Prevention of double taxation
If the business of a company formed in Estonia is only carried on outside of Estonia, the income earned by the Estonian resident company abroad is taxed abroad and Estonia ensures the prevention of double taxation. Income of Estonian companies is also taxed abroad when the management of Estonian companies occurs outside of Estonia.
In a foreign country taxation occurs according to the rules of such country if activities are carried on there, regardless of the fact that the company was formed in Estonia. If permanent establishment exists in a foreign country then such taxation corresponds to tax treaties.
Please note! Estonian tax residency does not automatically exempt companies from taxation elsewhere in the world where business is carried on or where the Estonian company earns income.
If an Estonian resident company earns profit abroad through a permanent establishment, dividends distributed in Estonia against such profit of the permanent establishment taxed abroad is exempted from income tax in Estonia. Therefore, an Estonian e-resident company incurs a tax liability in such case primarily in the foreign country and e-residency in Estonia does not give an automatic exemption from foreign tax liabilities.
Even though an Estonian resident company may not become subject to income tax in Estonia, they may still have the obligation to file tax returns in Estonia. For example, the prevention of double taxation on dividends paid in Estonia against foreign income is achieved through the filing of Annex 7 of Form TSD of the tax return upon receipt of foreign income.
Please note! Regardless of the place of business of a company, non-business-related expenses are taxed in Estonia, unless a foreign state where a permanent establishment exists has taxed non-business-related expenses as part of profit.
Interest imposed pursuant to the Taxation Act is reported in Annex 6 to the Form TSD tax return and is subject to taxation.
According to Estonian rules profits are subject to income tax at the time that profits are distributed (e.g. via dividend payment) and not when income is earned.
Double taxation is prevented, for instance, when an Estonian resident company carries on its business in a foreign state, the distribution of profits earned abroad as dividends or distributions from equity in Estonia may under certain circumstances be exempted from income tax in Estonia.
If an e-resident owner of an Estonian resident company receives a dividend, it necessary to draw a distinction between the income tax applicable to a dividend of an Estonian company and income tax withheld on a natural person’s dividend income. If an Estonian company pays income tax on dividends at the normal rate of 20/80, no further income tax withholding will apply for the dividend distribution to a natural (e-resident) person. An e-resident natural person in most cases will not be able to use income tax paid by an Estonian company for the purposes of double taxation relief in their own country of residency because the Estonian income tax was paid by a different person.
From the year 2019, dividends paid regularly by an Estonian company are subject to a lower rate of 14/86. In the latter case the Estonian company will withhold a further 7% on a non-resident natural person’s dividend income upon making a dividend distribution. Income tax withheld on dividends (7%) is an income tax rate applicable to natural person dividend recipients in Estonia that can be used for double taxation relief in the dividend recipient’s country of residency, depending upon such country’s rules and the tax treaty for the prevention of double taxation of income.
An e-resident formed a company in Estonia, which earned 1,000 euros of income in 2017 and 500 euros of income in 2018.
As the profits were not withdrawn from the company, no income tax will be due for the years 2017 and 2018. In 2019, the e-resident receives dividends in the amount of 1,200 euros. The Estonian company pays 300 euros in income tax on the dividends. The calculation is as follows: 1200 × 20 ÷ 80.
The term for payment of corporate income tax and dividend declaration is the 10th day of the month following payment.
The e-resident receives 1,200 euros of dividends, the Estonian company pays income tax and no further income taxes are withheld in Estonia. The e-resident reports the dividend income received in the income tax return of their home country and income tax paid by the Estonian company will not count.
An Estonian resident company formed by an e-resident (foreign tax resident) is managed from abroad. The foreign country applies the rules applicable to income taxation in such country to the profit earned through the permanent establishment of the Estonian resident company located in such foreign country.
If the taxable profit of the Estonian company's permanent establishment located abroad is 100 euros, the rate of corporate income tax of the Estonian company declared and paid abroad is 15% and the company pays dividends in the amount of 85 euros, Estonia will not subject the dividends payable by the Estonian company to its e-resident owner to further taxation of income.
In Estonia, the profit of a permanent establishment in a foreign country must nevertheless be reported in Annex 7 to the Form TSD tax return and dividend recipients must be included in the INF 1 tax return even though the dividends are paid out without having to pay income tax in Estonia.
Estonia may audit the amount of the profit that was taxed in the foreign country and that was the basis for tax exemption, therefore we recommend that evidence should be gathered on the amount that was taxed in the foreign country.
