The Attractiveness of the Estonian Business Environment
Taxation is often the most essential aspect when choosing a location for business. Estonian tax system supports business growth and lets international companies reduce their tax expenses.
Key among its advantages is a tax rate of 0% on undistributed enterprise earnings. Until profits are distributed to founders, a business will not face corporate or income taxes. It enables companies to reinvest profits for further growth. It is one good reason why entrepreneurs choose to register a company in Estonia.
Key Aspects of Estonian Tax Rules
Estonia follows a straightforward regulation, deeming a company as a tax resident if established under Estonian law. If you’ve registered an Estonian OÜ, it signifies your business’s tax residency in Estonia and its subsequent taxation obligations.
However, various countries adopt different criteria for tax residency. Aside from the incorporation location, the effective management’s locale also dictates tax residency. Operating your business based on such criteria may result in dual tax residency.
If a company conducts its activities outside Estonia or is managed internationally, the earnings are taxed in that foreign nation. Estonian tax system, however, ensures the elimination of dual taxation.
The Estonian Government’s website provides a comprehensive list of double taxation avoidance conventions.
Given the complexity of international taxation, which varies based on your business type and location, we recommend consulting a Legal Vaspex expert before making important decisions.
Book a ConsultationEstonian Tax Rates
Corporate Income Tax (CIT)
Corporate income tax (non-distributed profit) is 0%
Companies don't face taxes on their earnings (with a 0% tax rate) unless they distribute these as dividends. Essentially, any profits that remain within the company are free from tax. This tax relief applies to all forms of income. It is valid if the earnings come from active operations (like trading or crypto mining) or passive sources (like dividends, interest, and royalties). Additionally, profits from selling assets, be it shares, securities, crypto, or real estate, also benefit from this exemption.
- Corporate income tax (distributed profit) is 20%
- Combined corporate income tax and payroll tax returns need to be submitted to the local tax authorities
- Taxes must be remitted by the 10th day of the month following a taxable payment
- For any late payment, taxpayers will have to pay interest fees
Dividend Taxation (CIT)
- Taxes are postponed until profits are allocated as dividends
- Tax is seen as a Corporate Income Tax (CIT) and not a Withholding Tax (WHT)
It means tax treaties don't change the rate. Generally, when profit is shared out, it is taxed at a rate of 20%, calculated as 20/80 of the total distributed profit. For instance, if a company has 100 EUR in profit to give out, they can distribute 80 EUR in dividends and would need to pay a 20 EUR CIT.
Alternatively, if a company wants to give out a net amount of 100 EUR as dividends, they'd have to account for a 25 EUR CIT, making the total distribution fund 125 EUR.
Value Added Tax (VAT)
- The standard VAT rate is 22%
- Some goods and services, like books and accommodations, might qualify for a reduced rate of 9%
- Obligation to register the company as a VAT payer if the annual taxable turnover exceeds 40,000€ (with the Tax and Customs Board)
- The necessity to submit VAT returns and pay VAT to the tax authority (at the latest on the 20th of the month following the taxable period)
Social Security Tax
- Is from gross income and is paid on top of salary by an employer
- Tax rate 33% - applies to all employee compensations (20% social security, 13% health insurance)
All employers in Estonia (including branches of foreign companies) contribute social tax on payments given to their staff.
This tax is at a rate of 33%: 20% goes to social security, and the remaining 13% is for health insurance.
In Estonia, as of 2024, the lowest monthly gross wage is 820€. For a handy way to calculate salary funds, visit this Salary Calculator site.
Tax and VAT Registration for New Businesses
When launching a business in Estonia, registering for taxes is an essential step. After registration with the Trade Register, a business should proceed with its tax registration. Additionally, companies need to sign up for social contributions as employers.
As a next step, companies have the option to register for VAT. VAT registration is not mandatory in Estonia if your annual taxable turnover is below €40,000.
However, it’s crucial to understand that if your goods and services surpass 40,000 euros, VAT registration is no longer optional but required in Estonia. The rule holds for individuals and businesses that offer VAT-taxable products and services. Learn more about VAT registration.
How are Dividend Taxes Calculated in Estonia?
One of the major perks for Estonian companies is that you don’t pay taxes on your profits until you decide to share them (like when you give yourself dividends).
In Estonia, the dividends you distribute get taxed at a rate of 20%. If you live in another country, you are also required to declare these dividends there, and the tax rules might differ.
Here are some basic rules about dividends for Estonian companies:
- You can only start giving out dividends after your company has finished its first financial year and shared its annual report.
- Before distributing dividends, your company’s share capital has to be fully paid and recorded in the e-Business Register.
- The dividends you give out can’t be more than the saved profits shown in your annual report.
Leverage the Estonian Tax System for Your Business
Estonia offers a business-friendly tax environment with a notable 0% tax on undistributed enterprise earnings. The straightforward tax residency rules and efforts to prevent dual taxation further enhance its appeal.
The Estonian Tax and Customs Board (EMTA) supervises the Estonian tax system, and its official website offers valuable information on Estonia’s tax framework. If you need help understanding the Estonian tax system or help with the company formation in Estonia, Vaspex Legal experts are here to help.
