TABLE OF CONTENTS
- World-class tax policies make Estonia a leader among nations
- Your Guide to corporate tax in Estonia
- CIT: Paying corporate income taxes in Estonia
- VAT: Value-added taxes for Estonian corporations
- Select rules regarding employment taxes for staff, board members or shareholders in Estonia
- Commercial registration and corporate reviews and audits
- Call on our experts to help you maximize the benefits of a corporate tax system built for growth
One of the most important decisions founders must make when forming a new business is the jurisdiction in which the business will be formed. Which jurisdiction’s laws and regulations will support your business goals and allow your new venture to thrive? In particular, you should consider each potential jurisdiction’s laws regarding corporate tax. In Estonia, favorable tax treatment for businesses enables new corporations the convenience and flexibility they need to launch and grow.
Estonia’s business-friendly tax environment is just one of the reasons Estonia has become the European Union jurisdiction of choice for many founders.
World-class tax policies make Estonia a leader among nations
Estonia has the most competitive corporate tax code among the world’s leading nations according to the Organization for Economic Co-operation and Development (OECD). For the sixth year in a row, Estonia outranked 36 other nations, including Switzerland, Luxembourg, New Zealand, and the Czech Republic, for its corporate tax policy’s competitiveness and neutrality.
Holding the top overall score of 100, Estonia ranked among the top 10 nations in four out of five categories in OECD’s 2019 International Tax Competitiveness Index (ITCI).
Estonia’s e-Tax system makes it easy for organizations to declare corporate tax in Estonia
Declaring taxes in Estonia is easy. Estonia’s Tax and Customs board permits citizens, non-citizen e-residents, and corporations to declare their taxes and make payments via an online portal. Additionally, Estonian corporations, whether owned by members physically located in Estonia or e-residents, can authorize their accountants to use the online system to declare taxes on the corporation’s behalf. This means your organization can partner with local experts to ensure that you financial reports and tax declarations are filed accurately and on time.
In this article, the Incorporate in Estonia team describes the fundamentals of corporate tax in Estonia and some key processes for managing corporate tax declarations and reports.
Your Guide to corporate tax in Estonia
All Estonian companies are taxed equally and on the same substantive basis. While local governments may impose various local taxes, most Estonian corporate taxes are imposed at the national level. At the national level, Estonia’s Tax and Customs Board is responsible for calculating the amount of taxes owed, collecting tax payments, and designating the available methods of payment. For local taxes, the local government manages these tasks.
Depending on the activity of the organization, national-level corporate tax obligations may include any or all of the following:
- Corporate income taxes (CIT)
- Social and unemployment (payroll) taxes
- Land taxes
- Gambling taxes
- Value-added taxes (VAT)
- Customs duties
- Excise duties
- Heavy goods vehicle taxes
In the following sections, we will focus primarily on the two primary types of corporate taxes: income tax and VAT. We will also review Estonian employment taxes and provide guidance about how to file your organization’s annual reports and meet corporate audit and review obligations.
CIT: Paying corporate income taxes in Estonia
Estonia’s unusual corporate income tax system empowers shareholders to defer payments on corporate profits by choosing when and how those profits are used or distributed.
Estonia’s corporate income tax system significantly differs from that of many other jurisdictions. The government does not impose an income tax on a corporation’s monthly or annual earnings. Instead, corporate income tax (CIT) is due only when profits are taken out of the business (e.g., in the form of a dividend or payment). This unique system enables corporate shareholders to decide when corporate taxes will be paid by deciding when and if they will distribute the organization’s profits. However, it is not only the payment of a dividend that can trigger a taxable event.
The following are some events that will trigger corporate income tax liability in Estonia:
- Distribution of corporate profits within a tax period
- Making gifts or donations, or paying representation expenses
- Assuming costs or making payments not related to the business
How corporations report taxable distributions in Estonia
Estonia requires income tax obligations to be declared and paid monthly. An organization should declare the taxable amount using the Tax and Customs Board’s Form TDS, no later than the 10th day of the month following the distribution. This declaration must be filed regardless of whether the distribution was made as a dividend payment or one of the other triggering events such as the payment of a taxable expense.
One convenience of this taxation system is that smaller organizations do not need to submit a separate annual tax return. Declarations are only required when the organization has a taxable event within the reporting period. Offering advice about potential corporate tax liabilities and assistance in preparing declaration forms are two of the services that the accountants at Incorporate in Estonia provide to our clients.
What taxation rates apply to corporate tax in Estonia?
Estonia applies two separate CIT rates, a regular tax rate of 20% and a new, reduced rate that went into effect in 2019.
