Starting a new business venture in a foreign country might leave you with a lot of questions about local rules and regulations. Within this article, we will explain the ins and the outs about VAT, salaries, tax treaties, regulations, and corporate tax in Estonia. Before we get into that, we would like to remind you not to worry as taxes in Estonia are easy and fair. This also reflects in business environment and the government provides many tax incentives for entrepreneurs - it is for a reason that Estonia ranks the 1st overall on the 2020 International Tax Competitiveness for the 7th year in a row. The local tax system has attracted both local-residents and entrepreneurs from all over the world to establish a business here.
Estonia has a lot to offer when it comes to running a company here, especially with local taxes.
Benefits of the tax system in Estonia are:
Value-added tax, also known as VAT, is the consumption tax that is based on the value of goods and services and is added to the final payable amount. Almost all goods and services that are traded with within the European Union have VAT added to their price.
In Estonia, VAT is controlled by the Estonian Tax & Customs Board, who also will receive notices about your company’s income and its activities.
In Estonia, when you form a company, it is not immediately given a tax identification number. You must apply for one if you want to obtain it. At the same time, VAT number is not obligatory for everyone–your company must have an annual taxable turnover of €40,000 for it to be obligatory. Before the threshold is met, you can voluntarily apply to receive one.
Per the Estonian law, taxable income is generated when:
The time of the income that generated is established by the completion of one of the abovementioned conditions.
According to the Estonian law, your income will generally be considered generated in Estonia if:
In case that your company operates outside of Estonia, you cannot receive a VAT number in Estonia for your company. Furthermore, we suggest you always consult a tax professional or an accountant who can assist you with determining if the income is taxable in Estonia or in a foreign country.
To register for VAT, you must fill out an application via the e-Tax Board’s website, where you state the basis for you to have one and how your company will contribute to the Estonian economy with its operation.
Alternatively, you can now submit your VAT number application through the Company Registration Portal, if you are creating your company yourself on the same website.
Within the application, you must mention the basis for you applying – did you go over the €40,000 revenue threshold or are you doing it voluntarily. You also must mention your main business activity, your primary business partners (if you have any) and explain if you plan to hire any employees. By this time, you should also have an EEA business bank account for your company, which you will use to pay taxes to the state.
Following the application, you will receive an answer within 5 business days via e-mail or SMS. The official answer to your case will be uploaded to your e-Tax Board account. In case the tax authorities need additional documents about your company, then they will get in contact with you via phone or e-mail within the same period.
If your company meets all the requirements, you will see your new VAT number in the official answer.
Note that the Estonian Tax & Customs Board checks regularly if your company continues to fulfil the requirements needed to remain VAT registered. In case that your company does not fulfil them, ETCB can ask you to present them documents proving your activity, or they will take your VAT number away.
The VAT rates that apply are stipulated in the Value-Added Tax Act that was drawn in 2003 and is based on the European Council’s directive. According to the Act, the current general VAT rate that applies to goods and services in Estonia is 20%, however in certain cases, it can be reduced to 9% and even to 0%. The VAT rate is generally added to your goods or services that you provide to others, and it must be added to invoices, along with your VAT id number.
Now, we are sure that you want to know more about the reduced VAT rates - so, the 9% VAT is applied if you for example sell books and workbooks, periodical literature, medicine, or medical equipment or provide accommodation services. 0% VAT rate is applied for goods or services that are meant for export, equipment and objects that are meant for operation and consumption on international ships and airplanes, and equipment that is sent out to another EU country to be delivered to a government worker.
VAT rate calculation is a straightforward process when you need to add it to the base price of your products and services.
Example: To add 20% VAT to €100, you must multiply €100 x 1.2 = €120
Calculating what is the VAT portion of €120 is not as simple as taking 20% of the €120, as €120 minus 20% is €96. The backwards calculation of VAT is done by dividing the gross amount by (1. + VAT%).
