Residents pay tax on their worldwide income. Taxable income includes, in particular, income from employment (salaries, wages, bonuses and other remuneration); business income; interest, royalties, rental income; capital gains; pensions and scholarships (except scholarships financed from the state budget or paid on the basis of law). Taxable income does not include dividends paid by Estonian or foreign companies when the underlying profits have already been taxed.
The personal income tax is withheld from the employees’ gross salary every month and paid by the employer.
Non-residents pay personal income tax only on their income received from Estonian sources. Taxable income in Estonia includes:
- income from work under a labour contract or contractor’s agreement in Estonia
- income from business carried out in Estonia
- interest income received from Estonia (only if it is substantially higher than that of similar debt claims)
- royalties
- income from the lease of assets located in Estonia
- gains from disposal of assets located in Estonia
- directors’ fees paid by Estonian enterprises; » income of a sportsman or an artist from his or her activities in Estonia
- pensions and scholarships
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The rate of social tax is 33% (20% for social security and 13% for health insurance). Besides the social tax, unemployment insurance tax at a rate of 0.8% must be paid on the gross salary (an additional 1.6% is withheld from the employees’ salary).
Employers registered in Estonia (including the permanent establishments of foreign entities) must pay social tax on all payments made to employees, except on those specifically exempted by law.
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There is no corporate income tax on retained and reinvested profits.
Tax on distributed profits is 14-20%.
Distributed profits include:
- corporate profits distributed in the tax period
- gifts, donations and representation expenses
- expenses and payments not related to business
- transfer of the assets of the permanent establishment to its head office or to other companies
Dividends paid to non-residents are no longer subject to withholding tax, irrespective of participation in the share capital of the distributing Estonian company. However, various withholding taxes may still apply to other payments to non-residents if they do not have a permanent establishment in Estonia or unless the tax treaties otherwise provide.
As the tax period for corporate entities is a month, income tax must be returned and paid monthly by the 10th day of the following month.
It is possible to run your company without any corporate income taxation at all.
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