Estonian taxes and tax structure (april 2014)

ESTONIAN TAXES AND TAX STRUCTURE

Tax Policy DepartmentRevised in April 2014

Population (01.01.2014) 1 311 870

Total area 45,227 km2

Average salary (2013) 948 EUR

Average pension (April 2014) 354 EUR

Currency EUR

GDP (2013) 18 434,7 million EUR

Economic growth (2013) 0,8%

(forecast for 2014) 2,0%

GDP per capita (2013) 13 784,2 EUR

Inflation (2013) 2.8%

Outline of the presentation

• The main principles of the Estonian tax system, the current tax structure

• Taxation Act • Direct Taxes

– Reasons for introduction of the flat rate in Estonia

– The outcome of the reform – Personal Income Tax – Corporate Income Tax – Social Tax

• Indirect taxes – VAT – Excise duties – Gambling tax

• Plans for the future

Estonian Tax System

The main principles of Estonian tax policy:• simple tax system• broad tax base, low rates

Estonia is a European pioneer in income taxation:

• Flat income tax rate since 1994 (followed by Lithuania, Latvia, Russia, Ukraine, Serbia, Slovakia, Georgia, Romania, ..)

• Unique corporate tax system since 2000

5

Taxation Act

Estonian Tax System

• To achieve sustainable, socially and regionally balanced economic growth Estonian tax system consists of state taxes provided and imposed by tax acts and local taxes imposed by a rural municipality or city council in its administrative territory pursuant to law

1) excise duties;

2) income taxes;3) gambling tax;4) value added tax;5) land tax;6) social tax;7) customs duty;8) heavy goods vehicle

tax.

State taxes Local taxes

1) advertisement tax;

2) road and street closure tax;

3) motor vehicle tax;4) animal tax;5) entertainment

tax;6) parking charge.

Taxation Act

• Taxation act specifies – Estonian tax system– main definitions used in all tax acts– requirements for tax acts– rights, duties and liability of taxpayers,

withholding agents, guarantors and tax authorities

– regulations of the tax procedure and procedure for resolution of tax disputes

– penalty interest rate 0,06% per day

Taxation Act

“Tax” is • a single or periodical financial obligation • imposed by an Act or by a local government

council regulation according to Local Taxes Act

• for the performance of the public law functions or to obtain revenue to perform these functions

• subject to performance pursuant to the procedure, in the amount and on the due dates prescribed by an Act

• collected without direct compensation therefore.

Taxation ActRequirements for Act concerning tax

1) name of the tax;2) object of taxation;3) tax rate;4) taxpayer;5) recipient of or place of receipt of the tax; 6) due date or term for payment of the tax;7) procedure for payment of the tax;8) procedure for implementation of the Act

concerning a tax;9) possible tax incentives.

Tax authority

• The tax authority for state taxes is the Tax and Customs Board with its regional offices. The tax authority operates within the area of government of the Ministry of Finance.

• Tax authority verifies the correctness of tax payments, assesses amounts of tax and interest due in the cases provided by law, collects tax arrears and implements sanctions against persons who violate tax Acts.

• Corporate income tax – 21% on distributed profit

• Personal income tax – 21%• Social tax – 33% (payable by employer)• Unemployment insurance payment – 2,0

% payable by employee and 1,0% payable by employer (from Jan 1, 2013)

• Contribution to the mandatory funded pension system - 2% (payable by employee)

• Value added tax - 20% (standard rate), 9% (reduced rate)

Main tax rates

Tax structure

0

5

10

15

20

25

30

35

40

2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*Direct taxes Indirect taxes Social security contributions

Structure of tax burden (% of GDP)

Source: Statistical Office of Estonia, Ministry of Finance

Tax burden ( % of GDP)


31,0

30,2

31,0 30,830,6

30,6

30,7

31,431,9

35,3

34,0

32,3 32,532,3 32,4

31,9

31,631,6 31,7

29

30

31

32

33

34

35

36

37

2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*

Structure of tax revenue

0%

20%

40%

60%

80%

100%

Personal income tax Corporate income taxSocial contributions VATExice duties Land taxOther taxes


State Budget Tax Revenue 2014Total tax revenue 6,559.8 million EUR Total revenue 7,880.9 million EUR

5,1% 5,0%

25,5%

12,6%

0,1%0,4%

33,8%

0,3%17,1%

Personal income tax Corporate income tax VATExcise duties Heavy vechile tax Customs dutySocial tax Gambling tax transmittable taxes

Source: Ministry of Finance

Tax Revenue 2013, million € (collected)

* - The amount received by the state + local governments

State taxes 6 140,4 Direct taxes 3 652,7 Personal income tax* 1 030,6 Corporate income tax 326,6 Social tax 2 071,2 Unemployment insurance 167,1 Land tax 57,2 Indirect taxes 2 397,7 VAT 1 550,6 Excise duties 792,8 Heavy vehicle tax 4,0 Customs tax 28,7 Gambling tax 21,6 Local taxes 10,9

Source: Ministry of Finance

Direct taxes

• Income tax (personal and corporate income tax both stipulated in the Income Tax Act)

• Social tax• Land tax

Direct taxes

Reasons for introducing flat rate in Estonia

Reasons for introducing flat rate in Estonia

• High inflation rate - in case of flat rate there is no need of frequent adjustment of tax brackets

• Flat rate system is easier to administer (for both taxpayers and tax administrators)

• More transparency

The new law entered into force on 1 January 1994.

