Examples 2018

Below are examples of declaring income in case a resident of another Contracting State earns:

Example 1. If a resident of another Contracting State receives from Estonia the taxable income exceeding 75 per cent

An Estonian employer employed a Latvian resident for five months in Estonia. The employer withheld every month an income tax 20 per cent on the payment in the amount of 2000 euros, deducting 1.6 per cent of unemployment insurance premium withheld, therefore the amount of income tax withheld is 1968 euros = (10,000 – 160) × 0.20. The Estonian taxable income of the Latvian resident was 10,000 euros, in Latvia he earned the same year totally 2500 euros.

The taxable income in Estonia is therefore 80 per cent of the taxable income for the taxation period and the Latvian resident has the right to submit in Estonia an income tax return for a resident natural person and deduct from the taxable income of the person in Estonia the expenses 80 per cent allowed for a resident according to the Income Tax Act. The Latvian resident has two children under the age of 17 and he has made training expenses in the amount of 200 euros.

Income in Estonia 10,000
Income tax withheld in Estonia during a year 1968
Unemployment insurance premium withheld in Estonia 160
Basic exemption 6000
Increased basic exemption for a child 1848
Training expenses 200
Total deductions 6598 [(6000 + 1848 + 200) × 0.8] + 160
Taxable income in Estonia 3402 (10,000 – 6598)
The final income tax 680.40 (3402 × 0.20)
Income tax to be refunded 1287.60 (1968 – 680.40)
Example 2. If a resident of another Contracting State receives from Estonia the taxable income less than 75 per cent

A German resident has purchased an apartment in Pärnu and earns 5000 euros in a year for renting out this apartment to a company. During the year, the company has withheld 20% of income tax, which is 1000 euros (5000 × 20% = 1000). German resident’s income from foreign states is 6500 euros in total (it is declared in table 8.9 of the income tax return). The total income of the taxation period is 11,500 euros (5000 + 6500 = 11,500), from which Estonian income (5000 euros) is 43.4782%. Therefore, the non-resident received less than 75% of his total income in Estonia and only basic exemption could be used as tax incentive.

At the same time, the basic exemption in Estonia is calculated proportionately to the share of Estonian income (43.4782% of the given example) of its total income.

Income in Estonia 5000
Income tax withheld in Estonia during a year 1000
The basic exemption taken into account as a deduction 1129.75 (6000 × 0.434782)
Taxable income in Estonia 3870.25 (5000 – 1129.75)
The final income tax 774.05 (3870,25 × 20%)
Income tax to be refunded 225.95 (1000 – 774.05)
Example 3. If a resident of another country receives income, which exceeds basic exemption

A German resident has purchased an apartment in Pärnu and earns 18,000 euros in a year for renting out this apartment to a company. During the year, the company has withheld 20% of income tax, which is 3600 euros (18,000 × 20% = 3600). German resident’s income from foreign states is 14,500 euros in total (it is declared in table 8.9 of the income tax return). The total income of the taxation period is 32,500 euros (18,000 + 14,500 = 32,500), from which Estonian income is 55.38%. Therefore, the non-resident received less than 75% of his/her total income in Estonia and only basic exemption could be used as tax incentive.

At the same time, the German resident’s worldwide income exceeds the amount on which basic exemption is applied, which is why the income tax withheld in Estonia will not be refunded.

21.08.2018