland or a permanent establishment situated in another EU member state or Switzerland. “Associated companies” are companies with a minimum direct holding of 25% within a period of the last 2 consecutive years.

Royalties are exempted from taxation only in case if the taxpayer uses the values of transactions similar to those applied by non-associated independent persons under similar conditions.

A tax treaty in many cases prescribes for lower rates of a withholding income tax. Lower rates will be applied if the withholding agent submits a document certifying the recipient of income and the residency of the recipient of income to the regional tax and customs centre of the Tax and Customs Board together with the tax return. The document needs not to be submitted if data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons.
 

5.6. Interest


Income tax is generally not charged on interest received by a non-resident.

From 2014, income tax is charged on interest received from the holding in a contractual investment fund or other pool of assets of whose property, at the time of the transfer or during a period within two years before transfer, more than 50 per cent was directly or indirectly made up of immovables or structures as movables located in Estonia and in which the non-resident had a holding of at least 10 per cent at the time of transfer.

Until the end of year 2013, if the value of any interest received did differ from the value of similar interest paid under market conditions upon beginning of the debt instrument or upon making the payment of the interest, the interest surplus has been taxable to the non-resident recipient. From 2014, such amount is taxed according to transfer pricing rules by corporate income tax in the hands of the payer.
 

5.7. Dividends


No income tax is charged on dividend payment received by a non-resident, no matter if the recipient is a legal or a natural person and in spite of the amount in a share capital of the resident company distributing the dividends. Dividends are subject to corporate income tax in the hands of the payer: the Estonian company.
 

5.8. Other income


Income tax is charged on all pensions, scholarships and grants, cultural, sports and scientific awards, benefits, gambling winnings and benefits paid on the basis of the Parental Benefit Act which are paid to a non-resident by the Estonian state, a local government, a resident or through or on behalf of the permanent establishment of a non-resident legal person in Estonia. Income tax is also charged on insurance indemnities paid to a non-resident by the Estonian Health Insurance Fund, the Estonian Unemployment Fund or a resident insurance company and on payments made to a non-resident from Estonian pension funds.

Maintenance support and amounts paid to satisfy claims for support shall not be taxable income of the recipients from 1 January 2011.
 

5.9. Remuneration paid to non-resident artiste, sportsman or sportswoman


Income tax is charged on remuneration paid to a non-resident artist, sportsman or sportswoman in connection with his or her performance or competition in Estonia or the presentation of his or her works in Estonia. Income tax is also charged on remuneration paid to a non-resident third person in connection with the activities of a resident or non-resident artist, sportsman or sportswoman in Estonia.
 

6. Non-resident’s income not subject to income tax


Non-residents (natural and legal persons) have a limited tax liability in Estonia; they are taxed on Estonian-source income only.

Income tax is not charged on the following income of a non-resident:

  • accepted succession;
  • property returned in the course of ownership reform;
  • expropriation payments and compensation paid upon expropriation;
  • income from transfer of movable property in personal use;
  • interest paid to a natural person by a credit institution resident in a contracting state of the European Economic Area or a branch of a non-resident credit institution situated in a contracting state of the European Economic Area;
  • scholarships and grants paid pursuant to law or from the state budget, and benefits paid pursuant to law, except for scholarships, grants and benefits which are paid in connection with business or an employment or service relationship or with membership of the management or controlling body of a legal person;
  • international and state cultural and scientific awards and sports awards granted by the Government of the Republic;
  • royalty payments between associated companies arising in Estonia are exempt from tax if the beneficial owner is a company of another EU member state or Switzerland or a permanent establishment situated in another EU member state or Switzerland. “Associated companies” are companies with a minimum direct holding of 25% within a period of the last 2 consecutive years
  • gains from transfer of property 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.

Non-residents cannot claim the same deductions and allowances as available to residents.
 

7. Forms and filing of tax returns


7.1. Withholding tax


An withholding agent is required to withhold income tax on taxable payments. Income tax is withheld upon the making of a payment. Income tax withheld in accordance with the rates specified in the Estonian Income Tax Act or in foreign agreements is, for a non-resident recipient, the final income tax on income from Estonian sources.