If an e-resident natural person is employed and receives employment income in Estonia, the Estonian resident company as an employer must file a tax return on such payments in Estonia and pay income tax, social tax and unemployment insurance premiums for the employee in Estonia.
Please note! If a non-resident employee’s employment income is taxed in Estonia, any fringe benefits granted to such employee are, as the employer’s income, also subject to income tax and social tax in Estonia and are included in Annex 4 to the Form TSD tax return.
If an employee has an A1 certificate of social security coverage issued in a Contracting Party to the European Economic Area (European Union Member States, Norway, Liechtenstein, Iceland) or Switzerland, no liability will be incurred in Estonia for social tax or unemployment insurance premiums.
An Estonian company files Form TSD and reports taxes payable on e-resident employment income in Annex 2 to Form TSD to Estonian Tax and Customs Board by the 10th day of the month following the payment month.
The company (employer) must register the employee in the employment register.
If the employer has correctly withheld income tax upon making payments to the e-resident employee and the employee has no other taxable income in Estonia, such non-resident employee by himself or herself is not under any obligation to file an income tax return in Estonia.
If the work of a non-resident is carried on outside of Estonia, there is no need to declare employment income or pay taxes on employment income in Estonia. Even though the employer is from Estonia, in such cases a tax liability may arise abroad.
If an e-resident receives remuneration paid to members of the management or control body (supervisory board) of an Estonian company, such Estonian company must pay income tax and social tax in Estonia regardless of the location where work is carried on or the place of business of the company.
Please note! If remuneration paid to non-resident members of the management or control body of a legal entity is taxed in Estonia then income tax and social tax in Estonia also applies to fringe benefits granted.
Social tax is not due on remuneration paid to members of the management body of an Estonian company only if the recipient of such remuneration has been issued in his or her home country a certificate of social security coverage valid in such foreign country on Form A1.
Members of the management or control body of a legal entity who receive remuneration subject to taxation in Estonia must be registered by the company (employer) in the employment register.
An Estonian company files Form TSD and reports taxes payable on disbursements made to the e-resident’s (non-resident) management board member in Annex 2 to Form TSD to Estonian Tax and Customs Board by the 10th day of the month following the payment date.
If an e-resident receives a monthly management board member’s fee of 100 euros from an Estonian company, the Estonian resident company will withhold income tax on it at the rate of 20% and pay social tax at 33%.
The company’s expense is 133 euros and the e-resident will be left with 80 after taxes have been paid.
If an e-resident manages the company from outside of Estonia, such Estonian company will probably have a permanent establishment abroad and income tax must be paid on the profit earned by this Estonian company in that foreign state.
If an e-resident is the sole shareholder, management board member and employee all in one person of a company formed in Estonia and in addition to management of the company also actively contributes to the business of the company, provides services or sells goods, a distinction must be drawn between different disbursements such as employment income, management board member fees and dividends and must be reported in tax returns according to their actual substance.
Estonian businesses (companies registered in Estonia or sole proprietors) are not automatically deemed value added tax payers. If an Estonian business has no actual business activity in Estonia and has no taxable revenue in Estonia or other transactions subject to value added tax (such as intra-Community purchase of goods, in the process of which the goods are transported from another Member State to Estonia), such a business is generally not registered for value added tax in Estonia.
If a company is registered in the Estonian commercial register but in the course of its business only conducts transactions that are subject to value added tax in foreign countries, such company should contact that country’s tax authority to determine its value added tax obligations.
Examples of transactions where a company incurs a value added tax liability in a foreign state and the company does not have to register as a person liable to value added tax in Estonia.
- An Estonian company purchases goods from China, which are imported to Germany and released for free circulation there. In Germany, the goods are sold from the warehouse on to business customers and private individuals for example in Germany, France and Poland. The place of supply is not Estonia. When goods are sold from a warehouse located in Germany to a taxable person of a Member State of the European Union or to private individuals of Germany, the place of supply is always Germany. When goods are sold from a warehouse in Germany to private individuals of other Member States, such sales are deemed distance selling and the distance selling thresholds established in the Member State of the purchaser must be adhered to (it is 35,000 euros from the beginning of the calendar year in Estonia but is different in some Member States). The place of supply is Germany until the distance selling threshold of the purchaser’s Member State is exceeded or the vendor has registered in the purchaser’s Member State on a voluntary basis. The place of supply is the purchaser’s Member State after the distance selling threshold in the purchaser’s Member State has been exceeded or the vendor has registered in the purchaser’s Member State on a voluntary basis.
