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.

Withholding income tax

Income tax at the rate of 20% is withheld from the income subject to taxation on the gross principle: from remuneration paid under the contract of employment or remuneration paid for the provision of other services under the law of obligations; rent, royalties; interest; benefits, grants and scholarships; pensions and other income.

Income tax is not withheld from the types of income taxed on the basis of the net principle: from business income and gains from transfer of property. These income types are taxed on the basis of the income tax return of a resident natural person.

The withholding agents are all resident legal persons, as well as state or local government authorities, and employers who are natural persons or non-residents. The withholding agent is obliged to withhold income tax on income taxable on the so-called gross principle, transfer it to the bank account of the Estonian Tax and Customs Board and submit a tax return form TSD at the latest by the 10th day of the month following the month in which the payment is made.

If a person receives income from a person who is not a withholding agent (e.g. when renting a dwelling from a private individual to a another private individual), the person must declare the income received in the income tax return of a resident natural person and pay income tax on the basis of the income tax return.

Calculation of basic exemption

Read more from the web page "Calculation of basic exemption".

Since 1 January 2020 the minimum hourly wage rate is 3,48 euros per hour. The minimum monthly wage in the case of full-time working time is 584 euros.

From Minimum wage per hour Minimum monthly wage in the case of full-time work Basis
01.01.2021 3,48 euros 584 euros Government of the Republic Regulation No 115 of 19.12.2019
01.01.2020 3,48 euros 584 euros Government of the Republic Regulation No 115 of 19.12.2019
01.01.2019 3,21 euros 540 euros Government of the Republic Regulation No 117 of 13.12.2018
01.01.2018 2,97 euros 500 euros Government of the Republic Regulation No 189 of 21.12.2017
01.01.2017 2,78 euros 470 euros Government of the Republic Regulation No 139 of 18.12.2015
01.01.2016 2,54 euros 430 euros Government of the Republic Regulation No 139 of 18.12.2015
01.01.2015 2,34 euros 390 euros Government of the Republic Regulation No 166 of 28.11.2013
01.01.2014 2,13 euros 355 euros Government of the Republic Regulation No 166 of 28.11.2013
01.01.2013 1,90 euros 320 euros Government of the Republic Regulation No 6 of 10.01.2013
01.01.2012 1,80 euros 290 euros Government of the Republic Regulation No 169 of 22.12.2011
01.01.2011 1,73 euros 278,02 euros Government of the Republic Regulation No 118 of 23.08.2010 § 81
01.01.2008 27 kroons 4350 kroons Government of the Republic Regulation No 90 of 11 June 2009
Government of the Republic Regulation No 254 of 20 December 2007
01.01.2007 21 kroons 50 cents 3600 kroons Government of the Republic Regulation No 273 of 21 December 2006
01.01.2006 17 kroons 80 cents 3000 kroons Government of the Republic Regulation No 328 of 22 December 2005
01.01.2005 15 kroons 90 cents 2690 kroons Government of the Republic Regulation No 374 of 23 December 2004
01.01.2004 14 kroons 60 cents 2480 kroons Government of the Republic Regulation No 323 of 18 December 2003
01.01.2003 12 kroons 90 cents 2160 kroons Government of the Republic Regulation No 366 of 3 December 2002
01.01.2002 10 kroons 95 cents 1850 kroons Government of the Republic Regulation No 396 of 18 December 2001
01.01.2001 9 kroons 40 cents 1600 kroons Government of the Republic Regulation No 428 of 19 December 2000
01.01.2000 8 kroons 25 cents 1400 kroons Government of the Republic Regulation No 360 of 23 November 1999
01.01.1999 7 kroons 35 cents 1250 kroons Government of the Republic Regulation No 270 of 8 December 1998
01.01.1998 6 kroons 50 cents 1100 kroons Government of the Republic Regulation No 245 of 18 December 1997
01.02.1997 5 kroons 845 kroons Government of the Republic Regulation No 52 of 6 March 1997
01.01.1996 4 kroons 680 kroons Government of the Republic Regulation No 14 of 16 January 1996

Taxation of profits in Estonia

The system of corporate earnings taxation in force currently in Estonia is a unique system, which shifts the moment of corporate taxation from the moment of earning the profits to the moment of their distribution.