Example: €120 divided by 1.20 = €100
Now this is how you get the backwards VAT calculation right, and now you can assess the actual value of the product or service that you will sell or buy. This will also help you determine the price that you want to ask for on the market and if the income from it covers your operating costs.
From the day that your company has been VAT approved by the authorities, you must start including your VAT number and tax percentage (20%). This must be included on any receipts or invoices that you provide to individuals that are residing in the EU and to an EU company that is not VAT registered. VAT will also be added to an invoice issued to an Estonian company (there is no difference if the company is VAT registered or not).
An invoice without VAT will be issued to an individual residing outside of the EU, a company that is domiciled outside of the EU, or to an EU domiciled and VAT registered company.
A company that is VAT liable must pay it to the Estonian Tax & Customs Board by the 20th calendar day in the month following the calculation period. The same goes for the amount that your company has accumulated by giving out invoices or any other sales documents.
In case that the 20th day of the month is on a public holiday or on the weekend, you must realise the payment by the following working day.
When you have just registered yourself as a VAT liable company and there are less than 15 days left until the taxation period ends, you may submit your first declaration together with the next declaration.
Also, you must correctly store and account for the documents and invoices to be able to present them in case your company is examined by the tax authorities.
In case you submit your VAT declaration a few days past the deadline, generally it will not become a problem. However, if you for example submit your declaration one month past the deadline, you will start receiving notifications from the tax authorities. These notifications serve as reminders. In case you ignore the reminders, you will be appointed a penalty. Your company’s deficiencies with submitting tax reports or not paying the taxes will also be reflected in the e-Business Register and that information is public – available to anyone.
Deducting VAT on your purchases of goods and services can be done only if they are related to your company and its operations. This type of tax is called input VAT. To begin the process of getting back the tax amount, you must submit all the documents within the deadline mentioned above and from that day, you will receive the repayment within 60 days.
When you do business with companies from other EU states, you usually must pay the tax rates of that specific country from where you purchase. Those VAT returns are handled by you in Estonia. You provide the documents, and the Estonian tax inspector submits an application to that specific country, where you made the purchase. Note that this VAT return approval process from the beginning until the end can anywhere between 4 to 8 months. Once it has been approved, they will return the money within 10 business days.
In case you are making purchases outside of the borders of the European Union, the rules are based on mutual tax returns and are paid in cases, where Estonia also makes VAT returns to that specific country. Another big difference here is that Estonian authorities communicate directly with the foreign tax representatives, not electronically as the case is in the EU.
In cases where there is no real business activity or purchases are not related to your company, you cannot legally deduct VAT, and may end up paying fines if caught doing so.
When goods and services are exported out of the EU and sold to foreign companies or customers, there is normally no basis for VAT liability as the end consumer is not within the European Union. However, it is still a good idea to register for VAT if the income is generated in Estonia, even if the customer is outside of the EU.
Consequently, imports into the EU are taxed to maintain equal terms and competitiveness on the European market. Payment of VAT on importation to Estonia is determined by customs legislations.
In general, purchases up to €22 in value will not have VAT added to the purchase price upon import. However, this does not apply to alcohol, tobacco, or perfumes that are imported from outside of the EU. The regular Estonian VAT rate of 20% is added to most imports, while books for example only have 9% VAT added. Upon import, there might be additional excise and customs duties, which depend on the specific product that you purchased. More on that in the end of the article.
The MOSS directive is a VAT simplification measure that reduces the costs and tax burdens on electronic communications service and digitally supplied service providers within the European Union to non-taxable persons. If the company’s the taxable turnover for services provided in EU reaches €10,000 per year, the company must register for MOSS scheme or for VAT. If you will not use MOSS scheme, then you must register and account for VAT in each individual EU member state, where you operate. We recommend using it since it makes running your company easier and is less money consuming.