Estonia’s 20% corporate income tax rate
Estonia’s general corporate income tax rate is 20%, calculated as 20/80 from taxable net payment. This rate applies to non-regular dividends.
Here is an example of how the distribution and taxation process looks in practice:
If a company makes a dividend distribution in the amount of EUR 100,000 per shareholder in February, the CIT has to be declared and paid no later than March 10 of the same year. The amount of the CIT is EUR 20,000 (100,000 x 20%). Each shareholder then receives a net dividend in the amount of EUR 80,000. Estonia does impose an individual tax on dividend distributions. Thus the CIT cost is the total Estonian tax cost related to the dividend payment.
Estonia’s 14% corporate income tax rate
Organizations paying regular dividends are taxed at a reduced rate of 14%, calculated as 14/86 from the taxable net.
This reduced, regular distribution rate went into effect in 2019 and applies as follows:
As of 2019, the reduced tax rate for regular distributions may be applied to any amount distributed from corporate profits in the present calendar year that is less than or equal to the average distributed profit of the previous three calendar years. The corporation must have paid taxes on the previous distributions for them to be included in this three-year average calculation. If the recipient of a dividend is a legal person (e.g., a corporate entity), then the tax rate will be 14% for the portion of any distribution that is deemed a regular dividend payment.
Natural persons receiving dividends in Estonia are subject to an additional 7% income tax. This tax is paid by the corporation and is thus, withheld from the distribution at the corporate level. If a legal person who received a distribution taxed at the 14% rate is paying out the received payments to its owners who are natural persons, the additional 7% income tax must be withheld. If the legal person who received this lower rate dividends is a non-Estonian company, the income tax rate is 14% and no additional tax on forwarding those dividends, as this is then outside Estonian jurisdiction.
Because 2019 was the first year that this new rate was implemented, there is a phase-in period for applying the 14% rate, which works as follows:
- In 2019, the 14% rate may be applied only to ⅓ of the profits that the organization distributed in 2018 and for which CIT was paid
- In 2020, the 14% may be applied to an amount equal to ⅓ of the profits that the organization distributed in 2018 and 2019 and for which CIT was paid
Any distributions not eligible for the 14% tax rate remain taxed at the regular, 20% CIT rate.
Corporate income tax liability for certain pass-through dividends
There are some circumstances in which an Estonian company paying a dividend is not obligated to pay CIT. Specifically, if the dividend is derived from a resident company of a Contracting State or the Swiss Confederation, is subject to income tax in another jurisdiction, and at least 10% of the originating company’s shares or votes belonged to the receiving company at the time the dividend was distributed, then CIT may not be owed. For example, if the minimum ownership criteria is met, an Estonian company may receive a distribution from a related company in Germany for which the German company has already paid taxes. In such instances, the Estonian company is not liable for further CIT when re-distributing the payment to its shareholders.
This pass-through benefit does not apply to every cross-corporation re-distribution of profits. Our accountants can evaluate your international transactions to determine whether your circumstances require a corporate tax declaration to be filed in Estonia.
VAT: Value-added taxes for Estonian corporations
When you form your corporation In Estonia, the company is not immediately assigned a tax identification number. Your Estonian corporation is permitted to use its registration number when engaging in transactions.
Your organization may choose to register for the purposes of paying VAT at the time of formation or wait until a later date. However, the company must register within a specified period after its taxable turnover (the value of the corporation’s transactions subject to VAT) meets the VAT threshold.
At present, the VAT (turnover) threshold in Estonia is EUR 40,000, calculated from the beginning of the calendar year. If you have not previously registered your organization as a VAT payer, you must do so within 3 business days after the turnover threshold is exceeded.
Once your organization has a VAT number, you must include the VAT amount on invoices to customers and declare it on your corresponding tax declarations. If your company’s transactions are not taxable, then there is no requirement to add VAT to your invoices. This allowance has the potential to lower the costs of goods and services for your customers.
If you are not certain whether your organization should register for a VAT number in Estonia, contact us. We provide our clients with expert consultations and guidance to assist them with this and other issues regarding corporate tax in Estonia. In addition, our team is available to prepare VAT registration applications and communicate with tax authorities to obtain answers to our clients’ questions.
