Doing business in Estonia - EY - United StatesFI… · 2 Doing business in Estonia Estonia’s...
Transcript of Doing business in Estonia - EY - United StatesFI… · 2 Doing business in Estonia Estonia’s...
Table of contents
Part one:
Estonia at a glance
Business climate
Economy of Estonia
Overview of the economy
Monetary policy
Trading
Transport and logistics
Banking sector
Information and
telecommunications
National support for businesses
Starting a business
Establishing a company
The main types of legal entities
Registration process
Accounting principles
Auditing
31
5
6
9
315
17
19
21
23
24
326
27
33
Part two:
Corporate tax system
Corporate income tax
Permanent establishment
Dividends
Interest
Royalties
Sale of real estate
Value added tax
VAT base
Non-established business
VAT payers
VAT rates
Returns and payment
VAT refund
VAT group registration
Social security payments
Social tax
Unemployment insurance
payments
Pension system
Voluntary schemes
Tax filing and payment
procedures
Non-resident employers
Totalization agreements
Other taxes
Land tax
Heavy goods vehicle tax
Local taxes
Gambling tax
Excises
Customs
Customs procedures
Authorized Economic Operator
(AEO) status
Part three:
Personal taxes
Income tax
Definiton of a resident
Income subject to tax
Employer-provided stock
options
Deductions
Rates
Tax filing and payment
procedures
Electronic declaration
Visas, work and residence
permits
Visas
Residence permits
Work permits
Doing business in Estonia
2 Doing business in Estonia
Estonia’s economicfreedom is rated as
ththe 16 freest in 2012
According to the Index of Economic Freedom published by the
Heritage Foundation in cooperation with The Wall Street Journal, th 1Estonia is rated as the 16 freest in 2012. Estonia enjoys high levels
of investment, financial freedom and property rights while the top
income and corporate tax rates are relatively low, compared with
other countries. According to the findings of Freedom House in its
latest edition of Freedom in the World, the annual survey of global
political rights and civil liberties, Estonia is ranked among the 47 2freest countries in the world and one of the top countries in Central
and Eastern Europe.
The global financial market crisis that started in 2007 has affected
the general economic growth in Estonia – economic expansion with
gross domestic product (GDP) growth approximately 10% per year
halted and the GDP decreased rapidly from 2008. However, the
consistent and stable economic policy has helped to bring the
economy out of recession, resulting in a national annual GDP growth 3of 7.6% in 2011.
Another recent significant achievement for Estonia is that it
managed to comply with Maastricht’s strict deficit rules and joined
the Eurozone on 1 January 2011.
The Estonian kroon was replaced with the euro (1 euro = 15.6466
kroons) on 1 January 2011. This accession has been a positive
landmark for Estonia, which will further enhance trade and tourism.
According to the Ernst & Young Eurozone Spring 2012 Forecast,
Estonian economic growth was the fastest in the Eurozone in 2011.
The forecasts show that, in 2012, there may be a slowdown in
growth pace, nevertheless Estonia will remain the fastest-growing
Eurozone economy in 2012.
Footnotes
1. 2012 Index of Economic Freedom, http://www.heritage.org/Index/Country/Estonia
2. Freedom House, http://www.freedomhouse.org
3. Statistics Estonia, 2012, http://www.stat.ee/57459
1. Estonia at a glance
Doing business in Estonia
Estonia at a glance
CapitalTallinn
(392,000 inhabitants)
Othercities
Tartu (98,000)
Narva (65,000)
Kohtla-Järve (43,000)
Pärnu (43,000)
GovernmentParliamentary
Republic
Majornaturalresources
Timber, oil shale, phosphorite,
peat, limestone, dolomite
LanguageEstonian;
English, Russian and Finnish
are also widely spoken
DistancefromTallinn
Helsinki 85km, Riga 307km,
St. Petersburg 395km,
Stockholm 405km,
Vilnius 605km, Warsaw 1,000km
Publicholidays
Low number of public holidays
(12)
Estonia is two hours ahead
of Greenwich Mean Time
(GMT +02);
in summer GMT +03
Timezone
Hours aheadof or behindEstonia
New York -7London -2
Helsinki 0Kyiv 0Tel Aviv 0
Moscow +1Beijing +5
Majoreconomicsectorsin Estonia
Information and communications
technologies (ICT)
Electronics
Machinery and metalwork
Wood processing
Logistics and transport
Food
Bio- and medical technology
GeographyLocated in Eastern Europe
and at the heart of the
Baltic Sea Region
Area 245,227 km
Population 1.29 million inhabitants
Neighboringcountries
Finland
Latvia
Russia
Sweden
Flight times
Helsinki 35 min, Stockholm 1h,
Copenhagen 1h 30 min, Moscow
1h 40 min, Amsterdam 2h 20 min,
London 2h 45 min
8:00-17:00
Offices of major banks are
open until 18:00, sporadically
until 21:00 (incl. weekends)
CurrencyEuro (EUR)
1 euro = 100 cents
Memberships
The United Nations, the European
Union, NATO, World Trade
Organization (WTO), World Health
Organization (WHO), OECD.
Estonia has signed the Kyoto
Protocol and the Schengen Treaty
Businesshours
Estonia offers key opportunities for
businesses in a number of economic sectors,
some of which are widely renowned (e.g.,
ICT, wood processing, biotechnology).
Estonia has effective trade ties especially
with Finland, Sweden, Russia and Germany,
and due to low labor costs, the services and
manufacturing sectors have been
prosperous.
1. Estonia at a glance
3
Doing business in Estonia
Estonia on the mapof Europe
Estonia is a country situated in the Baltic
Sea region. This small Eastern European
country is bordered to the north by the Gulf
of Finland, to the west by the Baltic Sea, to
the south by Latvia and to the east by
Russia. Besides these two neighboring
countries, Estonia has close ties with Finland
across the Gulf of Finland. Sweden is
Estonia's western neighbor across the Baltic
Sea.
1. Estonia at a glance
4
Doing business in Estonia
Business climate
� Developed communication networks:
business can be done remotely from
any part of the world due to a wide
range of internet-based services
� Tax system supporting the holding
structure without any need for separate
and complicated tax accounting
� Transparent regulatory environment
� Excellent connection links with the
Nordic markets as well as with Russia
Reasons to invest in Estonia:
The overall freedom to conduct business in Estonia is well protected under
a transparent regulatory environment.
4For example, starting a business takes an average 7 days, compared
with the world average of 35 days. Foreign and domestic
investments are both equally treated under the law, and this makes
Estonia one of the leading countries in Central and Eastern Europe in
terms of attracting foreign direct investments (FDI). The World Bank thhas ranked Estonia as 24 out of 183 countries on the ease of doing
5business.
There is a growing number of industrial parks and supply of high-
quality commercial and office property. The establishment of free
zones at Muuga Port, in Valga, Sillamäe and Paldiski has further
enhanced Estonia's attractiveness to foreign investors. Many costs
such as energy, labor, transport services, telecommunications and
property expenses are considerably lower compared with other
countries in the Baltic Sea region.
Investors find that in Estonia they can achieve very high quality
levels without having to pay heavy costs, evidenced by the Estonian
leading position in Central and Eastern Europe in terms of FDI per
capita. The FDI stock per capita was EUR9,669 as at 31 December 62011; in total EUR12.7 billion was invested in 2011 in Estonia.
Footnotes
4. Doing Business, http://www.doingbusiness.org/data/exploreeconomies/estonia
5. Doing Business, http://www.doingbusiness.org/rankings
6. Bank of Estonia 2012
1. Estonia at a glance
5
Doing business in Estonia
Estonia, the European Union entrant state from 2004, has a modern market-based
economy and one of the highest per capita income levels in Central Europe.
Economy of Estonia
Overview of the economy
Successive policies of governments have pursued a free market, a
pro-business economic agenda and have wavered little in their
commitment to pro-market reforms. The priority has been to sustain
high GDP growth rates – on an average 8% per year from
2003-07.
