Income derived in a foreign state

Estonian resident must declare in Estonia all income he or she has derived outside Estonia. The taxation of foreign income in Estonia depends on whether you are a resident in Estonia, the type of income and the length of time spent working in a foreign country and from which country is the payer.

Estonian residents must declare income from all sources of foreign income in Estonia: income from employment, business income, pension, benefits, rent, dividends, royalties, interest income, gains from transfer of property, remuneration paid to entertainers or athletes, fringe benefits, cultural, sports and scientific awards, gambling winnings, insurance indemnities, income of shareholders and other foreign income subject to income tax in Estonia.

A proportional part of income of a legal person located in a low tax rate territory and controlled by Estonian residents is also deemed to be income.

Useful to know

  • Estonian residents themselves must declare their income earned abroad in Estonia and, if necessary, pay additional taxes in Estonia. The fact that income is exempt from tax or taxed abroad on the basis of the laws of the foreign state does not exempt from the obligation to declare the income in Estonia under the Estonian law.
  • In a foreign state, it is worth examining whether the tax liability is to be paid there by the recipient of the income (for example, the employee) himself, i.e. whether the employee has to register with the foreign tax authority, submit declarations, pay income tax (e.g. advance payments and tax paid on the basis of a tax return) or other taxes. It is also worth examining how and to whom to pay taxes. In some cases, it is sufficient when the payer (employer) withholds taxes.
  • We recommend that you treat the information provided by a foreign tax authority carefully, as failure to do so may lead to the application of forms of coercion. In case of misunderstandings, ask the foreign tax authority for additional information or submit a complaint in due time.
  • Furthermore, please take into account that it is not possible to avoid foreign tax obligations by avoiding tax notices or returning to your home country as the tax authorities of different countries exchange information and cooperate in the collection of tax debts as well.

About residency

Resident natural persons pay income tax in Estonia on income earned worldwide, while non-resident natural persons pay income tax only on income derived in Estonia.

If a natural person resident in Estonia is staying abroad for the purpose of employment, it is important to determine his or her residency for tax purposes after leaving Estonia before imposing income tax on his or her income.

If a person maintains his or her place of residence in Estonia, he or she will remain an Estonian resident.
At the same time, it is possible that a person who left Estonia for a longer period will become resident in his or her new country of residence as well on the basis of the laws there.

If a person goes to a foreign country and does not keep a place of residence in Estonia, the person is no longer an Estonian resident and he or she does not pay Estonian income tax on the income earned abroad as of the change of residency.

If the residency of a person changes, the Estonian Tax and Customs Board must be notified thereof (form R). The Tax and Customs Board makes a decision on the residency of the person.
 

Additional information

The avoidance of double taxation of foreign income

Double taxation of foreign income is avoided in Estonia by means of a tax return. There are two methods for avoiding double taxation:

  1. income tax already paid on foreign income in a foreign state is taken into account when calculating income tax in Estonia. If the income tax paid in a foreign state is lower than the income tax calculated in the income tax return on the basis of the Estonian Income Tax Act, the difference by which foreign income tax is lower than the income tax calculated in Estonia must be paid on foreign income in Estonia.
  2. income taxed in a foreign state is exempt from tax in Estonia. Nevertheless, foreign income must be declared in Estonia. It affects, for example, the calculation of basic exemption in Estonia.

In order to avoid double taxation, account must also be taken of the conventions entered into between Estonia and a foreign state for the avoidance of double taxation (hereinafter tax treaty). Depending on the type of income, a certificate of residency for tax purposes issued by the Estonian Tax and Customs Board may be required in order to be exempted from income tax or obtain a tax reduction in a foreign country. 

Documents and certificates concerning the declaration and payment of foreign taxes must be collected and kept as they prove the foreign tax liability which may reduce income tax liability in Estonia.

The avoidance of double taxation of social security taxes and contributions in the European Economic Area is provided for in European law (Regulation (EEC) No 1408/71 of the Council) and is not covered by tax treaties.

Taxation of foreign wages of Estonian residents

The concept of residency is not the only criterion for taxing wages in and outside Estonia. It is also important where and for how long the work actually takes place and who is the employer.

Under a tax treaty, income from employment is taxed in the country where the work is performed, regardless of the number of days spent abroad, even if:

  • the employer is a resident in the country where the work is carried out; or
  • the employer has a permanent establishment in the country where the work is carried out;

and if the law of the foreign state provides for taxation.

In the case of short-term employment abroad, income tax is paid in both countries. Income tax paid abroad reduces the amount of income tax calculated in Estonia (table 8.1 must be completed in the Estonian income tax return of a natural person).

In the case of short-term employment, a foreign state has the right to tax the wages of an Estonian resident if the employer is from a foreign state or if the Estonian employer has a permanent establishment in the foreign state.