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.

The income tax is withheld by the paying entity at a rate of 20% (since 2015) or at a lower rate of 10% for some types of income monthly.

An withholding agent for income tax is a resident legal person, state or local government authority, sole proprietor, employer who is a natural person, or non-resident with a permanent establishment or operating as an employer in Estonia, who makes payments subject to income tax to a natural person or non-resident.

The income tax has to be withheld on all taxable payments made and declared (on form TSD with annex 2 in case if the recipient is a non-resident natural person or on form TSD with annex 3 in case if the recipient is a non-resident legal person) and transferred to the Estonian Tax and Customs Board (income accounts of the Estonian Tax and Customs Board) by the 10th of every month, following the month of payment (i.e. tax should be withheld on payments made in January and transferred and declared to the Tax and Customs Board by February 10). The forms of income tax returns are available on website www.emta.ee or at any service bureau of the Estonian Tax and Customs Board.

It is possible to submit an income tax return through the e-service of the Estonian Tax and Customs Board.

At the request of a taxpayer, a withholding agent is required to issue a certificate to the taxpayer concerning payments made and the income tax withheld during a calendar year, broken down by types of income and tax rates, not later than by 1 February of the year following the withholding of the tax or, if the taxpayer quits employment, together with the final settlement. The format of the certificate and the procedure for completing the certificate have been established by regulation of the Minister of Finance (Forms TSM1 and TM1).

If an international agreement prescribes for lower rates for withholding income tax from a payment made to a non-resident than the rates specified in the Estonian Income Tax Act, the rates prescribed by the international agreement are applied if the withholding agent submits a document certifying the recipient of income and the residency of the recipient of income to the service bureaus the Estonian Tax and Customs Board together with the tax return on form TSD. The document need not be submitted if data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons.
 

7.2 Obligation of non-resident to file income tax return


Taxation of the income of non-residents shall generally be performed by withholding income tax. A non-resident is required to submit an income tax return only in specific cases.

A non-resident who has received business income, gain from transfer of property or taxable income which is subject to taxation in Estonia on which no income tax has been withheld is required to submit an income tax return concerning this income derived during the period of taxation.

An income tax return shall be submitted to a service bureau of the Estonian Tax and Customs Board. The formats of income tax returns and annexes thereto, and the procedure for completion thereof are established by the regulation of the Minister of Finance. The forms (A1, E1 and V1) of income tax returns are available on website www.emta.ee or at any service bureau of the Estonian Tax and Customs Board.

Tax return shall be filled in in euros.

In order to obtain the reference number needed for the payment of income tax, regional tax and customs centre of the Estonian Tax and Customs Board has to be contacted.

Tax notices are not issued to non-residents.

Non-residents who have received gain from a transfer of property have to submit an income tax return on form V1 and pay income tax, because in this case income tax is not withheld upon making the payment. An income tax return shall be submitted to the Tax and Customs Centre not later than by 31 March of the following year. If a non-resident transfers an immovable, the income tax return shall be submitted within one month following the date of receiving the gain from transfer of the property. If the payment for immovable property was made by instalments, income tax return declaring the full amount of the transfer price shall be submitted within one month following the date of receiving the first instalment.

The due date for payment of income tax on gains derived from a transfer of property shall be within three months from the date of submission of income tax return.

A tax notice will not be issued to a non-resident. A non-resident shall pay amounts of tax to the bank accounts of the Estonian Tax and Customs Board. In order to obtain the reference number needed for payment of income tax, a service bureau of the Estonian Tax and Customs Board has to be contacted.

The form E1 shall be filed by a non-resident sole proprietor or a non-resident legal entity that has no permanent establishment in Estonia, with regard to their business income derived from Estonian sources. A non-resident who has not been entered into the commercial register, with regard to the relevant business income shall file the form E1.

Sole proprietors entered in the commercial register may make the deductions allowed in the Estonian Income Tax Act from their business income.

