Taxation: Corporate Tax, VAT, Dividends, and Social Taxes
Taxation: Corporate Tax, VAT, Dividends, and Social Taxes
Even though the Estonian tax regime is one of the most comfortable tax regimes in the EU, taxation can affect companies and individuals wherever.
E-Residency Doesn't Make You an Estonian Tax Resident
PERSONAL TAXATION: Even if you already received an e-Residency, your personal tax stays in the country in which you are a tax resident. Being an e-Resident doesn't make you an Estonian tax resident and doesn't exempt you from double taxation, except for the countries featured here.
CORPORATE TAXATION: In regard to companies, a simple rule applies — a company is a tax resident in Estonia if it is incorporated under Estonian law. Right after the incorporation, companies will be automatically recorded into the taxpayer's registry and there is no separate registration as Estonian taxpayers, except for VAT purposes.
CORPORATE TAXATION: In regard to companies, a simple rule applies — a company is a tax resident in Estonia if it is incorporated under Estonian law. Right after the incorporation, companies will be automatically recorded into the taxpayer's registry and there is no separate registration as Estonian taxpayers, except for VAT purposes.
Which Taxes a Company Needs to Pay
There are 3 main types of taxes that most companies in Estonia will have to pay
Corporate Taxes
By general rule, Estonia taxes distributed profits at a 20% tax rate, while in fact the real tax reaches 25% mark. This means that if a business in Estonia earns $100 and pays that $100 to its shareholders, the business would be required to pay a tax of $25 on the distributed profit.
But what makes Estonian tax regime so great is that, there is a 0% tax rate on reinvested profits. This means that if a business decides to reinvest $100, the business would not have to pay tax on that $100.
Decision regarding profit distribution must be made during creation of an annual report. Basically, this means that profit distribution in the form of dividends can be done only after your company is at least 1 year old.
To summarize:
But what makes Estonian tax regime so great is that, there is a 0% tax rate on reinvested profits. This means that if a business decides to reinvest $100, the business would not have to pay tax on that $100.
Decision regarding profit distribution must be made during creation of an annual report. Basically, this means that profit distribution in the form of dividends can be done only after your company is at least 1 year old.
To summarize:
- If you do not distribute profits, you don’t pay anything — 0%!
- If you do distribute them to your shareholders, you pay 20 Euros from 80 Euros
Social Taxes
If you have hired employees or don’t want to wait for a year to pay yourself from a company, let’s take a look at such possibilities and applicable taxes.
Taxes for Employees
In this case, the main difference will depend on tax residence of your employee
Taxes for Employees
In this case, the main difference will depend on tax residence of your employee
Estonian Tax Resident
So, here things get a bit tricky but we’ll explain everything for you. First, we must identify that there is are two taxes, one is paid by a company and the other one by an employee:
Paid by a company:
Social tax — 33%
Unemployment insurance tax — 0.8%
Paid by an employee:
Personal income tax (PIT) — 20%
Unemployment insurance tax — 1.6%
Social tax — 2%
So, here things get a bit tricky but we’ll explain everything for you. First, we must identify that there is are two taxes, one is paid by a company and the other one by an employee:
Paid by a company:
Social tax — 33%
Unemployment insurance tax — 0.8%
Paid by an employee:
Personal income tax (PIT) — 20%
Unemployment insurance tax — 1.6%
Social tax — 2%
Non-Estonian Tax Resident
If your employee is a tax resident of other country than Estonia, then taxes will need to be paid according to this jurisdiction. At the same time, your company will have to register in tax authority in this country.
If your employee is a tax resident of other country than Estonia, then taxes will need to be paid according to this jurisdiction. At the same time, your company will have to register in tax authority in this country.
Example for the calculation of payroll taxes
The gross salary agreed with the employee is EUR 1,000
1,6% employee’s unemployment insurance contribution
2% mandatory funded pension contribution
500 EUR monthly tax-free income
20% personal income tax
The employee receives net salary of EUR
33% social tax calculated on top of the gross salary payable by employer
0,8% employer’s unemployment insurance contribution
The total cost born by employer is EUR 1,338
Source: e-resident.gov.ee
1,6% employee’s unemployment insurance contribution
2% mandatory funded pension contribution
500 EUR monthly tax-free income
20% personal income tax
The employee receives net salary of EUR
33% social tax calculated on top of the gross salary payable by employer
0,8% employer’s unemployment insurance contribution
The total cost born by employer is EUR 1,338
Source: e-resident.gov.ee
1000
-16
-20
-500
-92,8
871,2
330
8
-16
-20
-500
-92,8
871,2
330
8
Paying Salary to Yourself as a Company Director
If you are a shareholder and a director, you will have to pay yourself a salary. No matter what your tax residency is, you’ll be obliged to pay 33% tax on your salary.
