About the taxation of non-residents
Non-residents pay income tax only on income received from Estonia.
Income tax is withheld on payments made to non-residents at the moment of making the payment.
To apply a tax rate provided in the conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital concluded between Estonia and different foreign states (hereinafter ‘tax treaty’) at the moment of making a payment, a certificate of residency of the beneficiary is submitted at the moment of making the payment with the income tax declaration form TSD.
Usually, the withheld income tax amount (incl. with the reduced rate of the tax treaty) is the non-resident’s final tax amount, i.e. the non-resident does not have to file an income tax return (depending on the income type, only the beneficiary has declaration obligation, e.g. in case of business income or gains derived from transfer of property).
Payer will withhold income tax on the entire amount, i.e. deductions (basic exemption etc.) cannot be made from taxable income when calculating income tax. As an exemption, withheld unemployment insurance premiums (1.6%) are deducted from the amount taxable with income tax, in case paying unemployment insurance premiums is mandatory in Estonia.
Deductions from taxable income
A non-resident may make deductions, which are prescribed for residents in the Income Tax Act, according to the percentage of his/her Estonian income in his/her worldwide income, in case this non-resident natural person is a resident of another Contracting State of the European Economic Area Agreement, who submits the income tax return of a resident natural person (Income Tax Act § 311 (2)–(4)).
The non-resident has to make a notation in the natural person’s income tax return that he/she is a resident of another Contracting State of the European Economic Area Agreement, because a non-resident cannot submit the resident natural person’s income tax return in other cases.
The non-resident indicates the income derived outside of Estonia in the table 8.9 of the resident natural person’s income tax return, because although only Estonian income is taxed in Estonia, the size of worldwide income amount affects the size of deductions allowed in Estonia. The non-resident indicates in the income tax return the taxable income in Estonia and tax withheld on it in Estonia, also the income derived from a foreign state according to the legislation of his/her state of residency or source state of the income (Income Tax Act § 311 (2) or (3)).
Foreign income and income tax paid to a foreign state have to be certified (e.g. a copy of income tax return submitted to a foreign tax authority is suitable for certification). Other tables of foreign income (8.1–8.8) are not filled in by the non-resident.
Deductible expenses are indicated in the income tax return according to certifying documentation.
The income tax return of a resident natural person is submitted on taxable income of a calendar year by 31 March of the following year at the latest.
Therefore, non-residents receive their refunds of overpaid withheld (in the extent of allowed deductions) income tax amounts from the tax authority once a year, after the taxation period has ended, even if this income tax is withheld on monthly payments.
The following deductions can be made from year 2017 income under certain conditions:
basic exemption – 2160 euros
increased basic exemption in case of minor children – 1848 euros per calendar year for each child up to 17 years of age beginning from second child
housing loan interest – up to 300 euros per year
gifts and donations
insurance premiums and acquisition of pension fund units
mandatory social security contribution
The following deductions can be made from year 2018 income under certain conditions:
basic exemption – up to 6000 euros per calendar year depending on income size (more information from article “Amount of tax-free income beginning from 1 January 2018”)
- increased basic exemption in case of minor children – 1848 euros per calendar year for each child up to 17 years of age beginning from second child
- housing loan interest – up to 300 euros per year
- training expenses
- gifts and donations
- insurance premiums and acquisition of pension fund units
- mandatory social security contribution
Housing loan interest, training expenses, gifts and donations can be deducted from taxable income in an amount not exceeding 1200 euros per tax payer, but no more than in the extent of 50% tax payer’s income of the same taxable period, from which business related deductions have been made.
Deductions are also limited to the percentage of Estonian income in worldwide income.
The proportion of Estonian income in worldwide income is applied on the amount of deductions, as well as the type of deductions depends on it. In case a person earned less than 75% of his/her income in Estonia during a taxable period, only basic exemption can be deducted (but not basic exemption in the event of children, housing loan interest, training expenses, gifts or donations).