The economy benefits from the strong electronics and
telecommunications sectors as well as the close trade ties with
Finland, Sweden and Germany. The current government has pursued
sound fiscal policies, resulting in balanced budgets and low public 7debt.
Estonia's economy slowed down noticeably and fell into recession in
the middle of 2008, primarily as the result of an investment and
consumption slump, following the burst of the real estate market 7bubble. A modest recovery began in 2010, leading to fast economic
growth in the first quarter of 2011.
Footnotes
7. “The World Factbook”, Central Intelligence Agency website,
https://www.cia.gov/library/publications/the-world-factbook/geos/en.html
Sources: Statistics Estonia 2012, http://www.stat.ee/29958
Bank of Estonia 2012, http://statistika.eestipank.ee
“The World Factbook”, Central Intelligence Agency website,
https://www.cia.gov/library/publications/the-world-factbook/geos/en.html
Key factors of 2011
ExportsEUR12billion
ImportsEUR12.6
billion
GDP percapita
EUR15,972
GDP growth7.6%
Inflation5.1%
Public debt
5.8% of GDP
Un-employment
12.5%
Labor force
704,400
1. Estonia at a glance
6
Monetary policy Banking sector
As from January 2011, Estonia joined the Eurozone. Estonia's The banking system in Estonia, with its Scandinavian connections, is
accession to the Economic and Monetary Union provides the stability modern and efficient, encompassing the major banks in the region.
and low inflation level of the currency in circulation. The accession to Commercial banks provide domestic and international services,
the Eurozone gives Estonia the opportunity to participate in the including internet and telephone banking, at very competitive rates.
European monetary policy decision-making process. Estonia has highly advanced electronic channels: 98% of total 8payment transactions are made via internet banking systems.
TradingInformation and telecommunications
Estonia's main export partners are Finland, Sweden, Russia, other
Baltic countries, Germany and the USA. The main partners for Foreign investors have made considerable investments into high
imported goods and services are Finland, Russia, Sweden and technology and communication networks in order to modernize the
Germany. Estonia's major export articles are machinery and infrastructure of IT communications in Estonia. As a result, the
equipment, mineral products, wood and wood products. Estonia's Estonian information and telecommunications sector is one of the
main imports are machinery and appliances, mineral products and most developed in Central and Eastern Europe. Consequently, a wide
transport equipment. range of high-quality voice, data and internet services are available
throughout the country.The 2012 Global Enabling Trade Report by the World Economic
Forum, ranked Estonia as the twelfth (out of 132 countries) in their Due to the fact that internet services are widely available, schools,
customs services index and rated Estonia highly in the efficiency of libraries and other public places are connected to the internet.
import and export procedures. Seventy-six percent of the population aged 16 to 74 are internet 9users. A large percentage of the population files income tax returns
Transport and logistics online (92% of personal tax returns in 2010); and online voting was
used for the first time in the local elections of 2005. Estonia has also Estonia's excellent transportation links and geographic location make made progress in implementing IT services in the medical sector — it a good base for production and distribution. Estonia has a the state's Health Information System and digital prescriptions have considerable share of transit trade through the Baltic Sea with the been implemented. Most shops, restaurants and other service deepwater port and free zone of Muuga, which has created providers accept bank or credit cards for payment. Also, it is advanced communication links in the region. The newly established common that public places offer free internet via wireless.multifunctional port with the free zone at Sillamäe is the most
eastern port of the European Union. It is capable of handling all Estonia is also characterized by a large number of telephone cargo groups from oil products and dry bulk to containerized cargo, connections both via fixed landline and mobile telephones (117
9and has access to the most cost-effective transit corridors in the mobile subscriptions per 100 inhabitants).region. Paldiski Northern Port and free zone in northwest Estonia is a
rapidly developing private-owned port, which specializes in handling
rolling cargo, including new cars, containers, general cargo and
oversized project cargo. Estonian ports are ice free and easily
navigable all year round.
Freight and passenger links enable sea crossings across the Baltic
Sea, and air connections provide easy access to Tallinn from the
major European cities. Estonian railways use the same gauge as
throughout Russia, making Estonia an attractive center for bulk
shipment of goods from the Eastern area.
Doing business in Estonia
Footnotes
8. Estonia.eu, Economy & IT
9. Statistics Estonia, 2010
1. Estonia at a glance
7
National support for businesses
Besides offering a favorable business environment for attracting FDI,
Estonia also presents a range of national support schemes.
Enterprise Estonia (EAS) is one of the largest institutions within the
national support system for entrepreneurship, providing financial
assistance, advisory, cooperation opportunities and training for
entrepreneurs, research establishments, public and the third sector.
Pursuant to the accession of Estonia to the European Union, EAS
became one of the implementing units of the European Union
structural funds in Estonia. Today, most of the EAS programs and
grants offered are co-financed from the EU structural funds. EAS has
foreign representative offices in Hamburg, Helsinki, Kyiv, London,
Moscow, Shanghai, Silicon Valley, Stockholm, St. Petersburg and
Tokyo.
Businesses can also get support from the Credit and Export
Guarantee Fund KredEx in Estonia. The support schemes are, for
example, a start-up loan to finance investments and working capital
of starting businesses; a business loan guarantee for companies
whose collateral property value or self-financing is not sufficient for
getting a bank loan or who do not have a long history of operation;
and a subordinated loan for sustainable companies oriented on
growth that the banks are not ready to finance due to insufficient
self-financing and collaterals.
Doing business in Estonia
1. Estonia at a glance
8
Doing business in Estonia
The formation and regulation of business entities in Estonia are determined by the
Commercial Code. The most common forms of business entities in Estonia are private
limited companies, public limited companies and branches of foreign entities. General and
limited partnerships are rarely formed.
Starting a business
Establishing a company
All enterprises are required to be entered in
the Commercial Register. The Commercial
Register is a public register, which means
that everyone is entitled to examine the
register and the business files and to obtain
copies of registry cards and documents in
the business files.
To enter a company in the Commercial Register, the founders must submit the memorandum
of association, which includes the following information:
The business name and official addressThe names and residences or seats of the foundersThe proposed amount of share capitalThe number and nominal value of shares and, upon issue of more than one class of
shares, the rights attached to the shares and the division of shares among the foundersThe amount to be paid for shares, the procedure, time and place of paymentIn case a share is paid for by a non-monetary contribution, the item of the non-monetary
contribution and its valuation methodInformation on the members of the Management Board, the Supervisory Board and the
auditorInformation on procurators (authorized persons), if appointedThe projected costs of foundation and the procedure for payment thereof
With the conclusion of the memorandum of association, the founders shall also approve the
articles of association of the limited liability company as an annex to the memorandum of
association. The memorandum of association and the articles of association approved
thereby shall be notarized and signed by all founders.
1. Estonia at a glance
9
Doing business in Estonia
� Limited liability companies
Limited liability companies are liable
for their obligations only to the extent
covered by their assets. Shareholders
are liable up to the issue price, which
is to be paid for all the shares that
they have subscribed for.
Shareholders are not personally liable
for the obligations of the company. If
the members of the Supervisory
Board or Management Board cause
any damage to the company, the
company can claim compensation for
damages from the latter.
Private limited liability companies (osaühing, OÜ)
The minimum share capital of an OÜ is
EUR2,500. If the intended share capital of
an OÜ does not exceed EUR25,000 when
establishing the company, the shareholders
may prescribe in the memorandum of
association that payment for shares by the
founders is not needed; however, the
payment is necessary at a later date. This
regulation only applies when the founders
are natural persons. The minimum number
of shareholders is one. The transfer of
shares must be confirmed by a notary,
except if the shares are registered in the
Central Register of Securities. In this case,
the transfer of shares may be executed by
transfer from one securities account to
another, e.g., by using internet banking
services.
Public limited liability companies (aktsiaselts, AS)
The minimum share capital of an AS is
EUR25,000. The minimum number of
shareholders is one. There is no maximum
number of shareholders. The shares of an
AS must be registered in the Central
Register of Securities. Registered shares
may be freely transferred. The articles of
association may prescribe that, upon
transfer of shares to third persons, other
shareholders have a pre-emptive right that
applies to each transfer of shares for a
payment.