There are two types of profit distribution possible – an implicit and an explicit way. The explicit way stands for dividends and other profit distributions.

Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company are generally subject to corporate income tax in the hands of the payer at the moment of distribution.

The resident legal person and the non-resident legal person acting through its permanent establishment registered in Estonia carrying out profit distribution has to pay income tax of the amount of profits distributed.

The Estonian company pays corporate income tax at the moment of payment, while tax rate is calculated from net amount, 20/80 of the payment.

The company income tax rate is the rate of 20% as in the provisions for the taxation of salaried work payments. The difference is that 20% is applied to gross payments and 20/80 is applied to net payments.

No income tax is withheld from income of the dividend recipient generally.

A reduced tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly. The natural person receiving such dividends taxed at a reduced rate (14/86) in the hands of the Estonian company or a permanent establishment of a non-resident company, has to pay income tax at a rate of 7% in addition. It has to be withheld by the payer.

A non-resident natural person has to pay income tax on dividends received from the Estonian company in the resident country also and he or she cannot take into account the corporate income tax (20/80 or 14/86) paid in Estonia by the Estonian resident company to avoid double taxation of the recipient. Only the income tax withheld at a rate of 7% may qualify to avoid double taxation of the natural person recipient.

The implicit way to distribute profits is to do that through fringe benefits, gifts and donations, as well as expenses and payments unrelated to business activity.

All of these profit distributions are taxed at a rate of 20/80.

Hence, there is no obligation to submit a tax return annually by the Estonian company or a permanent establishment of a non-resident, regardless of profits or losses. Income tax is assessed monthly (Form TSD with Annexes), thus taxable amount must be declared monthly (10th day of the month following the payment) whenever profits are distributed or other taxable expenses are incurred.

  • An Estonian resident legal person pays 10 000 EUR of (not regular) dividends to a natural person. A tax of 2500 EUR (10 000 × 20/80) has to be paid by the resident legal person (total cost 12 500 EUR).
    In case of regular dividends paid, corporate income tax of 14/86 has to be paid by the Estonian resident legal person instead (1627.91 EUR).
    If the recipient of such regular dividend taxed at a reduced rate is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld from income of the recipient in addition (700 EUR).
  • A resident legal person pays 10 000 EUR of (not regular) dividends to a non-resident legal person who owns less than 10% of the profit-distributing entity. A tax of 2500 EUR (10 000 × 20/80) has to be paid by the resident legal person. In case of regular dividends paid, corporate income tax of 14/86 has to be paid instead (1627.91 EUR).
    As the recipient of such dividend taxed at a reduced rate is a non-resident legal person, no income tax is withheld from the payment.
  • An Estonian resident legal person A pays 10 000 EUR of (not regular) dividends to an Estonian resident legal person B, who owns less than 10% share in the profit-distributing entity A. A corporate income tax of 2500 EUR (10 000 × 20/80) has to be paid. As the recipient is the Estonian legal person (or a non-resident with a permanent establishment in Estonia), no income tax is withheld from the payment.
    In case of regular dividends paid, corporate income tax of 14/86 has to be paid by A instead (1627.91 EUR).
    As the recipient of such dividend (taxed at a normal or reduced rate) is an Estonian resident legal person, no income tax is withheld from the payment also. When the receiving entity B pays out dividends further to other persons, then the tax of either 14/86 or 20/80 of the amount paid out has to be paid again.
  • An Estonian resident legal person C pays 10 000 EUR of (not regular) dividends to another Estonian resident legal person D, who owns at least 10% share in the profit-distributing entity C. A tax of 2500 EUR (10 000 × 20/80) has to be paid by C.
    In case of regular dividends paid, corporate income tax of 14/86 has to be paid by C instead (1627.91 EUR).
    When the receiving entity D pays out dividends further to other persons, then the amount is tax-free. No corporate income tax of 20/80 or 14/86 of the amount paid out shall be paid. Still, if the recipient of such dividend paid by D and taxed at a reduced rate by C is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld in addition (700 EUR) by D from payment.

There are tax exemptions available for resident legal persons and non-resident legal persons acting through its permanent establishment in Estonia in order to avoid double taxation. Please do check exact rules, as those depend on various circumstances.

Last updated: 19.11.2021

Was this page helpful?