- An Estonian company purchases goods from Poland which are then transported to a warehouse in Germany. In Germany, the goods are sold from the warehouse on to business customers and private individuals for example in Germany, France, Sweden, Austria, etc. The place of supply is not Estonia. When goods are sold from a warehouse located in Germany to a taxable person of a Member State of the European Union or to private individuals of Germany, the place of supply is always Germany. When goods are sold from a warehouse in Germany to private individuals of other Member States, such sales are deemed distance selling and the distance selling thresholds established in the Member State of the purchaser must be adhered to (it is 35,000 euros from the beginning of the calendar year in Estonia but is different in some Member States). The place of supply is Germany until the distance selling threshold of the purchaser’s Member State is exceeded or the vendor has registered in the purchaser’s Member State on a voluntary basis. The place of supply is the purchaser’s Member State after the distance selling threshold in the purchaser’s Member State has been exceeded or the vendor has registered in the purchaser’s Member State on a voluntary basis.
- An Estonian company is engaged in its own name in the sale of concert tickets (access) to a concert held in Finland. The place of supply is not Estonia but Finland, the country where the event is held.
- An Estonian company performs passenger transport services in Sweden. The place of supply is not Estonia but Sweden, the country where the transport services are performed.
- An Estonian company provides freight transport services to private individuals from Poland to Estonia and within Poland. The place of supply is not Estonia but Poland, the country where the freight transport services are initiated.
- An Estonian company rents vehicles in Italy. As this constitutes providing a vehicle for short-term rental, the place of supply is Italy and not Estonia.
- An Estonian company imports goods from Ukraine but the goods are not transported from Ukraine to Estonia but to Lithuania instead and the release of goods for free circulation and resale also occurs in Lithuania, the goods are never brought to Estonia. The place of supply of the resale transaction involving the goods is Lithuania and not Estonia.
- An Estonian company performs construction services in Finland to a private individual. The place of supply of services related to immovable property is always the country where such immovable property is located, which in this example is Finland and not Estonia. Transactions where an Estonian business becomes subject to value added tax in a foreign state, is not subject to value added tax in Estonia and does not report in value added tax returns filed in Estonia. If an Estonian company only provides such supply then they have no obligation or need to register for value added tax in Estonia.
A business must register for value added tax in Estonia when its taxable supply (supply of goods and services that is subject to taxation in Estonia and is subject to a rate of value added tax of 20%, 9% or 0%) from the beginning of the calendar year exceeds the threshold of 40,000 euros annually which is laid down in the Value Added Tax Act of Estonia. The threshold does not include any sale of non-current assets. If the annual revenue of a business is under this threshold then it has no obligation to register for value added tax or pay value added tax when selling goods subject to value added tax or provide services subject to value added tax in Estonia.
If a company is registered for value added tax in Estonia it must file value added tax returns with the Estonian Tax and Customs Board and pay value added tax. The period of taxation with respect to value added tax is the calendar month and value added tax returns must be filed and value added tax must be paid by the 20th day of the month following the taxable period. A value added tax return must be filed even if no supply or input value added tax occurred during the taxable period.
Estonian Tax and Customs Board may remove from the register of value added tax payers any person that has failed to file value added tax returns for the six most recent consecutive taxable periods or that fails to submit evidence of engaging in business in Estonia upon request by Estonian Tax and Customs Board (§ 22 (3) and (31) of the Value Added Tax Act).
The standard rate of value added tax is 20% in Estonia.
If a company registered for value-added tax in Estonia has engaged in intra-Community supply or has sold goods as a distributor in a triangular transaction it will have the obligation to also file a report on intra-Community supply by the 20th day of the month following the taxable period.
The following is deemed intra-Community supply:
- Sale of goods from Estonia to value-added taxpayers of another Member State if goods are transported from Estonia to another Member State; and
- Performing such services to taxable persons of another Member State where the place of supply, independent of the country where the service was actually provided, is deemed the Member State of the service recipient (and where the service provider reports their supply at 0% tax rate in its own Member State).
Services that regardless of the recipient (incl. in case services are provided to taxable persons of another Member State) are always subject to taxation and reporting in the country where they are actually provided are not included in the report on intra-Community supply.
