Notable facts about Estonian tax system you ought know

Published 25 September 2019 by Law Office Turnstone

Cristen Helendi

In our previous article Notable facts about Estonian business environment, you ought to know we described the advantages of starting and establishing your company in Estonia, then this article will focus on the advantages of the Estonian tax system from the companies point of view.

Estonian business environment is supported by a simple, unique and stable flat-rate tax system, which encourages long-term value creation. Actually the Estonian tax system is believed to be the most flexible taxation laws in European Union as well as the rest of the world. There is no tax on retained profits, no withholding tax on interest or dividends. 

For example, a special feature of corporate income tax in Estonia is the fact that only dividends are taxed. Earnings are not taxed as long as they are reinvested in the company. Income tax must be paid on distributed earnings, expenses and payments not related to enterprise and on gifts, donations, costs of entertaining guests and fringe benefits granted to employees. Also subject to income tax are the reduction of corporate capital, repurchases of shares and disbursement of liquidation proceeds exceeding the monetary and non-monetary contributions to the company’s equity. Today the Estonian income tax rate is 20%.

In order to encourage companies and attract foreign direct investment, all reinvested corporate profits are exempt from income tax in Estonia. In addition, the Estonian government has decided for the period 2015-2020 to focus particularly on entrepreneurship and seeks to create a highly competitive environment where it is easy to create and develop its businesses.

Estonian resident companies and the permanent establishments of foreign entities (including branches) are subject to 0% income tax.

The standard rate of value-added tax (VAT) in Estonia is 20%, the reduced rate is 9% and 0% in some cases. The VAT is charged on the supply of goods and services in the course of business activities and the self-supply of goods and services.

For instance, a tax rate of 9% applies to some goods and services like books, periodicals, accommodation services and medical equipment for the use of disabled persons. A 0% VAT rate is in effect for a number of goods, including exported goods and consultation services provided to VAT payers in another EU member state as well for watercraft and aircraft used in international traffic. Also, the supply of a number of goods and services with a social orientation is tax-free in Estonia, such as postal services, insurance, health care and social services.

Over the last few years, the lawyers at Law Office Turnstone has gained much experience by helping entrepreneurs from inside and outside the European Union with various Estonian tax matters. Depending on the company’s area of activity and size, there could be many different tax nuances you need to know. Thus Law Office Turnstone team would be glad your partner and contact point in Estonia who will advise you on any tax matters or overall on any legal matters in accordance of Estonian legislation.

Cristen Helendi

Lawyer

Law Office Turnstone