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Taxation of income of a non-resident through a permanent establishment in Estonia

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.

NB! New!  Value of assets of a permanent establishment

A permanent establishment of a non-resident legal person has to

declare value of assets imported into Estonia, which exceeds the value of assets taken out,

as of 31 December 2018 to the Estonian Tax and Customs Board

on code 3333 of form TSD Annex 3 by 10th February, 2019.

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.

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.

Since 2019, a lower tax rate of 14/86 applies to part of profit distributed by permanent establishment of a non-resident company regularly (The profit distributed in a calendar year, which is smaller than or equal to the average distributed profit of the previous three calendar years (starting from 2018) on which a permanent establishmetn has paid income tax in Estonia).

Taxable profit taken out of permanent establishment shall be declared in Annex 3 of form TSD.

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.

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 the  Estonian income tax calculated from the amount of payment paiable by the non-resident in Estonia. 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 5 or 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.

Taxes on fringe benefits (§ 48 of the Estonian Income Tax Act) are payable by the employer in full, and to be declared on annex 4 of form TSD.

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.

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

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 to the 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 Tallinn Service Bureau, Lõõtsa 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.
 

28.12.2018