A non-resident, who derived business income subject to taxation in Estonia, shall submit an income tax return on form E1within six months following the period of taxation. If engagement in business is terminated before the end of the period of taxation, the income tax return shall be submitted within two months following the termination of activities.

A non-resident shall calculate the tax amount payable on the basis of the income tax return and shall pay this amount into the bank account of the Tax and Customs Board (income accounts of the Estonian Tax and Customs Board) within 3 months following the date of submitting the income tax return.

The Form A1 shall be submitted by a non-resident, who has received taxable income during the period of taxation pursuant to § 29 (1)(employment and service), (2) remuneration of a member of the contolling or management body, (6)(commercial lease and royalties), (7)(interest), (9)(other taxable income (pensions, scholarships and grants, cultural, sports and scientific awards, benefits, gambling winnings)) and (10)(income of artists and sportsmen) of the Income Tax Act, and on which no income tax has been withheld on the basis of § 41 of the Income Tax Act. Taxation of the income of non-residents shall generally be performed by withholding income tax (on form TSD with annex 2 in case if the recipient is a non-resident natural person or on form TSD with annex 3 in case if the recipient is a non-resident legal person).

For a non-resident recipient of the payments, the income tax withheld in accordance with the rates prescribed in § 43 (1) of the Income Tax Act or the tax treaty is the final income tax on his or her income from Estonian sources. In this case there is no need to submit tax return by the non-resident recipient.

The income tax return shall be submitted to the Tax and Customs Board by March 31 of the year following the period of taxation.

A non-resident shall calculate the tax amount payable on the basis of the income tax return and shall pay this amount into the bank account of the Estonian Tax and Customs Board (income accounts of the Estonian Tax and Customs Board) within 3 months following the date of submitting the income tax return.

Form Form A1
Due date of filing by 31 March of the year following the period of taxation
Due date of payment within 3 months following the due date of filing the tax return
Form Form E1
Due date of filing within 6 months following the period of taxation*
* upon termination of business before the end of the period of taxation within two months following the termination of activities
Due date of payment within 3 months following the due date of filing tax return
Form Form V1
Due date of filing by 31 March of the year following the period of taxation*
* upon transfers of an immovable within one month following the date of receiving the gain
Due date of payment within 3 months following the day of filing the tax return

 

7.3 Possibility of deductions for non-resident natural person


Generally, non-residents may not claim for tax deductions and allowances available to residents and income tax shall be withheld from the gross amount, without permission of any deductions like basic exemption in Estonia.

You can find more information about this refund from a guide "How to get refund of income tax to non-resident natural persons in Estonia".
 

8. Taxation of income of non-resident through permanent establishment


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.

The Estonian Income Tax Act exempts non-residents that have a permanent establishment in Estonia from payment of income tax on earned income unless it is distributed.

Income tax is imposed on:

  • profit distributions;
  • fringe benefits granted by a non-resident;
  • gifts, donations and costs of entertaining guests;
  • expenses and payments not related to business, made by a non-resident through a permanent establishment.

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 3 of form TSD since 2015 (had been Annex 6 until 2014). 

If tax treaty prescribes for more favourable conditions for the taxation of the income of non-residents than those provided by the Income Tax Act, the provisions of the international agreement apply.

Where company receives through a permanent establishment in Estonia a dividend from another company in which it owns at least 10 per cent of its shares having full voting rights, income tax is not charged on the basis of § 53 (4) of the Income Tax Act on payments made from

  • dividends received from resident for tax purposes in a contracting state of the European Economic Area or of Switzerland (but not located in a low tax territory)
  • dividends received from a company resident in a country which do not appear in the preceding paragraph (but not located in a low tax territory) and which dividend have been taxable or when underlying profit out of which dividends were paid has been taxable.