Corporate taxes are collected by the Estonian government, as it is considered a source of income. You must pay the corporate income tax based on the company’s annual profits, and it follows the calendar year. In case you do not wish to proceed to making dividend pay-outs, and you will retain and reinvest the annual profits in your company, 0% CIT tax will apply to your business. All resident companies and permanent establishments of foreign entities (including branches) are liable to 20% corporate income tax only in respect of all distributions, including:
Dividends might be one of the best parts when it comes to running and owning a company in Estonia, as Estonia has a low rate for corporate taxation. Although the company might be yours and you have made an investment in it with your own money, there are certain requirements the company must fill before you can distribute the profits to the shareholders:
In Estonia, like in most places, dividend pay-outs are made based on the annual earnings of your company. As mentioned before, 20% CIT will apply on their distribution. Luckily, no other local taxes, like social tax or personal income tax, apply to dividends if they are paid to a resident from a local company. The CIT sum needs to be paid to the state by the 10th day of the month following the dividend payments.
Dividend pay-out amount calculation is like VAT calculation that we demonstrated earlier.
For example: The annual report’s decision states that €8,000 net will be paid out to the shareholders. As mentioned earlier, the CIT is 20%, which goes to the state. To calculate the gross amount, you need to multiply €8,000 x 1.25 = €10,000. This means that €2,000 must be paid as taxes.
You might wonder why 25% instead of 20% - this is because 25% is the additional percentage of the total net amount, while 20% is the retention percentage of the gross amount.
Therefore, if you know that you will have a total of €10,000 to pay out as dividends, you can calculate the tax by €10,000 x 0.2 = €2,000. €8,000 will be taken from the retained earnings and €2,000 of tax will be the expense for the current year.
Determining where and what taxes you must pay, and who must pay them, can be complicated when you deal with cross-border employment and business arrangements. Below, we have brought out cases each relevant to Estonian residents and non-residents.
In case you or your employee is a tax resident in Estonia, the taxes must be paid to the Republic of Estonia according to the local laws. You can gain Estonian tax residency through physical residency only, and for the state to consider you as one, you should reside there for more than half a year within one calendar year.
As an employer, you are liable to pay the social tax to the state, and is regulated by the Social Tax Act. Generally, the social tax rate is 33%, and you pay it from the income that you generate from economic activity, either by working or doing business. The social tax is used to cover your national health insurance costs and make payments to your pension funds, which you will start receiving when you retire.
The parties that are liable to pay to the state:
Also, there have been appointed minimum thresholds that establish the basis of social tax withholding. As of 2020, the minimum threshold is €540 and applies for employers, and sole-proprietors and their business activity income.
Salaries and income in Estonia are also regulated by the Income Tax Act that was put in force in the year 2000. The act has been numerously changed and updated after that. Income taxes are paid on employees' gross salary and is withheld by the employer who then pays it to the tax office. Currently, the income tax rate in Estonia is 20% flat.
Below we have brought out a table to give a good overview of taxable and tax-exempt income for Estonian tax residents:
|Taxable income||Tax-exempt income|
Employer and the employee both pay the unemployment insurance tax in Estonia, each pay a different amount. The employee pays 1,6% from their salary, and the employer must pay 0,6%. Similarly, to the income tax, the unemployment insurance is withheld by the employer and paid to the state together with other taxes.
The aim of the unemployment insurance tax is to offer benefits and compensation to the unemployed, injured, or laid-off employees and add protection against employer insolvency.
Similarly, to most of the countries in the world, Estonia has a pension scheme, which enables people over a certain age to receive monthly payments from the state based on money accumulated over the years. Pension is regulated by the State Pension Insurance Act. In Estonia, pension is paid to the state within the social tax rate. By 2026, the age eligible for pension in Estonia is expected to be 65.