� Full liability companies
General partnerships (täisühing, TÜ)
General partnership is a legal person and its
shareholders’ liability for the company’s
obligations is unlimited. A partnership is
established on the basis of a joint activity
agreement by the partners who are jointly
liable for the obligations of the general
partnership with all their assets. Partners
can be both legal and natural persons.
Limited partnerships (usaldusühing, UÜ)
Limited partnership has both general and
limited liability members. The liability of
general liability members is unlimited. The
liability of limited liability members is limited
to their share property. A limited liability
partner does not have the right to manage
the limited partnership but can participate as
a general partner in the decision-making
process.
The main types of legal entites
� Branches of foreign companies (filiaal)
If a foreign company wants to permanently offer goods or services in its own name in
Estonia, it can enter a branch in the Commercial Register. A branch is not a legal person.
The main company shall be liable for the obligations arising from the activities of the branch.
As a rule, the branches registered in Estonia are considered as permanent establishments for
taxation purposes.
� Personal enterprise or sole proprietorship (füüsilisest isikust ettevõtja, FIE)
A sole proprietor can be entered in the Commercial Register and has unlimited liability for its
obligations. The sole proprietorship cannot be regarded as a private company. Sole
proprietorships are widely used by individuals for smaller-scale entrepreneurial businesses.
1. Estonia at a glance
10
Doing business in Estonia
ComparisonBranch of foreign entity Private limited company Public limited company
A foreign company shall appoint a director
or directors for the branch. At least one
director has to be a resident of Estonia,
another EEA Member State or Switzerland.
Management board (MB)
MB may have one or several members, who need not be shareholder(s).
A foreign company is liable for the
obligations of the branch.
Liability
A company is liable with all of its assets.
Not required.
Supervisory board (SB)
Required if prescribed by the articles of
association.
At least three members, who need not be
shareholders. A member of the MB shall
not be a member of the SB.
Minimum capitalN/A
Minimum capital
EUR2,500 EUR25,000
Not required.
Auditing
The annual report must be audited if, at
the balance sheet date of the accounting
year, the limits of at least two of the
following criteria have been exceeded: see
"Auditing" section p.14.
Required.
If the formation of the reserve capital is
prescribed by the articles of association, it
shall not be less than 1/10 of the share
capital. At least 1/20 of net profit of the
financial year shall be entered in the
reserve capital until it has reached the
amount provided by the articles of
association.
The amount of the reserve capital is
prescribed by the articles of association
and it shall not be less than 1/10 of the
share capital of the financial year. At least
1/20 of net profit of the financial year shall
be entered in the reserve capital until it has
reached the amount provided by the
articles of association.
Not required.
Reserve capital
Not regulated.
Decrease of assets
If the net assets are less than half of the share capital or less than the minimum capital
requirement of EUR2,500 regarding private limited liability companies and EUR250,000
regarding public limited liability companies, the shareholders must decide on:(1) The implementation of measures as a result of which the net assets would form at least half of the share capital and minimum capital requirement Or(2) Dissolution, merger, division, transformation of the company Or(3) Submission of a bankruptcy petition
1. Estonia at a glance
11
Doing business in Estonia
Branch of foreign entity Private limited company Public limited company
Not regulated.
Prohibited loans
A company shall not grant or guarantee a
loan to:(1) One of its shareholders whose share
represents more than 5% of share capital(2) A shareholder or member of its parent
company whose share represents more
than 5% of the parent company's share
capital(3) A person to acquire its shares(4) A member of its MB or SB or
procurator (authorized person)
A subsidiary may grant or guarantee a loan
to its parent undertaking or a member of
the same group if this does not harm the
financial status of the company or the
interests of creditors.
A company shall not grant or guarantee a
loan to:(1) One of its shareholders whose shares
represent more than 1% of share capital(2) A shareholder or member of its parent
company whose share represents more
than 1% of parent company's share capital(3) A person to acquire its shares(4) A member of its MB or SB or
procurator (authorized person)
A subsidiary may grant or guarantee a loan
to its parent undertaking or a member of
the same group if this does not harm the
financial status of the company or the
interests of creditors.
Not regulated.
Prohibition on competition
Without the consent of shareholders or SB, a member of the MB or SB shall not:(1) Be a sole proprietor in the area of activity of the company(2) Be a partner of a general partnership or a general partner of a limited partnership
that operates in the same area of activity as the company(3) Be a member of the managerial body of a company, which operates in the same area
of activity, except if the companies belong to one group
A foreign company must maintain separate
accounts concerning the branch. An
unattested copy of the audited and
approved annual report of the foreign
company must be submitted to the
Commercial Register of the location of the
branch not later than one month after the
approval of the annual report or seven
months after the end of the financial year.
Exceptions apply to companies of the
states, which are parties to the EEA
Agreement.
Reporting at the end of the financial year
A company is required to prepare the annual report that consists of the annual account
(balance sheet, income statement, cash flow statement, statement of changes in owner’s
equity and accompanying notes), the management report, the auditor’s report (if
required) and the profit distribution proposal. Within six months after the end of the
financial year, the company is required to submit a signed copy of the entity’s annual
report together with the auditor’s report, if applicable, the profit distribution proposal and
the list of shareholders (in public limited company shareholders owning over 10%)
electronically to the Commercial Register for permanent retention.
1. Estonia at a glance
12
Registration process Accounting principles
As a rule, the registration of an entity into the Commercial Register The generally accepted accounting principles (GAAP) of Estonia are
of Estonia takes five working days. based on the internationally accepted accounting and reporting
principles, the main requirements of which have been stipulated in The owners of an ID card in Estonia, Finland, Belgium, Portugal and the Accounting Act of the Republic of Estonia. These have been the mobile ID owners in Lithuania can use the internet for: supplemented by the guidelines issued by the Estonian Accounting
Standards Board.Registering a new legal entity
Estonian legislation allows entities to prepare their financial reports in Changing the registry information of an already existing legal accordance with the IFRS. In general, there are no significant entity differences between the Estonian GAAP and the IFRS, except for:
Filing annual reports Annual reports prepared in accordance with the IFRS are more
detailed, because those standards require considerably more All documents shall be provided via the e-portal of the Commercial
information to be disclosedRegister and there is no need to execute any notarization
proceedings. Unlike the IFRS, the Estonian GAAP does not allow using the
revaluation method for fixed assetsA private limited company can be created within two hours via the
internet, without notarization, in an accelerated procedure. The IFRS does not allow entities to choose whether they will capitalize loan interests, but the Estonian GAAP does allow it Additional information regarding operating in the Commercial
(to capitalize or record in the income statement)Register via ID card or mobile ID is available at
http://ariregister.rik.ee. The Estonian GAAP does not describe deferred tax accounting
in detail
Unlike the IFRS, the Estonian GAAP describes the transactions
(business combinations) under common control
There are also some minor differences. If an entity prepares its
financial reports according to the Estonian GAAP and it has an
accounting issue that is not described in the Estonian Accounting
Standards Board regulations (RTJ), the IFRS framework should be
followed.
Doing business in Estonia
1. Estonia at a glance
13
Doing business in Estonia
Auditing
Generally, all companies subject to audit are required to submit their
audited financial statements to the Commercial Register within six
months of the end of the financial year. A few specific types of
companies such as banks, insurance companies and investment
funds have particular reporting requirements.