In the case of temporary employment services, the person who actually uses the workforce is considered to be the employer. It is therefore possible that the income of an Estonian resident is taxed in a foreign state even if the employer is from Estonia or the employee stays abroad for less than 183 days.

For example, if an employee is employed in Finland and the employer is a Finnish company, the wages are taxed in Finland from the first day, regardless of the fact that the employee is resident in Estonia. In addition, a tax treaty may provide for special arrangements for different types of work (government service, directors’ fees, seafarers’ remuneration, etc.).

If more income tax has been paid or withheld in a foreign state than the amount prescribed by the state’s law or a tax treaty, only the part of the foreign income tax the payment of which was compulsory may be deducted from the income tax due in Estonia.

In the case of long-term employment in a foreign state, a tax exemption applies to the remuneration in Estonia if the remuneration is taxed in the foreign state (in accordance with the laws of the foreign state and tax treaties). The employee has the obligation to provide information on foreign wages in the Estonian income tax return (table 8.8 must be completed in the Estonian income tax return of a natural person).

If the employee is an Estonian resident who stays in a foreign state for at least 183 days over the course of a period of 12 months, depending on the laws in force in the other country and the provisions of tax treaties, income tax liability on wages arises in the country of employment.

The procedure for counting days for tax liability may vary from country to country. The counting of days spent abroad for the purpose of applying the exemption in Estonia begins on the day of arrival to work abroad and does not depend on the calendar year. The days physically present in the country of employment (including the days of entry and exit) are counted in the period of 12 consecutive calendar months. If a person has stayed in different countries outside Estonia, the total number of days spent in different foreign countries for the purpose of work will be calculated.

Income derived in a foreign state — wages and fees received for the provision of services on the basis of a contract under the law of obligations — are exempt from income tax in Estonia if all of the following conditions are met:

  • the person has stayed in a foreign state for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months;
  • the specified income has been the taxable income of the person in the foreign state and 
  • the taxation is documented.

In Estonia, the wages of officials of international organisations such as the United Nations, the International Monetary Fund, the European Patent Office, the World Health Organisation, etc. are exempt from tax if Estonia is a member of the organisation and a tax exemption for civil servants is provided for in the accession agreement.

Tax liabilities of payers and employees in Estonia

The person making a payment in Estonia must withhold income tax on wages and other remuneration subject to income tax and paid to a resident natural person (clause 41 1) of the Income Tax Act).

According to the general rule, income tax is also withheld on the wages received by an Estonian resident from an Estonian employer for working abroad. In order to avoid double taxation, the person making a payment in Estonia does not withhold income tax on wages if the recipient performs his or her duties outside Estonia and:

  • the payment is made through a resident legal person’s permanent establishment in a foreign state, or
  • the withholding agent has a certificate issued by the foreign tax authority stating that the recipient of the payment is a taxable person in the foreign state with regard to that income.

Therefore, if the remuneration of employees who are Estonian residents is subject to income tax outside Estonia, the Estonian employer is not obliged to declare or withhold income tax in Estonia on payments made to employees who are Estonian residents for work performed abroad if a certificate issued by a foreign tax authority exists.

Similarly, if an Estonian employer has a permanent establishment in a foreign state and payments to employees are made through or on account of the permanent establishment located in a foreign state, there is no obligation to withhold income tax on the payments in Estonia.

If the same payments are subject to social tax, unemployment insurance premiums and funded pension contributions in Estonia, it is necessary to choose the payment type 11 in Annex 1 to the TSD form.

If social security contributions are also paid in a foreign state, the payment is not declared in Estonia in Annex 1 to the TSD form.

An Estonian resident employee is required to declare the wages earned outside Estonia in the Estonian income tax return of a natural person even if it is not subject to income tax in Estonia. If an employee who is a non-resident carries out duties in a foreign state, his or her wages are not subject to income tax in Estonia and the person making the payment does not have the obligation to withhold income tax and declare wages in Estonia.

If an employee is a natural person who is an Estonian resident, he or she pays income tax in Estonia on income received both in and outside Estonia and declares his or her income and income tax paid in Estonia by 30 April of the calendar year following the tax period.

If additional income tax has to be paid in Estonia on the income received abroad, the deadline for payment is 1 October of the year of declaration of income. That means there should be sufficient time to obtain evidence of foreign income and taxes paid before any additional tax liability arises in Estonia.

If the remuneration earned in a foreign state is exempt from income tax in Estonia for a natural person resident in Estonia because of long-term employment outside Estonia, the recipient is nevertheless required to declare the income in table 8.8 of the Estonian income tax return of a natural person.

If a person has stayed in different countries outside Estonia, the total number of days spent in different countries for the purpose of work will be calculated.