When management board members perform work according to a management board member agreement, they are not liable to pay unemployment insurance contributions. Therefore, it can be beneficial for you to draw up a board member contract that gives at least minimal compensation to enable the members of your board to get access to health insurance and meet the minimal retirement requirements. The thing to remember here is that pension contributions and income tax must be deducted from the remuneration paid to the board member, and a social tax of 33% will apply to the gross board member’s salary. In cases where health insurance is unnecessary, you do not need to consider the social tax rate when deciding on the salary.
Within your work contract with employees, you must stipulate when will you make payments to their bank accounts, and you must send them payslips, where their salary calculations are brought out based on the salary that is stated within the contract. Within those calculations, you must demonstrate which taxes have been deducted and the amounts.
Now with non-resident natural and legal persons, the salaries and taxes are calculated differently. There are many changes in the rules and regulations within this aspect about the facts mentioned above. Before we continue, we want to remind that we always recommend consulting your local tax advisors to find out your tax obligations that apply in your case because of differences in local and international tax regulations.
In case you have an employee that is performing his/her duties outside of Estonia, in most cases no payroll taxes, like social tax and unemployment tax, are presumably due in Estonia. Or, if a non-resident performs their duties on behalf of your company outside of Estonia, their salary in Estonia is not subject to income tax neither.
If your company operates a lot in a foreign country–like importing and delivering goods to your customers–the likelihood that you must pay taxes in that country increase greatly. In some situations, it might be smarter to pay a board member to perform tasks outside of Estonia according to a board member’s agreement, rather than paying them a regular salary. This is because a board member can receive profit distributions rather than a salary, where high income tax rates can apply, as the income will then be taxed according to the Estonian law (link in Estonian).
For more information about accounting for an Estonian company, please click here!
According to the Estonian Ministry of Finance, Estonia has 61 effective tax treaties with different countries around the world. Under the double tax treaties, a significant reduction of withholding taxes on various payments to non-resident legal persons and natural persons are available. To apply for the lower tax rates and avoid double taxation, the residence certificate of the recipient of the income must be submitted to the Estonian Tax & Customs Board by the 10th day of the month following the payment.
As of October 2020, Estonia has double taxation avoidance treaties with the following countries: Albania, Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Isle of Man, Ireland, Israel, Italy, Japan, Jersey, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Mexico, Moldova, Netherlands, Norway, Poland, Portugal, Romania, Serbia, Singapore, Slovakia, Slovenia, South-Korea, Spain, Sweden, Switzerland, Ukraine, United Kingdom, United Arab Emirates, United States of America, Uzbekistan, Thailand Turkey, and Vietnam.
Also, treaties are being prepared with Bosnia and Herzegovina, South Africa, Morocco, Oman, Tajikistan, Russia, Pakistan, Mauritius, and Qatar.
There are some business expenses that your Estonian company may deduct from annual tax returns. This can be done only when the expenses are directly related to your business activities and are essential for your operations. As mentioned before, if this rule is not followed, your company may receive fines.
Generally, the expenses and costs that are named business-related according to the corporate tax rules in Estonia are the following categories:
To give you a more concrete overview of the expenses that you could write off as business expenses, we have made a list of 50 direct examples with what you could claim a return:
As a disclaimer - this not a closed list nor an official list of examples that you may write off as business expenses - it is made just to give you an idea. We always recommend you consult a professional and see what is best for your specific case.
As mentioned before, there is some money that you may get back with tax returns that are related to company business trips and assignments abroad. We have put this into a separate category, as this is one of the questions that our clients have questions about.
Note that for non-residents tax-free expenses work a bit differently:
In case you or some of your employees work from a different country, then the rates and regulations that apply come from the same country, where the work is performed and where the tax residency is. Which means that if some expense is not deemed tax-free, you will not be able to use the Estonian rates. Consequently, if that employee is sent on a business trip to a third country, those regulations will also come from the country in which they are tax residents.