Auditing is obligatory for public limited companies (AS). Other
entities need to be audited if, at the balance sheet date of the
accounting year, the accounting entity exceeds the limits of at least
two of the three following criteria:
Sales revenue (net turnover) in the case of a company, orincome in the case of other accounting entities — EUR2m Total assets as of the balance sheet date — EUR1m Average number of employees — 30
Or if one of the three following criteria is exceeded:
Sales revenue — EUR6m Total assets as of the balance sheet date — EUR3m Average number of employees — 90
According to the Auditors Activities Act, smaller companies are
subject to audit if two of the three following indicators are
exceeded:
Sales revenue or income — EUR1m
Total assets as of the balance sheet date — EUR0.5m
Average number of employees — 15
Or if one of the three following indicators are exceeded:
Sales revenue or income — EUR3m
Total assets as of the balance sheet date — EUR1.5m
Average number of employees — 45
The auditing process in Estonia is regulated by the Estonian Auditing
Standards, which are based on the International Standards of
Auditing issued by the International Federation of Accountants.
1. Estonia at a glance
Doing business in Estonia
2. Corporate tax system
Corporate income tax is not based on accrual accounting, but on payments and expenses on
a cash basis calculation. There are neither thin capitalization nor interest cap rules.
Participation exemption is applied for dividends from subsidiaries to parent companies and
for profit from permanent establishment (both from the EU and third countries). Estonia has
few withholding taxes and can therefore be a favorable holding jurisdiction.
The cost-based Estonian tax system with its
. Deferral of taxation shifts the time of taxation from the moment of earning the profits to that of their distribution. Thus, undistributed profits are not subject to income taxation, regardless of whether these are reinvested or merely retained.
flat rate of 21% is considered one of the most unique and simple tax regimes in the world
IcelandIrelandIsle of ManIsraelItalyJerseyKazakhstanLatviaLithuaniaLuxembourgMacedoniaMaltaMoldovaThe NetherlandsNorwayPolandPortugalRomania
AlbaniaArmeniaAustriaAzerbaijanBelarusBelgiumBulgariaCanadaChinaCroatiaCzech Republic
DenmarkFinlandFranceGeorgiaGermanyGreeceHungary
SerbiaSingaporeSlovakiaSloveniaSpainSouth KoreaSwedenSwitzerlandTurkeyUkraineUnited Arab
EmiratesUnited KingdomUnited States
Estonia has effective agreements on the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes
on income and capital with 49 countries:
The agreements on the avoidance of double taxation have been
signed but are not yet in force with the following countries:
Bahrain, Bosnia and Herzegovina, Cyprus, India, Indonesia, Mexico,
Morocco, Russia, Oman, South Africa, Thailand, Turkmenistan and
Uzbekistan.
Tax rates:
�
�
�
�
�
�
�
�
�
�
Corporate income tax on profit distribution
Capital gains tax(paid upon distribution)
Branch tax
Withholding tax on: Interest Royalty Dividends
Service fees**
Land tax
VAT
Personal income tax
Social security tax
Obligatory funded pension
Unemployment insurance (employer)
(employee)
21% (21/79 net)
21%
21% (21/79 net)
0%; 21%*0%; 5%; 10%
0% 0%; 10%; 21%
0.1%—2.5%
20%; 9%; 0%
21%
33%
2%
1.4% 2.8%
* 21% withholding tax applies to interest paid to
non-residents on the amount exceeding the fair
market interest.
** 10% withholding tax applies on service fee
payments to non-residents if services were
provided in Estonia and no double tax treaty
applies.21% withholding tax applies on service fee
payments to legal persons located in a low tax
rate territory, irrespective of where the services
were provided or used.
16
Doing business in Estonia
2. Corporate tax system
Corporate income tax
There is no traditional corporate income tax system in
Estonia. The profit of an Estonian entity will not be taxed until
distribution.
Estonian companies do not have to pay income tax on the profit
derived from their business on an earnings basis. Instead of taxation
on the profit earned by resident companies, actual and deemed
profit distributions (usually in the form of dividends) are taxed at
the rate of 21% on the gross amount of distribution. The transfer of
profits from a permanent establishment to its head office or to other
non-residents is also treated as a taxable distribution. Capital
contributions to the equity of an Estonian company (upon formation
or increase of share capital) may be repaid free of Estonian tax. The
assets attributed to the Estonian branch by the headquarters are
treated equally for tax purposes with the capital contributions to the
equity of a limited liability company.
A company's tax liability arises at the moment when it makes
distributions, not the moment when the profits are earned.
Therefore, the main feature of the Estonian corporate income tax
system different from the tax systems in other countries is the
timing of tax liability.
Certain costs that, under a traditional corporate income tax system
would be non-deductible for tax purposes, are subject to corporate
tax in Estonia. For example:1)Fringe benefits2)Gifts3)Donations4)Representation expenses (e.g., cost of entertaining guests)5)Expenses and payments not related to the business
Corporate income tax at the rate of 21/79 is applied on the net
amount of the above-mentioned payments, i.e., 21% of gross
amount.
Estonia's simple system is based on a cash-basis tax calculation, and
therefore, there is no need for tax depreciation rules.
The period of taxation in the case of corporate entities is a calendar
month; the income tax return must be submitted and the income tax
paid by the 10th day of the following month.
17
Doing business in Estonia
2. Corporate tax system
Permanent establishment Interest
A foreign enterprise is considered to have a permanent As a rule, interest paid to non-residents is not subject to withholding
establishment in Estonia if: tax. An exception applies to the portion of interest that significantly
exceeds the market interest rate — a tax rate of 21% is applied to the It has an economic unit through which the economic activity of a amount exceeding fair market interest.non-resident is permanently carried out in Estonia For resident private individuals, interest paid from loans, securities, The economic activity is carried out within certain geographical leases or other debt obligations, including the amounts calculated on boundaries or such activity is mobile in nature the basis of debt obligations by which the initial debt obligations are
increased, is subject to the standard income tax rate of 21%. Interest A representative of a non-resident operates in Estonia and is paid by credit institutions in relation to a deposit account is tax authorized to carry out, and repeatedly carries out, transactions exempt.in the name of the non-resident
No thin capitalization or interest cap or debt-to-equity rules are Taxation principles for a permanent establishment are the same as applicable in Estonia.for a resident legal person in Estonia.
RoyaltiesDividends
Royalties paid to non-residents are subject to 10% tax at source. Companies distributing dividends must pay corporate income tax at No tax is withheld if royalties are paid to a related party from the rate of 21% on the gross amount of dividends paid. This income another EU Member State or Switzerland (either directly or via its tax is treated as a payment of income tax by the distributing permanent establishment), and at least one of the following company and not as a tax withheld from the payment to the requirements is met:recipient of dividends.
The company receiving payments owns and has owned 25% of If an Estonian company is paying the received dividends forward the share capital of the company paying the fee for at least two (except for dividends from companies located in a low-tax yearsjurisdiction), the dividends distributed are exempt from corporate
income tax if these were received from a taxable subsidiary resident The company paying royalties owns and has owned 25% of the in the EEA or Switzerland, or where the following conditions are share capital of the company receiving payments for at least two satisfied: years
Foreign tax has been paid or withheld from the profit from which The company situated in the EU or Switzerland owns and has the dividends were paid owned 25% of the share capital of both companies
The Estonian company paying dividends owned at least 10% of A standard withholding tax rate of 21% applies to the royalties paid the shares or votes of the foreign company when the dividends to resident private individuals.were received
Sale of real estateThe following payments are also taxable as deemed dividends: the
The gain from the sale of real property by a non-resident in Estonia decrease of share capital, the redemption of shares and the payment is subject to 21% income tax.of liquidation proceeds in the amount which exceeds monetary and
non-monetary payments made to equity.Furthermore, the gain from the sale of shares in a real estate
company is subject to 21% income tax. A non-resident must hold at
least 10% of the shares and at least 50% of the assets must consist
of Estonian real estate (not necessarily at the time of the sale but at
any point during the two preceding years) for the company to
qualify as a real estate company. The same applies for contractual
investment funds and other pool of assets.
18
Doing business in Estonia
2. Corporate tax system
Value added tax
Non-established business
A “non-established business” is a business that has no fixed
establishment in the territory of Estonia. A non-established business
must register for VAT if it makes taxable supplies of goods or
services regardless of the amount of supply. A registered branch,
fixed establishment of a foreign company or a resident legal person
must be registered for VAT purposes if making taxable supplies in
Estonia of more than EUR16,000 per calendar year.