In order to prove the right to exemption in Estonia, documents concerning taxation of income in a foreign state may be requested.

If this exemption does not apply, income tax paid in a foreign state can be taken into account upon payment of income tax in Estonia, i.e. the income tax liability in Estonia is reduced by the income tax already paid on the same income in the foreign state.

Only the income tax the payment of which was mandatory in a foreign state and in accordance with a tax treaty entered into with Estonia is taken into account.

Employee’s social security contributions paid on the same income can be deducted from the remuneration taxable in Estonia either:

  • in table 9.1, if there was an obligation to pay unemployment insurance premiums or funded pension contributions in Estonia, or
  • in table 9.3, if there was an obligation to pay social security contributions (pension, health, maternity, unemployment, accident at work or occupational disease insurance) in a foreign state and the payments were compulsory under a foreign law or international agreement.

Social security taxes or contributions paid in a foreign state on income exempt from income tax in Estonia will not be deducted. If the income tax on income derived in a foreign state is paid during a period of taxation different from the period when the income was derived, it will be taken into account in Estonia during the period of taxation when the income taxable in a foreign state was received.

If the amount of income tax paid in a foreign state exceeds the tax liability calculated on the basis of the Estonian Income Tax Act, foreign income tax is not refunded in Estonia.

Declaration of income

  • Income derived outside Estonia is to be declared in table 8 titled “Income received in a foreign country” of the income tax return”. Income derived abroad that is taxable in Estonia is declared in tables 8.1 to 8.7 of the income tax return.
  • If you are abroad during the period of declaration of income, you can submit the income tax return in the online services environment e-MTA.
  • A resident natural person must declare taxable income together with income tax already withheld in Estonia or abroad.
  • Foreign income must be declared in Estonia even if income tax has already been withheld or paid in the foreign state. Double taxation is avoided as part of the calculation of the income tax return. Foreign income affects the amount of basic exemption calculated in Estonia (up to 6000 euros per calendar year).
  • Information on foreign income and foreign expenses (tax incentives) that can be deducted from income under Estonian law has not been pre-filled.
  • Although the taxable income from employment derived outside Estonia and the dividends received abroad are not subject to taxation in Estonia, they still have to be declared in table 8.8 of the income tax return form.
    Income which is exempt from income tax in Estonia pursuant to an international agreement must also be declared in the same table. It affects the calculation of the Estonian basic exemption. It can be, for example, pension paid on the basis of Finnish social security legislation that is exempt from tax in Estonia on the basis of a tax treaty concluded between Estonia and Finland.
  • Income received abroad must be declared in the currency received (except table 8.2. for gains or losses from transfer of securities that are to be filled in euros). Income in currency other than euro will be converted into euros at the exchange rate of the European Central Bank on the date the income was received, thus columns for dates have been added to the table for income received in a foreign country.

Deductions

Read more about deductions from the web page on tax incentives.

Evidence

Information on income derived outside Estonia is not pre-filled in the tax return form in the e-MTA; it must be entered in the correct fields of the return form by yourself. Income tax paid or withheld in a foreign state may be deducted from income tax payable in Estonia only if the taxpayer submits a certificate issued by the foreign tax authority or withholding agent certifying the payment of income tax or another tax equivalent to income tax.

The best proof of taxation of foreign income is a certificate issued by the foreign tax authority containing information identifying the employer and the employee, the remuneration and other income received by the employee in the calendar year and the taxes paid and withheld during the calendar year.

Dividends received abroad

Exempt from income tax in Estonia

In Estonia, dividends received outside Estonia are exempt from income tax if income tax has been paid on the share of profit on the basis of which the dividends are paid or if income tax on the dividends has been withheld in a foreign state.

Although income tax does not have to be paid in Estonia on taxed dividends received outside Estonia, the dividends must still be declared in table 8.8 of the income tax return form. This includes the taxed dividend received from financial assets included in the investment account system and received in the investment account, which is also declared as a contribution in table 6.5.

In Estonia, income tax is not imposed on the income already taxed in a foreign state declared in table 8.8, regardless of the amount of income tax paid in the foreign state.

The income indicated in table 8.8 is not taxed in Estonia, but is taken into account in the calculation of the amount of basic exemption in the annual income of a person.

Income tax is payable in Estonia

If income tax has not been withheld from foreign dividends or paid on the profits on which the dividends are based on, foreign dividends must be declared in table 8.1 and income tax must be paid in Estonia.

Foreign income tax is deducted from the income tax due in Estonia.

Foreign income tax is taken into account to the extent that it is in accordance with laws and the conventions for avoidance of double taxation entered into between states.

If more income tax has been withheld in a foreign state than what was agreed in a tax treaty, a request for refund must be submitted to the foreign tax authority.

Last updated: 11.02.2022

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