In Estonia, land tax or property tax is based on the Land Tax Act. Generally, the tax amount must be paid by the owner of the land and paid into government’s annual budget. As said before the taxable amount is based only on the value of land, not by the value of the property on it. The amount is calculated by the Tax & Customs Board, with an annual tax rate of 0.1% to 2.5%. The rate depends and varies based on its location (link in Estonian).
All tax information regarding your land - amount, payment dates etc. can be found on e-Tax Board’s homepage by logging in and selecting “Taxes”–> “Other taxes”–> “Land tax”.
All land tax notices will be given to you on an annual basis and it is usually done by the 15th of February. If you have property in Estonia, we recommend you register your e-mail in the system or regularly check so you can get proper notice, as no tax notices are sent by physical mail. In case you have not received a notice by the 25th of February, you are required to reach out to the tax authorities within 30 days. Furthermore, all incorrect tax information must be corrected and in case of no notice, you need to write to the local municipality or city government yourself.
Taxes that are up to €64, must be paid in the full amount and all at once to the government by the 31st of March. In cases where the tax amount is over €64, you must pay €64 as the first payment within the deadline mentioned earlier, and the second by the 1st of October. The payment must be done directly to the ETCB’s bank account and you can find the requisites here.
The gambling tax and its legislation is determined by the Gambling Act and the Gambling Tax Act. Now, before we talk about taxation within this category, you must be aware that your company needs a licence and must fill certain requirements before it can legally operate in Estonia.
Regarding taxation of legal gambling businesses, the tax is paid by the operators and the taxes must be paid to the tax authorities every calendar month. Tax rates vary from game to game and are imposed on:
The heavy goods vehicle tax is regulated by the Heavy Goods Vehicles Tax Act, and the period of taxation is the 15th of every quarter in the calendar year. Like all other taxes, this is also paid to the Estonian Tax & Customs Board. The person liable to pay is generally the owner of the vehicle, but in certain cases it can also be the user or its proprietor.
The tax rates on heavy goods vehicles are variable and the amount depends on the number of axes, the weight, and the type of suspension it has. Please take a look at the heavy goods vehicle tax rates table here (link in Estonian). The information must be aligned with the information that the Estonian traffic register has on the given vehicle. In case this information is incorrect or changes, you must notify the traffic register.
Tax exempt heavy vehicles are that belong to the Estonian Defence Forces, the Defence League (Kaitseliit), police and rescue agencies, and heavy vehicles of local government, non-profit organisations, or foundations that undertake rescue work, which are primarily used for rescue services.
The customs duty is made in accordance with the European Union’s legislation. Customs duties must be carried out by a natural person or a company when goods are imported from outside of the EU, also known as import duty. Within the European Union, there are no customs duty on goods that have been declared, fabricated, and put into circulation there. The customs duty rates are established by the common EU policy and depend on how sensitive the market is to that specific product. This is so that the competitiveness within the market will not be greatly impacted by that specific product and its import.
In Europe, there are 3 different types of customs duties:
When importing goods, products that have value less than €150 will generally not receive any customs fees. However, there is an exception, if it is alcohol, tobacco, or perfume that you are receiving, there will be a customs fee between 0% to 17% added. You can find the specific tariffs and costs here.
Currently there are no customs duties upon exportation of goods outside of the EU boarders.
Besides customs duties, there might be additional excise duties and a VAT duty (discussed earlier in the article), which depend on the product type and the legal status of the importer. Each country can have different excise duty rates, but the European Commission has put the base rates in place.
There are excise duties for fuel, electricity, alcohol, tobacco products, and packaging in Estonia. The rates of the duties can vary by the sub-category of the product and its volume. The Estonian government has made their own excise duty rates and you can see them here.
Regardless of where you are located, local taxes might be complicated. Luckily, the rules governing company taxes in Estonia are one of the most business-friendly in the entire world. We hope that you will decide to launch your company in Estonia and take advantage of the favourable tax system and the friendly business environment it offers.
In case you need help with anything within the process of starting or managing your company, or just advice, please feel free to reach out to our team!