A foreign taxable person can make transactions that do not relate to
its Estonian fixed establishment. In this case, the rules for a
non-established business apply.
VAT base
The following activities are subject to VAT:
The supply of goods or services made in Estonia by a taxable
person
The supply of services for which the place of supply is not in
Estonia (that is, services that are provided through a seat or fixed
establishment located in Estonia to a person who is registered as
a taxable person or taxable person with limited liability in the EU
or who is a non-EU country person engaged in business)
Reverse-charge services received by a taxable person in Estonia
(that is, services for which the recipient is liable to pay VAT)
The intra-Community acquisition of goods
The importation of goods into Estonia (except VAT-exempt
import), regardless of the status of the importer
19
Doing business in Estonia
2. Corporate tax system
VAT payers The supply of certain financial and insurance services, sale of real
estate (except a new building), and leasing or letting of immovable If an Estonian entity (including the fixed establishment of a foreign property or parts thereof are generally exempt from VAT. However, entity) makes taxable supplies in Estonia over the current VAT VAT payers have the possibility to opt for the application of VAT on registration threshold of EUR16,000, the entity is required to the above transactions if the tax authorities are informed in advance. register and account for the Estonian VAT. The registration Taxable persons who have opted to charge VAT on the lease of real obligation does not arise if an entity is engaged in supplies, which are estate or some financial services should charge VAT on all the taxed with 0% VAT rate, unless the supplies are treated as intra- respective transactions for at least two years.Community supplies of goods or if services are provided to a taxable
person of another Member State. As from 1 January 2011, the domestic reverse charge applies on
the supply of immovables and waste metal by the recipient if both When a foreign entity without any fixed establishment in Estonia transaction parties are taxable persons and the transaction is makes taxable supply in Estonia that is not subject to the Estonian considered a taxable supply.reverse charge, the foreign entity must register for VAT purposes
from the date when the taxable supply was made. In this case, no Returns and paymentregistration threshold applies (see below). Different rules apply in
The taxable period is one calendar month. Monthly VAT returns must the case of distance sales and e-commerce.be submitted and VAT shall be paid to the tax authorities by the
If a business is not registered for VAT purposes in Estonia but sells 20th day of the month following the taxable period.
and delivers goods from another EU Member State to customers in VAT refundEstonia who are not VAT registered (distance sales), and where the
value of those sales exceeds a threshold of EUR35,000, the business Estonia refunds VAT incurred by a business activity that is neither is required to register and account for VAT in Estonia.established in Estonia nor registered for VAT in Estonia. VAT is
refunded if the taxable person is required to pay VAT in the country If the taxable value of intra-Community acquisitions acquired by a of residence and does not have a fixed establishment through which non-taxable person exceeds EUR10,000 from the beginning of the the economic activity is carried out in Estonia. VAT is refundable to calendar year, the obligation to register as a taxable person with another state's taxable persons on the condition that the Estonian limited liability arises from the date when the threshold was taxable person may deduct VAT under the same circumstances on exceeded.the import of goods and on the acquisition of goods or receipt of
A company does not have to register for VAT purposes in Estonia if services.
all supplies go through the free zone or a customs warehouse in For EU taxable persons, the refund request must be at least EUR50 Estonia.for a year or EUR400 for a period longer than three months but
VAT rates shorter than the calendar year.
The standard rate of VAT is 20%. On some goods and services, such For a non-EU taxable person, the refund request must be at least
as books, periodicals, accommodation services and medicinal EUR320 for a year.
products, the rate of VAT is 9%. VAT at the rate of 0% is applied on VAT group registrationgoods under export procedure and non-Community goods placed in
the free zone, a VAT warehouse, excise warehouse or a customs A parent company and its subsidiaries may apply to register as a warehouse. VAT at the rate of 0% is also applied to international VAT group. One VAT registration number is provided to all members transport services, as well as some other services where the place of of the VAT group. The effect of grouping is that no VAT is charged supply is not Estonia.on supplies between group members if the person who acquired the
goods or services as a result of the transaction uses them entirely The supply of certain goods and services of a social nature (e.g., for the purposes of that person's taxable supplies. Group members health and welfare services, education, postal services and stamps) are jointly and severally liable for all VAT liabilities.is exempt from VAT. In addition, some other goods and services are
exempt from VAT; for example, securities, investment gold and
gambling, including lotteries and lottery tickets.
20
2. Corporate tax system
Doing business in Estonia
Social security payments
Social tax
Social tax is imposed on employers to fund pension insurance and
health insurance. Social tax is applied on wages and other
remuneration paid to employees, public servants and members of
boards, business income of sole proprietors, remuneration paid to
natural persons on the basis of contracts for services and fringe
benefits. The flat tax rate is 33% (in certain instances, 13%). The
minimum monthly tax base for salaries on which social tax is
calculated is not less than EUR278.02 in 2011, i.e., the minimum
social tax to be paid monthly is EUR91.78 in 2011. However, there
are exceptions and special advantageous rules when the employee
has been unemployed previously for six months or if the employee
has two or more employers at the same time. No ceiling applies to
the amount of salary subject to social tax.
Self-employed persons must pay social tax at the rate of 33% on
their net business income, restricted to a maximum tax base of 15
times the sum of the minimum monthly wages for the taxable period
(EUR50,042.82 in 2011). In addition, self-employed persons are
required to pay social tax for the current quarter during the taxable
period as advance payments to the bank account of the Tax and
Customs Board by the 15th day of the 3rd month of each quarter in
the amount of EUR275.24 (EUR1,101.33 in a calendar year)in
2012.
21
2. Corporate tax system
Doing business in Estonia
Unemployment insurance payments Tax filing and payment procedures
Unemployment insurance payment is an obligatory payment withheld An employer is obliged to declare the social security contributions
from the insured person's (employee's) income and paid by an withheld and the social tax payable by submitting a monthly tax
employer from the gross income. The rate of payment can be return by the 10th day following the month of payment. Any taxes
changed annually within the established range: 0.5%—2.8% (for payable shall also be transferred to the tax authority's bank account
employee) and 0.25%—1.4% (for employer). In 2012, the rates are by the same date.
2.8% for the insured and 1.4% for the employer, but these are Non-resident employersplanned to be decreased in the future.
If a non-resident entity has employees performing their activity in Pension systemEstonia, it is required to register itself in the regional tax center of
The pension system in Estonia is divided into three pillars — state the Tax and Customs Board within 10 days of the date on which the
pension, mandatory funded pension and supplementary funded tax liability arises. Registering is necessary in order to declare and
pension. The state pension insurance provides income in the case of pay taxes applied on the payments made to the employees. In order
old age, disability or loss of provider. In Estonia, there are two types to register as a non-resident employer in Estonia, an application and
of state pensions: pensions depending on the labor input (old-age other documents stipulated by Estonian legislation must be
pension, disability pension and survivor's pension) and the minimum submitted to the regional tax and customs center of the Estonian
national pension. Funded pension is based on prepaid finance — Tax and Customs Board.
employees pay 2% from their gross income to a pension fund, and If a non-resident entity receives payments in Estonia that are subject the state adds 4% from the employee's salary. to income or social tax, unemployment insurance premiums or
Subscription to the funded pension is mandatory for persons born in funded pension payments, the payer of such income is required to
1983 or later. Prior to October 2010, for those born in 1942—1983 submit an application to the regional tax and customs center in order
the funded pension was not mandatory, yet the voluntary to receive a specific identification number for the non-resident entity.
subscription is no longer possible.Totalization agreements
Voluntary schemesThe Estonian social security legislation follows the rules provided by
The third pillar of the Estonian pension system covers a voluntary the European Council Regulation No. 883/2004. To provide relief
supplementary pension scheme; contributions to this scheme are tax from double social security taxes and to maintain relevant benefit
deductible for the employee. Starting from 2012, the employer can coverage, Estonia has concluded several totalization agreements.
make contributions exempt from income tax to the voluntary private These kinds of agreements have been concluded with Canada,
pension system on behalf of the employee (still having the obligation Ukraine and Moldova. Certain agreements regarding pensions have
to pay social tax). The tax-exempt limit is 15% of the taxable income also been made with Russia.
of employee but not over EUR6,000 per year, and it applies
collectively to the contributions made by the employee and
employer.
