Embarking on a business venture can be intricate, but grasping Estonian tax rates doesn’t have to be.

The country actively seeks founders and top talent for its technology sector, boasting a thriving startup scene.

Corporate Income Tax Only on Distributed Profits

Estonia stands out among OECD countries by taxing companies solely when profits are disbursed to shareholders, at a rate of 20/80, which is 25% of the dividends paid. This setup encourages reinvestment and growth, aligning seamlessly with Estonia’s entrepreneurial spirit since the unique bill’s introduction in 2000. In simpler terms, for every 80 euros of dividends distributed to shareholders, the company pays 20 euros to the government the following month.

Paying Estonian corporate income tax is a legal obligation when distributing dividends to any shareholder. Keep in mind that your e-resident business may be subject to tax in the country you operate or reside in.

Flat Personal Income Tax Rate

While personal income tax only applies after becoming an Estonian tax resident, it’s worth noting that Estonia has maintained a flat 20% personal income tax rate since 2015, set to change in 2025.

Starting from January 1, 2025, the Estonian income tax will be 22%, meaning all earned individual income will be subject to higher taxation. The effective tax rate may be influenced by the annual basic exemption available to top earners.

Estonia had initially promised a reduction in income tax to as low as 12% in the 2007 economic boom era elections, a commitment disrupted by the 2009 economic crisis, maintaining the rate at 21%. The last change occurred in 2015 when the rate dropped by 1%.

Annual Basic Exemption

Estonia aims to keep a portion of earnings tax-free to alleviate the tax burden on lower-income earners. For 2023, this non-taxable income can reach up to 7,848 euros annually, regressing as income surpasses 14,400 euros and disappearing at 25,200 euros. Although seen as a monument to PM Jüri Ratas’ first government, opponents label it a regressive income tax discouraging higher earnings.

After winning the 2023 elections, the Reform Party fulfilled the promise to remove the regressive annual basic exemption, establishing a flat annual basic exemption of 8,400 euros per year for top wage earners from 2025. This campaign promised to increase other Estonian tax rates, such as the Standard VAT rate and income tax rate.

Value Added Tax (VAT)

With a VAT registration threshold set at 40,000 euros of taxable supplies, Estonia provides room for small businesses to grow before delving into monthly VAT calculations and submissions. Unicount, starting its accounting services in 2023, assists its virtual office clients in navigating taxable supplies.

Beginning January 1, 2024, the standard VAT rate will be 22%, making all VAT-included services in Estonia 2% more expensive, unless outgoing VAT can be deducted. Estonian companies can register for VAT in their country of operations, potentially obtaining EC-reversed VAT invoices from Estonian suppliers.

Paying Your Team and Yourself

Paying taxes on employees or yourself as a director requires professional accounting assistance. Several taxes must be withheld, declared, and paid monthly by the 10th calendar date for payments made in the previous month. Individuals cannot directly pay taxes in Estonia; legal persons are responsible for all necessary taxes for their employees, directors, and contractors.

Company directors can receive a board member’s fee, paying Estonian personal income tax in Estonia while declaring and paying social tax in another EU member state or a country with a signed treaty for social security.

Social Tax on Wages Paid to Resident Employees

Estonia’s social tax stands at 33% of the gross wage, covering universal health insurance and pensions. Though significant, it’s an investment in the country’s collective well-being, particularly considering the aging population and increasing healthcare costs. Attempts to reduce the 33% social tax in 2017 were rolled back before implementation.

Unemployment Insurance for Employees

Employees contribute 1.6% of their gross salary to unemployment insurance, with employers adding 0.8%. It’s a small cost for a substantial safety net. Company directors are exempt from paying this, as they are ineligible for unemployment insurance.

Contribution to Funded Pension

A contribution to the funded pension is withheld from the gross salaries of resident employees and board members, amounting to 2%. The Estonian government adds 4% from the social tax, providing a notable boost to individuals’ funded pension accounts.

Lending Money to and from Your Company

The Estonian Commercial Code prohibits lending company funds to shareholders and board members. Shareholders can finance the company with interest-free loans. If interest is applied, market terms should be followed, with the company withholding income tax on interest payments to individuals. Loans to company employees should adhere to market terms to avoid taxation.

Deductible Business Expenses

Estonia encourages sensible business spending, allowing deductions for investments in technology, operational costs, and some representational expenses. Fringe benefits are taxed similarly to wages. Importantly, if expense documents for any cost are lost, income tax is still applicable.

E-resident founders without professional accountants might miss out on benefits provided by Estonian tax laws due to insufficient knowledge.

Tax-deductible business expenses are not tied to sales turnover. Some companies may be unprofitable for years during product and service development. Board members without a monthly salary are entitled to similar tax-deductible business expenses as monthly payroll employees.

Summary about Estonian Tax Rates

Estonia’s tax system is designed for simplicity, encouraging profit reinvestment. Personal and corporate tax returns should take mere minutes for an accounting professional, and individuals may not even need an accountant for their annual tax return, which is mostly pre-filled with data from employers and the tax office.

This simplicity in Estonia’s digital and entrepreneurial ecosystem makes setting up as straightforward as registering a domain name.

Whether you’re a seasoned entrepreneur or a budding startup enthusiast, Estonia’s tax system is poised to welcome you with efficiency and clarity.