NB: The role of director of a company can be part-time, meaning that you can pay only a portion of your salary as a director and pay the rest to yourself as an employee. Director’s part of a salary will be taxed in Estonia, while the rest will be taxed in the country of your tax residence. Usually paying 20% as a director is enough.
NB: The role of director of a company can be part-time, meaning that you can pay only a portion of your salary as a director and pay the rest to yourself as an employee. Director’s part of a salary will be taxed in Estonia, while the rest will be taxed in the country of your tax residence. Usually paying 20% as a director is enough.
How to Pay Salaries and Receive Profits: Overview
We know that everything we’ve covered up to this point, may be confusing, so that’s why we’ve prepared an overview of all methods to pay salaries and distribute profits.
VAT in Estonia
VAT, or value-added tax, is a consumption tax placed on a product whenever a value is added at each stage of the supply chain, from production to the point of sale.
VAT Rate in Estonia
The standard VAT rate in Estonia is 22%. In some cases, it might be reduced to 9% or 0%. Let’s take a quick look at cases when reduced VAT is applied.
After a company exceeds the threshold €40 000, there are 5 business days to register yourself as a VAT payer. Once a company becomes VAT-liable, it must apply VAT to invoices.
Cases When a Company Has to Become a VAT Payer With Limited Liabilities
Οne more complexity about VAT in the EU. Even if your company hasn’t exceeded the €40,000 threshold, you might become limitedly obligated to pay VAT if:
So if a company fits mentioned frames, it becomes obliged to register as a VAT payer with limited liabilities. It’s not a VAT-obliged company in the usual sense — a company has to pay VAT only on the intra-Community acquisition of goods and on receiving the services from a foreign person.
- a company purchases goods from another VAT payer the taxable value of which exceeds €10,000 (calculated from the beginning of a calendar year)
- a company receives certain services from a foreign person who is not registered as a VAT payer in Estonia. The list of services is quite big and consists of such services as advertising, different kinds of consulting services, and some financial ones. We advise you to explore the full list here and comply with all these rules to avoid tax issues.
So if a company fits mentioned frames, it becomes obliged to register as a VAT payer with limited liabilities. It’s not a VAT-obliged company in the usual sense — a company has to pay VAT only on the intra-Community acquisition of goods and on receiving the services from a foreign person.
How to Apply VAT
Once a company becomes VAT-liable, it is required to apply VAT to invoices. However, there are cases when VAT is applied at a 0% rate. Let’s figure out when you should apply VAT at 20% and when it must be applied at a 0% rate.
VAT payers must pay VAT to the Estonian Tax and Customs Board and submit monthly VAT returns even for the months when there could be nothing to declare. Voluntary registration before reaching the registration threshold is also possible.
VAT-liable Companies Must Submit VAT Returns Monthly
Companies with a VAT number must submit accounting reports monthly. The taxable period is one month, and VAT returns must be submitted to the tax authority (even for the months when there could be nothing to declare) by the 20th day of the month following the taxable period.
In a VAT return (or ‘declaration’), a taxable person (business) gives the tax authorities in the EU country where they are registered information about:
Basically, VAT Return calculates how much VAT a company should pay or be reimbursed. In order to file a VAT Return, a company must collect bank statements for all accounts, incoming and outgoing invoices, as they serve as a basis for the declaration itself and must be listed in the annex. Outside of that, companies are obliged to store all invoices electronically for the next 7 years.
In a VAT return (or ‘declaration’), a taxable person (business) gives the tax authorities in the EU country where they are registered information about:
- their taxable (taxed/exempt) transactions;
- the VAT they have charged their customers (output tax) and been charged by their suppliers (input tax);
- the amount of VAT payable (or refundable).
Basically, VAT Return calculates how much VAT a company should pay or be reimbursed. In order to file a VAT Return, a company must collect bank statements for all accounts, incoming and outgoing invoices, as they serve as a basis for the declaration itself and must be listed in the annex. Outside of that, companies are obliged to store all invoices electronically for the next 7 years.
E-Tax System
Estonian officials set up an electronic tax filing system — E-Tax. Around 95% of all tax declarations in Estonia are filed electronically. If you have your e-Residency card, you can submit all tax declarations online.
Through the e-Tax system you are going to be able to:
Through the e-Tax system you are going to be able to:
- pay taxes and view payment history;
- submit all your necessary tax returns;
- communicate with the Estonian Tax and Customs Board;
- register your company liable to value-added tax, etc.
Helpful Resources:
Well done! You now know a lot about taxation – one of the most important and challenging processes of each company in almost every part of the world. Now let’s take a look at the accounting requirements of Estonian companies.
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