The Health Insurance Fund also offers voluntary insurance. Voluntary
registration with the Health Insurance Fund is possible for those who
have no other insurance coverage. The insurance premium for one
calendar month in 2012 is EUR103, the quarterly payment is
EUR309 and the annual payment is EUR1,236.
22
2. Corporate tax system
Doing business in Estonia
Other taxes
Gambling tax
Gambling tax in Estonia is levied on the organizer of the gambling,
i.e., a person who organizes betting, lotteries, totalizators, games of
skill or games of chance. Gambling tax is imposed on:
Gambling tables and gambling machines used for organizing
games of chance (EUR1,278.23 per gambling table and
EUR447.38 per gambling machine) and gambling machines used
for games of skill (EUR31.96 per machine)
Amounts received from the sale of lottery tickets when lotteries
are organized (18%)
The winning fund of the commercial lottery when lotteries are
organized and the winning fund is more than EUR10,000 (18%)
Amounts received as the stakes made when totalizators are
organized, from which the winning amounts have been deducted
(5%)
Amounts received as the stakes made when games of chance or
games of skill are organized as distance gambling, from which the
winning amounts have been deducted (5%)
Participation stakes received when organizing a gambling
tournament (5%)
Excises
The products that are subject to excise tax are fuel, electricity,
packaging (bottles, cases etc.), tobacco and alcohol.
Land tax
Land tax is applied on the assessed value of land. The annual rate of
land tax varies between 0.1% and 2.5% of the taxable value of land.
The tax is paid by the owners of real estate, building leaseholders or
beneficial owners.
Heavy goods vehicle tax
Trucks and road trains are subject to tax based on the maximum
authorized weight, the number of axles, the type of suspension of
the driving axle of truck and the maximum authorized weight or
gross laden weight of a road train.
Local taxes
Local taxes are imposed by a rural municipality or city council
regulation in compliance with the conditions provided by the Local
Taxes Act. Those taxes allowed are: advertisement tax, road and
street closure tax, motor vehicle tax, animal tax, entertainment tax
and parking charge. The Local Taxes Amendment Act of 2012
abolished the local municipalities' right to establish sales and boat
taxes in their administrative area. The amendment has been made in
order to avoid indirect price increases in other regions of Estonia,
which is triggered by the tax obligation in one local municipality, thus
adversely affecting the overall business environment in the state.
23
2. Corporate tax system
Doing business in Estonia
Customs
Estonia has directly applied the EU Community’s customs
legislation, common customs tariffs and customs
preferences on the basis of free trade agreements
concluded by the EU or granted unilaterally. Hence, national
legislation assists in the application of the EU Community
customs legislation.
24
2. Corporate tax system
Doing business in Estonia
Customs procedures
The EU Community customs legislation provides the chance to
suspend or ease the customs payment obligation if certain conditions
are met. The suspensions or reductions in customs procedures are
as follows:
Inward processing with suspension or drawback
Customs warehousing
Transit procedure
Temporary importation
Processing under customs control
Outward processing
These procedures are subject to the approval of the customs
authority and a customs guarantee is generally needed.
Upon notifying the tax authority in writing in advance, a taxable
person may declare VAT calculated on the import of goods in the
VAT return, provided that the following conditions are met:
The applicant must have been registered for VAT in Estonia for at
least one year.
The applicant must have filed its Estonian VAT returns
electronically for the last year.
At least 50% of the supplies made by the applicant must be zero-
rated.
The applicant must have a good tax compliance history.
Authorized Economic Operator (AEO) status
Entities requesting access to simplified customs procedures have to
verify their activities are compliant with customs laws by achieving
Authorized Economic Operator (AEO) status.
As from 1 January 2008, entities wishing to obtain AEO status must
have met the following criteria during the previous three years:
Appropriate record of compliance with customs requirements
Satisfactory system of managing commercial and transport
records, allowing appropriate customs controls
Proven financial solvency and fulfillment of customs and tax
payment liabilities
Once AEO status is obtained, it is provided until withdrawal.
25
3. Personal taxes
Doing business in Estonia
Income tax
Definition of a resident
In Estonia, a natural person shall be regarded as a resident if their
place of residence is in Estonia or if they stay in Estonia for at least
183 days over the course of 12 consecutive calendar months.
However, if there is an applicable double tax treaty, the provisions of
the treaty shall prevail. Natural persons are obliged to inform the tax
authorities about the formation or change of their Estonian residency
via a special form.
A person shall be deemed to be a resident as of the date of their
arrival in Estonia if they stay in Estonia at least 183 days during 12
consecutive calendar months. It is not limited to a calendar year,
consequently, the number of days spent in Estonia during any 12
consecutive calendar months is decisive in determining tax residence.
Residents of Estonia are subject to income tax on their worldwide income regardless of the
source of income. Non-residents are taxable on the income from Estonian sources only.
However, tax treaty provisions override the domestic legislation.
� Income subject to taxIncome for tax purposes is the income derived from all
sources, including salaries, wages, pensions, scholarships,
grants, gambling prizes, directors' fees, insurance indemnities,
payments from pension funds, rent payments, royalties,
interest accrued from loans, securities, leases or other debt
obligations, and other payments made for services rendered
under the contracts governed by the Law of Obligations Act.
Individuals acting independently in their own name and at
their own risk are also subject to income tax on the income
derived from self-employment or entrepreneurial activities.
Any revenue received by an individual should be classified on
the basis of the relationship between the provider and the
recipient, third parties of the provider and the recipient and
the actual circumstances of receiving the income.
27
3. Personal taxes
� Taxation of resident persons
Resident persons are taxable on their worldwide income. In general,
the following items are excluded from the taxable income of
residents (within limits if applicable):
InheritancesGiftsInsurance proceedsIndemnification payments
Dividends that have been subject to corporate income tax or
foreign withholding taxIncome from the exchange of a holding in the course of a
merger, division, or transformation of companies or non-profit
associations
Income from the increase or acquisition of a holding in a
company through a non-monetary contribution
Income from the exchange of units of an EU investment fund
Interest received from credit institutions (EEA), with exceptions
of deposit and settlement account interests
Income from transfers of movable property used for personal
purposes
Gains from transfers of domicile
Gains from transfers of summer cottages or garden houses
Per diem allowances and accommodation costs of business trips,
and compensation for business use of a private car according to
limits
Childbirth allowances
In-service training and retraining of employees
Payments for the treatment of damage caused to the health of
an employee
Lottery winnings
State pensions and scholarships
Also, any compensation for certified expenses incurred for the
benefit of another person or any compensation for direct property
damage is not deemed to be taxable income of a resident (if
received other than as a result of entrepreneurial activities).
� � � �
�
�
�
�
�
�
�
�
�
�
�
�
�
�
� Employment income
Taxable gross employment income includes all compensation, such
as salary, vacation payments or advance payments. In general, fringe benefits, including a company car, housing, lunch
vouchers and similar items, are not treated as taxable income.
Instead, the company pays income tax on fringe benefits. However,
foreign employees working in Estonia, who are paid solely by a
foreign company and do not have an employer in Estonia, must pay
income tax on fringe benefits received from the foreign company.
Income from foreign employment is generally taxed in the same way
as income from Estonian employment (any income tax paid abroad
is creditable against the Estonian income tax obligation). Income for
the work performed or services provided abroad is not subject to
income tax in Estonia if the period of stay in the foreign state
exceeds 183 days during a 12-month period and the income was
considered taxable abroad. It is not relevant whether any actual tax
was paid, the fact that income was included in the individual’s
taxable income is sufficient.