A seller registered as taxable person in Estonia does not add value-added tax to goods that are transported to a buyer registered as a taxable person to another Member State (or transported there by the buyer). Supply will be deemed to have occurred in the country of origin of the sale of goods transaction (taxed at the rate of 0%) but taxation will occur in the country of destination of the goods and in accordance with the value-added tax rates applicable in the country of destination of the goods. In addition to the sale of goods, intra-Community supply of goods also occurs when a taxable person transports goods to another Member State for the purposes of a business it carries on in that state.
It is not deemed to be intra-Community supply of goods occurring in Estonia if goods are supplied that are not located in Estonia at the time of sale but instead in another Member State. In such cases the seller of the goods must follow the tax laws of that Member State where the goods are actually located and the seller must know if it has the obligation to register as a taxable person in such other Member State where the goods are actually located at the time of sale (except for triangular transactions).
Reporting by companies
Estonian companies must file their annual reports with the commercial register annually through the Company Registration Portal.
Officials of the Estonian Tax and Customs Board have electronic access to information submitted to the commercial register in the annual reports of the taxable person.
Estonian resident companies declare their income tax, social tax, mandatory funded pension contributions and unemployment insurance premiums to the Estonian Tax and Customs Board on the Form TSD tax return.
Estonia does not have a corporate tax return covering the taxable income of the entire calendar year.
Form TSD can be filed electronically in the e-MTA e-services environment where you log in and need to select Taxes – Declaration of income and social tax (TSD) – Submit and view TSD.
When reporting income and disbursements in the annexes to Form TSD, the tax amount is calculated automatically in e-MTA. For example, when reporting income from employment, it is sufficient to only enter the personal identification number of the recipient, the gross amount of the disbursement and to select the correct type of disbursement. The inserted information will be used to automatically calculate the income tax to be withheld, the social tax and the unemployment insurance premium.
The TSD tax return is filed by the 10th day of the calendar month following the month when the taxable disbursement was made.
In the annexes to Form TSD, both the tax liability of the company and the taxes that are withheld and paid on the income of the recipients of disbursements by the company are included.
- In Annex 2 to Form TSD, taxable remuneration of non-resident recipients is reported (on an individual basis). It is not necessary to apply for a register number issued by the Estonian Tax and Customs Board for declaring income of e-residents (non-resident) because e-residents always already have an Estonian personal identification number.
- Annex 4 to Form TSD is for reporting fringe benefits (without individual level data), taxes on fringe benefits are paid entirely by the employer.
- Annex 7 to Form TSD is used to report corporate income tax on dividends. It is sufficient to enter the net amount of a dividend distributed, the income tax is calculated automatically.
- Form INF 1 is used to report dividend recipients. You must enter the Estonian personal identification numbers of dividend recipients, the type of distribution and the amount of distribution.
If a company has not paid salary, management board member fees, rental fees, royalties, fringe benefits, made gifts, donations, incurred expenditures or disbursements unrelated to business, distributions from equity, etc. (no taxable income) and there is no obligation to submit information then there is no need to file TSD tax returns containing only zeros.
If there is no taxable income, there is nevertheless an obligation to file a TSD tax return for example in the following cases (the list is not conclusive):
- If a taxable disbursement is made but the tax liability is 0 as a result of calculation;
- Contributions to the equity of a company must be reported in Annex 7 to Form TSD in the month that such contribution is paid in for it to be eligible for a deduction from taxable distributions from equity or a liquidation distribution in the future (a distribution is exempt from taxation to the extent that is previously contributed to the company’s equity). Other income exempt from taxation are also reported upon receipt in accordance with the information provided in the tax return.
- A foreign state has taxed the profit of a permanent establishment in a foreign state of an Estonian company, dividends have been received from a foreign resident, etc. Foreign income tax is also reported that is used for reducing income tax on Estonian dividends if the offsetting method is applicable.
E-resident as a sole proprietor
If an e-resident registers as a sole proprietor (FIE) in Estonia, this will give rise to the following obligations:
- File annual income tax returns, even if no income subject to income tax in Estonia was earned, and
- Make advance payments of social tax four times per year, despite being a non-resident.
- The amount of advance payments of social tax does not depend on the amount of profit earned but is established through the state budget for each year. See more on the page Social tax.
Appointing a tax representative
A person from another Member State engaged in business without a permanent establishment in Estonia may, upon registration as a value-added tax payer, appoint a tax representative approved by the Estonian Tax and Customs Board as defined in the Taxation Act.
It is mandatory for a non-established person engaged in business without a permanent establishment in Estonia to appoint a tax representative upon registration as a value-added tax payer (§ 20 (6) of the Value-Added Tax Act).
Last updated: 02.12.2021