Quick look: Estonian VAT calculation and payment rules
According to Section 1(1), subsections (1) and (3) of the VAT Act the following types of transactions are subject to VAT:
- the sale of goods when the place of turnover is Estonia (defined as the “place of supply of goods” in Chapter 3, Section 9(1) of the VAT Act)
- the performance of service in Estonia (defined as the “place of supply of services” in Chapter 3, Sections 10(1), (2), and (3) of the VAT Act)
- the provision of a service not in Estonia under certain circumstances as defined by Chapter 3, Sections 10(4) and (5) of the VAT Act
From the date that your organization registers as a taxable person, it must perform the following steps:
- add VAT to the taxable value of the goods or services to be transferred
- calculate the amount of VAT payable
- pay all VAT liabilities to the state by the 20th day of the month following the tax period in which they accrued (this tax period is usually defined as a calendar month)
Additional laws and guidelines governing the calculation and payment of VAT in Estonia
There are some circumstances in which an Estonian corporation may deduct amounts from its VAT liability. For example, the VAT that the corporation paid when purchasing goods and services (input VAT) may be deducted if the goods purchased and services received are acquired for taxable turnover. If expenses are not related to any going business concern (e.g., the company has no turnover or profit-making activites) or if the goods and services have been acquired for tax-free turnover, input VAT cannot be deducted.
To ensure that your organization qualifies for its VAT deductions
- keep documents and records from these transactions
- ensure that the organization’s invoices include adequate information to determine eligibility
- submit a VAT return (Form KMD) by the 20th day of the month following the applicable tax period
Limited VAT payer registration
In Estonia, a company that does not have a VAT number may be required to register as a limited VAT payer if it engages in certain intra-Community transactions. Intra-Community transactions occur between businesses located in different European Union Member States.
For example, limited VAT payer registration is required if the total value of goods purchased by a non-VAT registered Estonian company from businesses subject to VAT and located in other EU states exceeds 10,000 euros (calculated from the beginning of the calendar year). Limited VAT payer registration is also required if the Estonian company receives specified services from foreign persons, including companies, that are engaged in business but not registered for VAT in Estonia.
Chapter 3, Section 10(5) of the VAT Act defines the types of services that may trigger the requirement that an Estonian company register as a limited VAT payer and includes the following:
- making available intellectual property or transferring the right to use it
- providing advertising service
- providing consulting, accounting, legal, auditing, engineering, translation, data processing or information services
- providing financial services other than the hire of safes or insurance services, including reinsurance and insurance intermediation
- the provision of labor
- the letting, hiring out or possession of a means of transport other than a means of transport
- providing electronic communications service, including the assignment of the right to use transmission lines
- delivering electronically provided service
- providing access to the natural gas or electricity, heating or cooling network and the transmission of natural gas or electricity, heating or cooling through the network, and directly related services
- the transfer of a unit of greenhouse gas emissions permitted by the Ambient Air Protection Act
- refraining from the above service for a fee, waiving the exercise of the right or tolerating the situation
A business that is obligated to register with the Tax and Customer Board as a limited VAT payer must do so within 3 business days of the event which triggers the obligation. Within three working days as of the date of occurrence of the obligation.
Why might a company register as a limited VAT payer versus a VAT payer?
The difference between a limited taxable person and a taxable person is that the limited taxable person pays VAT only on the intra-Community acquisition of goods and the supply of services by a foreign trader. The limited payer’s registration enables it to file appropriate declarations but does not enable it to add VAT to the goods and services it supplies. Limited VAT payers also may not deduct input VAT.
Limited VAT payer status is most often required for Estonian organizations that do not meet the criteria for VAT registration but engage in declarable intra-Community transactions. In these instances, the Estonian company must pay the VAT that was not paid by the other party in the transaction. Accounting for and deducting business-related expenses when calculating corporate tax in Estonia
Maintaining accurate records is essential to ensuring that your Estonian corporate pays appropriate corporate taxes. Expenses paid from the company’s bank account must be adequately documented. If inadequate or no documentation is available to demonstrate that the payment of a particular expense is business-related, these “payments with documents” should be assessed at an income tax rate of 25%.
Additionally, expenses that are not related to the company’s business activities that are paid using corporate funds, will be subject to a fringe benefits tax of approximately 66%. These taxes are paid by the corporation, not the employee or executive who receives the benefit. This limitation includes the costs of dining in restaurants and similar expenses. The fringe benefits tax may be avoided if the corporation is reimbursed for these expenses.
To avoid running afoul of Estonia’s accounting rules and incurring additional taxes or fines, we invite our clients to consult with our accountants before making any expense payments. And, as a practical matter, we recommend that Estonian business owners do not pay for any non-business related expenses using the corporation’s account.
What are some business expenses that may Estonian companies deduct?