28 Doing business in Estonia
3. Personal taxes
Doing business in Estonia
�
�
�
Income from self-employment
Directors' fees
Other income
All income attributable to self-employment or entrepreneurship is
subject to income tax. The individual receiving income from self-
employment or entrepreneurship is entitled to deduct verified costs,
which were necessary for their business and are recognized by
personal income tax law.
Losses from entrepreneurship, except for the losses incurred on the
sale of securities and receivables, may be offset against the income
derived from other sources. Losses may generally be carried forward
for seven years.
Directors' fees are regarded as employment income and are subject to tax in the same way.
Gifts received from non-resident entities are taxed at the rate of 21%
if income tax is not paid in a foreign country or if the gifts have not
been taxed as fringe benefits by the employer.
� Taxation of non-resident persons
Generally, foreign individuals are taxed on wages, salaries, bonuses,
allowances and other remuneration for the work or services
performed in Estonia. Income tax is charged on the income derived
by a non-resident natural person from work under an employment
contract if the person has stayed in Estonia for the purpose of
employment for at least 183 days over the course of a period of 12
consecutive calendar months, or the payment is made by an
Estonian employer.
Non-resident individuals are taxed on the following types of income
derived from Estonian sources:
Salary, wages and other employment income for the work
performed in Estonia if there are more than 183 days spent in this
country or if paid by a resident or non-resident registered in Estonia
Income from the transfer or lease of assets registered in Estonia
Interest received from the state of Estonia, the residents of
Estonia and non-residents with a permanent establishment registered
in Estonia, to the extent that the interest received significantly
exceeds the amount of interest payable on a similar debt obligation
under the market conditions
Royalties and income from the sales or licenses of patents,
copyrights, trademarks, software, know-how and other information
received from an Estonian person
Liquidation distributions and payments related to a company’s
reduction of its share capital to the extent that the amount received
exceeds the acquisition cost of the shares, except for the portion of
the received payment that has been taxed at the level of the
company making the payments
�
�
�
�
�
29
3. Personal taxes
� Investment income
The dividends received by residents from resident companies are
exempt from tax. Residents are taxed on all dividends and other
profit distributions received from foreign companies unless income
tax was paid on the profit out of which the dividends were paid or
unless income tax on the dividends was withheld in a foreign
country. Effective from 1 January 2009, the dividends paid to non-
resident shareholders are not subject to withholding tax.
Starting from 1 January 2011, there is a special private investment
tax exemption regime applicable in the form of an investment
account. Capital gains transferred to the investment account for
reinvestment shall not be taxed until taken out of the investment
account.
The interest received by individuals from resident credit institutions,
EEA resident credit institutions and branches of non-resident credit
institutions located in the EEA is exempt from tax. This tax
exemption does not apply to interest deposits where the rate of
return is dependant on the value of underlying asset and interest
from an investment account.
Rental payments and royalties received by resident individuals are
subject to withholding tax at the rate of 21%.
� Capital gain
Generally, capital gains derived from the sale of property or
securities are taxable under income tax rules. There are, however,
some exemptions; for example, the capital gains derived by resident
individuals from the sale of their home are not subject to income tax
(applies only to one transaction within a two-year period).
Losses incurred on the sale of securities in previous periods may be
offset against the gain received from the sale of securities. The
losses incurred may be carried forward indefinitely.
Non-resident individuals are taxed on the gains derived from the sale
of property located in Estonia, excluding securities issued by
companies registered in Estonia. However, this exclusion does not
apply if the transferred holding is a holding in a company, a
contractual investment fund or other pool of assets, and if both of
the following circumstances apply:
At the time of the transfer or during the two-year period before
the transfer, more than 50% of the property of the company, fund or
pool of assets was directly or indirectly made up of the immovables
or the buildings that are movables located in Estonia
At the time of transfer, the non-resident had a holding of at
least 10% in the company, fund or pool of assets.
�
�
30 Doing business in Estonia
3. Personal taxes
Doing business in Estonia
Employer-provided stock options Deductions
As from 1 January 2011, employer-provided stock options are taxed When determining taxable income, certain tax deductions and
as fringe benefits at the moment of exercising the options, not at the exemptions can be taken into account by resident or non-resident
moment of granting them. The taxable value of a fringe benefit is persons who are EEA residents with at least 75% of their worldwide
the difference between the fair market value of the securities and taxable income received in Estonia. If the person has not been a tax
the purchase price. However, stock options with at least a three-year resident in Estonia during the whole tax period, the deductions and
period between the grant and exercise of the option are considered exemptions can be taken into account in proportion to the period of
exempted from fringe benefit taxes. Estonian residence. Tax deductions can be received by submitting an
Estonian resident tax return by 31 March following the end of the No tax obligations are imposed on employees with respect to the taxable period (calendar year end 31 December).receipt of non-monetary benefits from Estonian employers. However,
employees are subject to tax on the capital gains derived from the For self-employment income, expenses related to the actual
disposal of shares. A taxable capital gain represents the sales price performance of business are also deductible if supported by proper
reduced by the acquisition price and by the taxable value of the documentation.
fringe benefit.The basic tax exemption is EUR1,728 per calendar year. There are
also additional basic exemptions for parents with two or more
children, for retirement allowances and for work accident or
occupational illness compensation.
Additional deductions are available (within applicable limits)for the
following items: housing loan interest paid to an EEA credit
institution, educational expenses, gifts to registered non-profit
organizations and similar institutions of the EEA, obligatory social
security payments paid in Estonia or abroad (if paid from the income
taxable in Estonia), and payments to voluntary pension funds.
Business deductionsOnly documented expenses directly related to entrepreneurial or self-
employment activities, including expenses for work-related advanced
training and retraining of employees, and losses incurred on the
disposal of assets (except for losses incurred on the sale of
securities), are deductible (with some limits applicable). If certain
expenses are only partly related to the entrepreneurial or self-
employment activities, only the part directly related to those
activities is deductible.
31
3. Personal taxes
Rates For a non-resident
Estonian and foreign individuals are, as a rule, subject to personal A non-resident person must file an income tax return if they derive
income tax at a flat rate of 21%. income or capital gains subject to taxation in Estonia from which
income tax has not been withheld or would like to claim deductions Income tax at the rate of 10% is applied on certain payments made available to non-residents with at least 75% of their worldwide by an insurer to a policyholder, on the payments made from a income received in Estonia. The tax return must be submitted by voluntary pension fund and also on certain payments paid to non- 31 March following the year of taxation. Exceptionally, in the case of residents (payments for services rendered in Estonia, payments to the transfer of an immovable, the income tax return shall be athletes and artists). submitted during one month after receiving the gain; also, a non-
resident who derives business income that is subject to taxation in Tax filing and payment procedures Estonia is required to submit an income tax return (concerning
business income derived during the period of taxation) within six The period of taxation is a calendar year.
months following the period of taxation. If the business is terminated
before the end of the period of taxation, the income tax return shall Estonian employers must withhold the proper amount of income tax
be submitted within two months following the termination of from employees' salaries. Individual tax liability is determined by
activities. Any additional amount of tax due shall be paid into the deducting the taxes withheld and creditable amounts of foreign taxes
bank account of the Tax and Customs Board within three months paid from the computed amount of income tax.
after the due date for submitting the income tax return.
For a residentElectronic declaration
A resident person must file an income tax return if their annual Tax returns may be submitted electronically. This service is available
income exceeds EUR1,728 (for 2012), and if they would be on the Tax and Customs Board's website www.emta.ee, and also in
required to pay additional income tax based on the income tax Russian and English.
return or would like to claim available deductions. Individual income
tax returns must be filed by 31 March of the year following the tax In order to submit tax returns electronically, a taxpayer must make
year. Individuals must pay income tax due by 1 July of the year an authentication and an e-services agreement with the Tax and
following the tax year. Resident individuals who declare business Customs Board, via local internet-bank or via the internet by using
income or gains from the transfer of property are required to pay an ID card or mobile ID. To do this, a valid identification document
any additional amount of tax by 1 October of the year following the must be presented by the person. Representatives of legal persons
tax year. Spouses may file a joint income tax return and are then must present a power of attorney to the Tax and Customs Board.
taxed jointly. Most of the tax returns are submitted electronically.