There is a tax exemption available also where a non-resident company receives through its permanent establishment in Estonia a shareholder gain upon a reduction in a share capital or contributions, a payment upon redemption of shares or liquidation of a legal person from another company (except for a company located within a low tax rate territory) and at the time of deriving the gain, the receiving company owned at least 10% of the shares or votes of such another company, and income tax has been withheld from the payment or income tax has been charged on the profit which is the basis for the taxable payment in Estonia.

The tax exemption is given proportionally according to the taxable part of the received payment.

Only the income tax subject to payment pursuant to law or an international agreement shall be taken into account upon tax exemptions.

Non-resident legal persons with permanent establishment in Estonia may deduct the income tax withheld from income abroad and also the income tax paid on the share of profit abroad which was the basis for the taxable payment in Estonia from the income tax payable on the basis of § 53 (4) of the Income Tax Act on conditions specified in § 54 (5) of the Estonian Income Tax Act. The amount of income tax withheld from the income tax payable on the basis of subsection 53 (4) shall not exceed 20/80 (21/79 until 2015) of the amount of payment paid by the non-resident. The income tax of a foreign state may be deducted only in the amount, which it is mandatory to pay pursuant to the law of the state or an international agreement. Income tax paid in each state shall be recorded separately. Income tax paid in a foreign state on the income which was the basis of the payment not taxable in Estonia shall not be taken into account for deduction.

Transfer pricing provisions may be implemented in taxation of distributed profit of non-residents derived through a permanent establishment in Estonia.

Non-resident legal persons are required to submit a tax return on form TSD with annexes 4 to 6 regarding the expenses and payments specified in §s 49–53 of the Estonian Income Tax Act, concerning the previous calendar month to the service bureau of the Estonian Tax and Customs Board by the 10th day of the calendar month following the period of taxation.

Non-resident with a permanent establishment or operating as an employer in Estonia is a withholding agent for income tax, who is required to withhold income tax on payments listed in § 41 of the Estonian Income Tax Act, pursuant to the rates prescribed in the same act.

A non-resident legal person with a permanent establishment in Estonia is required to submit a tax return on profit distributions and received double taxed income on form TSD Annex 3 since 2015.

There is no need to submit form INF 1 concerning the amount and the recipients of payments made during the period of taxation since 2015 any more.

The content of information that had been filled in on form INF 11 until 2014,  shall also be submitted on Annex 3 of form TSD. The moment of declaration of such income has changed since 2015: the received income which distribution is exempted from income tax in Estonia shall be declared at the moment of reciept, not of distribution as it had been until 2014.

Annex 3 of form TSD shall be submitted by the tenth day of the calendar month following the date of making of the payment.

A withholding agent is required to submit a tax return on form TSD with annexes 1 or 2 (since 2015) to the Estonian Tax and Customs Board by the 10th day of the month following the month during which the payment was made.

Foreign legal persons who are commencing economic activities in Estonia through a permanent establishment, which is not entered in the commercial register as a branch are required to register themselves in service bureaus prior to the commencement of activities. In this case non-residents have to register in the register of taxable persons in the Estonian Tax and Customs Board, Lõõtsa Street 8A, Tallinn, e-mail emta@emta.ee, phone (+372) 676 0810.

In order to be registered, an application on form R2 setting out the following shall be submitted:

1) the name of the non-resident;
2) the postal address of the non-resident in the home country, if any;
3) the postal address of the non-resident in Estonia, if any;
4) the name and postal address of the person representing the non-resident;
5) the signature of the employer or a person authorised by the non-resident.

A copy of the articles of association or another document regulating the activities of the non-resident employer shall be attached to the application if available.

A document certifying the authorisation of the person representing the employer and a specimen signature of the person, which is notarised or officially certified by a tax authority shall also be submitted.

Foreign legal persons who or associations of persons or pools of assets without the status of a legal person which are commencing economic activities in Estonia through a permanent establishment which is not entered in the commercial register as a branch are required to register themselves in the regional tax and customs centre prior to the commencement of activities.
 

