Income and social taxes

Natural persons pay income tax on their income. Income from employment, gains from transfer of property, business income and other income are taxed at the rate of 20%. In addition to income tax, income from employment and business income are also taxed with social tax, unemployment insurance premiums and in case of an obligated person, insurance premiums of mandatory funded pension.

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

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:

  • 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

  • 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. 

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

  • there is a treaty for the avoidance of double taxation between Estonia and the recipient’s country of residence (tax treaty),

  • 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

  • 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 (November 2021) the list of non-cooperative jurisdictions for tax purposes is comprised of the following:
American Samoa, Fiji, Guam, Palau, Panama, 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

Income tax and basic exemption

In Estonia, companies pay (corporation) income tax only when profit is distributed as dividends or in other form, on fringe benefits, gifts, donations, costs of entertaining guests, as well as expenses not related to business. One way of fulfilling the income tax liability is to withhold income tax from the taxable income of the recipient. When withholding income tax, there is a right to take into account the overall basic exemption.

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Tax rates

On this page you will find the rates of income tax, social tax, contribution to mandatory funded pension and unemployment insurance premium applicable from 2018 to 2022 as well as national minimum wage rates since 1996.

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Social tax

Social tax is levied on income from employment and business in order to finance pension insurance and state health insurance. The social tax rate is 33% (13% in some cases) on the taxable amount.

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Contributions to mandatory funded pension

The contribution to the mandatory funded pension is a social security contribution established by the Funded Pensions Act for the purposeful financing of the second pillar of pension. The provisions of the Taxation Act concerning taxes apply to social security contributions (hereinafter contribution).

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Fringe benefits

By its nature, fringe benefit is the income of the recipient (employee), but paying income and social tax on the fringe benefit is the obligation of the person granting the benefit (employer). Fringe benefits i.e. benefits provided by the employer to the employee are subject to income tax at a rate of 20/80 and social tax at a rate of 33%.

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Taxation of dividends

A resident company, including a general and limited partnership, pays income tax on profit distributed as dividends or other profit distributions upon payment thereof in monetary or non-monetary form. Income tax is not charged on profit distributed by way of a bonus issue.

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Special tax arrangement for crew members, tonnage scheme

An Estonian company taking profit from international carriage of goods and passengers by sea may abandon, upon request, the standard procedure for taxation and pay the income tax on the basis of the tonnage scheme. It is also possible to impose taxes on the remuneration of the members of a ship’s crew on the basis of the special arrangement.

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Last updated: 20.12.2021

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