32 Doing business in Estonia
Visa-free entry
3. Personal taxes
Doing business in Estonia
Visas, work and residence permits
According to the Estonian Aliens Act, permits are required
for non-EU foreign nationals in order to enter, stay or work
in Estonia.
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Nationals of the Member States of EU and EEA —
Schengen States —
Austria, Belgium, Bulgaria, Cyprus, Czech Republic,
Denmark, Germany, Greece, Finland, France, Hungary,
Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania,
Luxembourg, Malta, the Netherlands, Norway, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden,
Switzerland and the United Kingdom. The basis for their
stay in Estonia is regulated by the Citizen of European
Union Act.
Austria, Belgium, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary,
Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Norway, Portugal, Poland, Slovakia, Slovenia,
Spain, Sweden and Switzerland.
Estonian National Opera
33
Visa-free entry Categories of visas
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The holders of passports of the following countries
do not need any visa to enter Estonia for stays of no
more than three months within a six-month period:
Albania (for biometrical passport holders only), Andorra,
Antigua and Barbuda, Argentina, Australia, Bahamas,
Barbados, Bosnia and Herzegovina (for biometrical
passport holders only), Brazil, Brunei, Canada, Chile, Costa
Rica, Croatia, El Salvador, Guatemala, Holy See, Honduras,
Hong Kong Special Administrative Region, Israel, Japan,
Macao Special Administrative Region, Macedonia (for
biometrical passport holders only), Malaysia, Mauritius,
Mexico, Monaco, Montenegro (for biometrical passport
holders only), New Zealand, Nicaragua, Panama,
Paraguay, San Marino, Serbia (for biometrical passport
holders only), Seychelles, Singapore, South Korea, St
Kitts-Nevis, Taiwan (passports issued by Taiwan that
include an identity card number), the United States of
America, Uruguay, Vatican City and Venezuela.
A family member of an EU/EEA/EFTA national who,
in addition to the valid passport of the country of their
nationality, presents a residence card, which has been
issued pursuant to the Directive 2004/38/EC bearing the
text "Residence Card of a Family Member of an EEA
National," may enter Estonia without a visa if the family
member is traveling together with the EU/EEA/EFTA
national or traveling to see the EU/EEA/EFTA national.
This Directive shall apply to EU/EEA/EFTA nationals, who
move to or reside in a Member State other than that of
which they are a national.
The holders of diplomatic passports of Albania,
Armenia, Azerbaijan, Bosnia and Herzegovina, Georgia,
Kazakhstan, Montenegro, Russia and Serbia may stay visa-
free in Estonia for up to 90 days within 6 months.
The holders of diplomatic and service passports of
Bolivia, Macedonia, Morocco, Peru, Philippines and Ukraine
may stay visa-free in Estonia for up to 90 days within 6
months.
The holders of diplomatic, service and special
passports of Turkey may stay visa-free in Estonia for up to
90 days within a 6-month period.
The holders of Laissez-Passer issued by the United
Nations may stay visa-free in Estonia for up to 90 days
within a 6-month period.
The holders of the diplomatic and official passports
of Moldova may stay visa-free in Estonia for up to 90 days
within a six month period.
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Airport transit visa (A-type)
Short-stay visa (C-type)
Long-stay visa (D-type)
authorizes entry and
stay in the international zone of an airport until departure
of the flight headed for the required destination.
authorizes single or multiple
entries within 6 months and a maximum stay of 90 days.
authorizes multiple entries
and stay between 90 days and 1 year for the purpose
specified within.
34 Doing business in Estonia
3. Personal taxes
Residence permits The following persons do not require a work permit in order to work
in Estonia:Citizens of the EU, EEA or Switzerland have the right to stay in Foreign nationals with long-term residence permits Estonia on the basis of a valid travel document or identity document. Foreign nationals who have residence permits for employment As a result, these individuals are not subject to the rules regarding Foreign nationals who have residence permits for business (only residence permits. for executing directing functions in the company specified in the
residence permit) Residence permits are either temporary residence permits issued for Foreign nationals who have applied for a residence permit a period of up to five years, or long-term residence permits. As of before 12 July 1995 and who have obtained such a permit 1 June 2006, foreign nationals holding a permanent residence Imprisoned persons during their stay in prison permit shall automatically be deemed as holding the long-term Members of locomotive crews residence permit and they are not required to submit an application Staff serving on locomotives and trains for a long-term residence permit or pass the language proficiency Drivers for taking passengers or cargo over state borders examination. Foreign nationals who hold a residence permit for settling with a
close relative who is residing permanently in Estonia:A temporary residence permit shall be extended following an - Foreign nationals who hold a residence permit for settling with application for such an extension if the basis for the issue of the a spouseresidence permit has not ceased to exist, there is no reason to - Foreign nationals who hold a residence permit issued on the refuse to extend the permit and if it is justified. The temporary basis of an international agreement residence permit may be issued to a foreign national: - Foreign nationals who hold a residence permit issued on the
basis of substantial public interest For employment - Foreign nationals who hold a residence permit that is based on For business an international agreementFor studies in an educational institution based on the application
of the educational institution A work permit shall not be issued to a foreign national to whom a In order to settle with a close relative who is permanently residence permit has been issued on the condition that their legal
residing in Estonia income ensures their subsistence in Estonia.Whose permanent legal income ensures their subsistence in
Estonia The application for a work permit may be submitted personally to In case of substantial public interest the Service Office of the Citizenship and Migration Board of the Whose application for a residence permit is based on an Prefecture or by post.
international agreement A foreign national who has been issued a residence permit for study Who is married to a person with permanent residence in Estoniamay take employment in Estonia without a work permit in order to
As an additional condition for the extension of residence permits and participate in practical training pursuant to the curriculum. issue of long-term residence permits, foreign nationals are required Otherwise, they may take employment in Estonia only on the basis to enter their residence in Estonia in the population register. of a work permit and only outside of school hours, on condition that
such an employment does not interfere with their studies.Work permits
A work permit can be extended if a person holds a valid residence In order to work in Estonia, foreign nationals must hold a work permit, or if the residence permit is extended and the person has an permit. A citizen of the EU is not subject to the rules regarding work employer at the time of extension of the work permit.permits. Activities as a sole proprietor, employment with an
employment contract or any other contract, or any activity that may If a person holds a valid residence permit, the Citizenship and result in gaining profit or any other benefit irrespective of the type or Migration Board shall make a decision as to whether to issue a work form of the contract, or the location or place of residence of the permit during a period of one month from the date of registration other party to the contract shall be deemed to be employment, and starting processing of the application.unless an international agreement stipulates otherwise.
If a person applies for a work permit concurrently with a The period of validity of a work permit cannot exceed the period of residence permit, the Citizenship and Migration Board shall make a validity of a residence permit. decision as to whether to issue a work permit at the same time as
making the decision as to whether to issue a residence permit.
If a person wishes to extend the work permit, they have to
submit an application for the extension of the work permit at the
latest two months before the valid work permit expires. The term for
the extension of a temporary residence permit shall not be restored
if the residence permit has expired.
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35Doing business in Estonia
3. Personal taxes
Contacts
For further information please contact:
Ivar Kiigemägi
Partner
Assurance Services
Ernst & Young Baltic AS
Lili Kirikal
Senior Manager
Transaction Advisory Services
Ernst & Young Baltic AS
Ranno Tingas
Partner
Tax Services
Ernst & Young Baltic AS
Siim Aben
Senior Manager
Advisory Services
Ernst & Young Baltic AS
Ernst & Young Baltic AS
Rävala 4
10143 Tallinn
Estonia
+372 6 114 610
36 Doing business in Estonia
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Estonia is a land with manyopportunities for yourbusiness. Ernst & Youngwould be delightedto help you realize them.
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