Expenses directly related to the operation or your Estonian corporation’s business are deductible. Included among the expenses and costs that are deemed business-related according to corporate tax rules in Estonia are the following:
- Expenses covered by your customers
- Fees paid to subcontractors
- The costs of professional and support services
- Marketing costs
- Hardware and software costs
- Communication costs
- The costs of transportation and accommodations for business trips
- Daily allowances for employees during assignments abroad
Chapter 3, Section 13(3)(1) of the Income Tax Act provides that income tax is not owed on certain allowances paid to employees serving assignments abroad. The deductible amount varies, depending on the number of days for which the expenses are paid. Up to 50 euros per day may be deducted for up to 15-days of payments per calendar month. Payments of up to 32 euros per day may be deducted for assignments abroad that exceed 15 days per calendar month.
Companies may also deduct up to 32 euros per month for entertainment expenses such as catering and accommodations for guests or partners if the company is not paying a salary for someone to perform this service. As with other expenses, this expense must be documented and declared monthly in a declaration filed with the Tax and Customs board
- the costs of participation in business-related events
- payments for business-related professional training
- reimbursements for bank and transaction fees
- purchases of office costs and supplies
- Business lunches (taxable)
- Salary (taxable): Private person income tax 20%; Social tax 33%; Unemployment tax 0.8+1.6% Company cars (restrictions apply)
The tax-exempt limit of such representation expenses is 32 euros per month + 2% of the salary paid. In this context ‘salary’ means remuneration subject to social tax.
Are company cars a business expense or a fringe benefit?
Providing staff with a car for personal use is considered a fringe benefit for which income taxes must be paid at the corporate level. In Estonia, the value of this particular fringe benefit is based on the car’s engine power or kilowatt price and age. If the use of a private car exceeds the limits provided in the Income Tax Act, then the corporation will pay taxes ranging from 1.30 to .97 euros per kW per month.
Additionally, if a car is provided as a fringe benefit, then your corporation may only recover 50% of the VAT paid on invoices related to its purchase, leasing, fuel, and maintenance.
In order to be treated as a business expense and recover 100% of the VAT paid on those expenses, a vehicle may not be used for non-business purposes. Your corporation will need to keep detailed records to demonstrate that the car is being used for business.
How to ensure your company cars are treated as business expenses and not fringe benefits
● Register the car as a company car with the Estonian Road Administration (ERA)
● Allow staff or directors to use the vehicle only for business purposes
● Keep detailed records of the vehicle’s use and expenses
Determining which expenses must be declared and which are exempt can be complicated. We suggest that our clients consult with the Incorporate in Estonia accountants before they begin paying expenses or providing compensation to staff or directors that might be considered fringe benefits to ensure that they are handling those expenses properly and minimizing their tax liability.
Select rules regarding employment taxes for staff, board members or shareholders in Estonia
Shareholders of your company can work for the company, receive dividends or both. The types of remuneration management board members receive should be defined in your management board agreement and are subject to Estonia’s Law of Obligations Act. For employees of the corporation, Estonia’s Employment Act applies. Contracts with employees must be written and signed. The agreement must also meet other requirements provided by the Employment Act. On the other hand, an agreement with an individual member of the corporation’s management board may be oral or written. These agreements are subject to the requirements of the Law of Obligations Act.
Corporate payroll taxes for work performed outside Estonia
Determining what taxes are owed and who must pay them can become complicated when you are dealing with cross-border employment arrangements. When employing non-Estonian residents outside Estonia, We recommend that you contact local tax advisors in the country where the work is being performed to ensure that you fully understand each party’s tax obligations. In particular, there may be circumstances in which your company does not incur a tax obligation in Estonia but is liable for employment taxes in another jurisdiction.
For example, if an Estonian company is paying a salary to its employee for work that is performed outside of Estonia, then payroll taxes (including social tax and unemployment insurance premium) are presumably not due in Estonia. Or, if a non-resident performs their duties on behalf of the corporation outside Estonia, their salary in Estonia is not subject to income tax.
However, if a non-Estonian citizen performs work in Estonia, then the employee may be liable to pay income and payroll taxes in their country of tax residency. It is also possible that if your corporation employees non-Estonian residents to perform work outside of Estonia on a regular basis, you will need to register and pay taxes in the employee’s country of residence.
If you transact other business within another country–such as delivering goods to customers there–the likelihood that you may be subject to tax obligations in that country increases. In some cases, it is more prudent to pay a board member to perform tasks outside of Estonia rather than a salaried employee. A board member can receive profit distributions rather than a high salary and thus avoid the higher income tax rates assigned to salaries.