9. Obligations of non-resident employers


Taxation of the income of employees shall generally be performed by withholding income tax. Non-resident employers, which are not subject to the registration requirement arising from the Estonian Taxation Act or other Estonian legal acts, are registered in the register of taxable persons as employers in order to be able to fulfil tax obligations. A withholding agent for income tax is a non-resident with a permanent establishment or operating as an employer in Estonia, who makes payments subject to income tax to a natural person or non-resident.

A non-resident who operates as an employer in Estonia but does not have a permanent establishment in Estonia is required to withhold income tax only on salaries, wages and other remuneration subject to income tax paid to a resident natural person or to a non-resident, and remuneration paid to resident and non-resident members of the management and controlling bodies of a legal person, taking into account the deductions allowed to residents under the Estonian Income Tax Act.

Income tax on fringe benefits granted to a natural person is paid by employers who are non-residents having a permanent establishment or operating as employers in Estonia who grant taxable fringe benefits.

A withholding agent is required to submit a tax return on form TSD with annexes 1 or 2 to the service bureau of the Estonian Tax and Customs Board by the 10th day of the month following the month during which the payment was made and is required to transfer withheld income tax to a bank account of the Estonian Tax and Customs Board (income Accounts of the Estonian Tax and Customs Board).

Employers pay income and social tax on granted fringe benefits in full. A person who grants taxable fringe benefits is required to submit a tax return on form TSD with annex 4 to a regional tax and customs centre of the Tax and Customs Board by the 10th day of the calendar month following the period of taxation. 

The social tax is paid at a rate of 33% on all payments made to employees for salaried work performed. Employers pay the social tax in full. Pursuant to the Estonian Social Tax Act, social tax shall be paid on wages and other remuneration paid to employees, on remuneration paid to members of management and controlling bodies of legal persons, on fringe benefits and on income tax calculated on fringe benefits.

An unemployment insurance premium is withheld at a rate of 2% (or 3%) of the gross salary of the employee. 
Pensioners are not entitled to unemployment status benefits and therefore they do not pay the unemployment insurance premium. In addition to this, employers pay the unemployment insurance premium at a rate of 0,8% of the sum of gross salaries monthly.
 

10. Tax rates


Generally, income tax is withheld from taxable payments specified in the Estonian Income Tax Act at a rate of 
20% since 2015.

Income tax is withheld at a rate of 10% from:

  • royalties paid to a non-resident;
  • payments made to a non-resident artist, sportsman or sportswoman for activities conducted in Estonia, and payments made to a third person who is a non-resident or a natural person for activities conducted in Estonia by an artist, a sportsman or a sportswoman;
  • payments to a non-resident for services provided in Estonia;
  • supplementary funded pension specified in § 21 of the Estonian Income Tax Act.

For a non-resident recipient of the payments, the income tax withheld in accordance with the rates prescribed in § 43 (1) of the Income Tax Act or the tax treaty is the final income tax on his or her income from Estonian sources.

If an international agreement (for example, tax treaty) prescribes lower rates for withholding income tax from a payment made to a non-resident than the rates specified in the Estonian income Tax Act, the rates prescribed by the international agreement are applied.

In Estonia the tax incentives or exemptions arising from tax treaties can be applied only if the recipient of the payment has certified his residence status to the tax authority. Please note that residency should be certified for the purpose and in the sense of the relevant tax treaty and not in the sense of the national law of a foreign country. The document need not be submitted if data on the recipient of income and the residency of the recipient of income have been entered in the register of taxable persons. Form TM3 (547.39 KB, PDF) available on the website of the Estonian Tax and Customs Board www.emta.ee can be used for certifying the recipient of income and the residency of the recipient or a relevant form issued by the competent tax authority of the country of residence.

The rate of income tax on fringe benefits granted to a natural person and the rate of income tax imposed on gifts, donations and costs of entertaining guests, distributed profit, and expenses and payments not related to business, made by a resident legal person is 20/80 since 2015 (21/79 until 2015) of the taxable amount.

This guideline is to be considered as informative and should not be treated as a final law. In specific cases one must act according to law. In case of questions, you are welcome to contact the Estonian Tax and Customs Board.

 

28.03.2017