Management board member compensation versus employee compensation
When management board members perform work pursuant to a management board member agreement, they are not obligated to pay unemployment insurance contributions. Thus, it can be beneficial to create a management board member agreement that provides for at least minimal compensation to enable your board members to access health insurance and meet minimum retirement requirements. But, keep in mind that funded pension contributions (if applicable) and income tax must be deducted from the remuneration paid to the member of the management board and a social tax of 33% will be imposed on the gross remuneration amount. If access to health insurance is not necessary, you will not need to consider the minimum rate of social tax when deciding on the remuneration of a member of the management board.
Taxes on the remuneration of a member of the management board are declared similarly to other remuneration using Form TSD.
Ease the process of hiring and paying your staff with our help
Our advisors draft both employment and management board member agreements for our clients. In addition, our accountants are available to register the employments with the Tax and Customs Board and submit relevant declarations when needed.
Commercial registration and corporate reviews and audits
An Estonian corporation must file an annual report within 6 months after the conclusion of each financial year. A financial year may be any defined 12-month period. While companies may choose any starting date for their financial year, most find it easiest to use the traditional calendar year. This is what we recommend.
Annual reports are submitted to the Central Commercial Register (CCR), an online governmental service based on the central database of the Estonian registration department of the court. All companies registered in Estonia are listed in the CCR and each company has their own profile. Every company’s annual reports are available to the public through the CCR. However, they are housed behind a paywall.
According to Estonian law, the annual report your company files must meet certain minimum requirements. The information reported must be objective, correct and fair, and comprehensible. It must include information about your corporation’s financial position, financial results, and changes in equity and cash flows.
What goes into a corporate annual report in Estonia?
● An account report that includes:
○ a balance sheet
○ income statements,
○ cash flow statement
○ statement of changes in equity
● An activity report
● A profit distribution proposal
Best practices for preparing your Estonian corporation’s annual report
In our experience, some corporations have very little activity to report throughout the year. These organizations may choose to prepare their annual report at the end of their financial year. Other clients are active throughout the year, filing monthly declarations with the Tax and Customs Board. We have found that the preparation of these monthly filings actually streamlines the composing of their annual reports since all the accounting has been done throughout a year. Therefore, we strongly recommend that corporations keep monthly accounting documents to avoid additional work at the end of the financial year.
Regardless of how often you assemble and review your records, however, our experts are available to assist your organization in preparing its annual report.
When must an Estonian company file a review or audit report?
An Estonian corporation may need to compose a review or audit in addition to their annual report under certain circumstances. In particular, an audit or a review of the annual accounts is compulsory for private limited companies when the criteria detailed below are met.
An audit is mandatory if one of the following indicators is present:
- the corporation’s sales revenue or income is at least 12M
- the corporation’s total assets as of the balance sheet date is at least 6M and the average number of employees is at least 180 persons
Or, if both of the following indicators are present:
- the corporation’s sales revenue or income is at least 4M
- the corporation’s total assets as of the balance sheet date are at least 2M and the average number of employees is at least 60 persons
A review is mandatory if one of the following indicators is present:
- the corporation’s sales revenue or income is at least 4.8M
- the corporation’s total assets as of the balance sheet date are at least 2.4M and the average number of employees is at least 72 persons
Or, if both of the following indicators are present:
- The corporation’s sales revenue or income is at least 1.6M
- The corporation’s total assets as of the balance sheet date are at least 800K and the average number of employees is at least 24 persons
Only a professional auditor can perform a required audit or review. The shareholders must appoint the auditor(s), determine the number of auditors, the procedure for remuneration, and the term of office at a general meeting. The appointment of an auditor also requires the auditor’s written consent. A contract must be entered into with the auditor before the audit is performed.
Finally, it is important to keep in mind that your company must retain all accounting related documents (including invoices and contracts) for at least 7 years. This retention process is best managed by a professional to ensure that you have all the necessary documentation if it is requested.
Call on our experts to help you maximize the benefits of a corporate tax system built for growth
Taxes, regardless of where you are located, can be complicated. But the rules governing corporate tax in Estonia are the most business-friendly in the world. We hope that you’ll decide to incorporate your business in Estonia to take advantage of this favorable tax environment. And, we hope that you’ll count on the team at Incorporate in Estonia to help you.
Contact us today for a free consultation via email or phone and let us help you build something great.
Disclaimer: This article provides general information, which may or may not be correct, complete or current at the time of reading. No recipients of content from this site should act on the basis of content of the article without seeking appropriate legal advice or other professional counseling.