The outcome…

Personal income tax revenue 1994-2018 million €

0

200

400

600

800

1 000

1 200

1 400

1 600

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*

Local government State

million EUR


Corporate income tax revenue 1995-2018

0

50

100

150

200

250

300

350

400

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017*

67,1 56,978,5

122,3104,5

54,6 47,8

86,2

137,8161,2 159,5

199,6

261,0 266,3 256,3

193,8 201,1

252,4

326,6 329,0316,0

328,0

355,0373,0

million EUR

* - includes revenue under the prior Income Tax Act (taxable period 1999)

million €

Personal income tax

Personal income tax

• Residents pay tax on their total worldwide income.

• Non-residents pay tax only on their income received from Estonian sources.

• Individuals are Estonian residents if they: - have a permanent home in Estonia, or - stay in Estonia 183 days or more during any 12-month period.

Income Tax ActPeriod of taxation: a calendar year

Tax rate: 21% (separate tax rate 10% for certain pensions and payments to non-residents)

Decrease of the income tax rate (both for individuals and legal persons):

Until the year 2004 – 26%Income of the year 2005 –

24%Income of the year 2006 –

23%Income of the year 2007 –

22%Income of the years 2008-2014–

21% Since income of the year 2015 – 20%

Income Tax ActNon-taxable minimum (annual basic exemption):

1728 EUR

Additional exemption for state pensions: 2520 EUR

since 2015 2640 EUR

for calendar year

Increase of the non-taxable minimum (per year):Income of the year 2003 – 12 000 EEK

(767 EUR)Income of the year 2004 – 16 800 EEK

(1074 EUR)Income of the year 2005 – 20 400 EEK

(1304 EUR)Income of the years 2006- 2007 – 24 000 EEK (1534

EUR)Income of the years 2008- 2010 – 27 000 EEK (1726

EUR)Income of the years 2011- 2014 – 1728 EURSince income of the year 2015 – 1848 EUR

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014*

2015*

2016*

2017*

2018*

18

20

22

24

26

28

0

20

40

60

80

100

120

140

160

180

26

24

23

22

21

201932

51

64

89

109

128144

154

Income tax rate (left scale) Monthly basic exemption (€, right scale)

%Income tax reduction

Personal income taxFor non-residents there is a limited list of taxable

income in the Income Tax Act:• income from work under a labour contract or

contractor's agreement in Estonia; • directors' fees paid by Estonian enterprises; • income from a business carried on in Estonia;• gains from disposal of assets located in Estonia; • income from the lease of assets located in Estonia;• royalties;• interest received from the holding in a contractual

investment fund, whose property was made up more than 50 per cent of immovables in Estonia (in certain conditions);

• income of a sportsman or an artist from his activities in Estonia

• pensions and scholarships.

Personal income tax

For non-resident individuals• Period of taxation is a calendar year• Tax rates: 21% and 10%

• Estonia has 56 treaties for the avoidance of double taxation (income and capital taxes) in force

Personal income taxTax allocation of personal income tax paid by residents

• The amount received by local governments (from Jan 1, 2014) is 11.6% of taxable income (deductions are not taken into account), the excess amount is received by the state

• Income tax paid on pensions and capital gain is received by the state

Non-residents:• income tax is received by the state

Personal income tax

Avoidance of double taxation

Individuals

• Exemption method for foreign dividends and certain salary income

• Credit method for all other types of foreign income

Corporate income tax


• Corporate tax reform in year 2000

• The ultimate goal of the reform was promotion of business and acceleration of economic growth by making additional funds available for investment


Eliminationof technical

shortcomings

Additionalfunds availablefor investment

Stricter regulationof transfer

pricing

Accelerationof economic

growthIntroduction of the CFC

rules

Transparencyand exchangeof information


The moment of taxation of corporate income is postponed until the distribution of the profits

The system applies to: • Estonian resident companies

- legal persons that are established pursuant to Estonian law

• permanent establishments (PE) of non-resident companies - PE is an entity through which the business of a non-resident is carried out in

Estonia

Tax rate 26 % (on

gross profit)

Income tax

26 EUR

Dividend payment74 EUR

Profit earned 100 EUR

Time

The taxation of profit until 1999


Income tax

26 EUR

Dividend payment74 EUR

Profit earned 100 EUR

Tax rate 26/74 (on net

amount, equals to

26% of gross profit)

No tax

Time

The timing of tax payment under the new system (since 2000)*The tax rate has been decreased since 2005



• Tax rate in 2014: 21% (21/79 of the net

amount of the dividend or other profit

distribution)

• Period of taxation: a calendar month

Corporate income taxTax base

• corporate profits distributed in the tax period; dividends and other profit distributions, incl. liquidation proceeds and payments made on reduction of company’s equity or redemption or return of shares

• taxable gifts, donations and representation expenses;

• expenses and payments unrelated to business.

Fringe benefits are taxable at the level of employer.

Losses – taken into account (the Estonian Commercial Code does not allow to distribute profits if the company has losses from previous years)


+ qualified dividend received

100 EUR

+ foreign interest

received 100 EUR (source

state WHT 10)

Donations 200 EUR

Expenses unrelated

to business

300 EUR

Gifts 100 EUR

14

00

EU

R p

ote

nti

all

y ta

xab

le

incom

e

Tax l

iab

ilit

y d

efe

rred

Profit earned in

2010

200 EUR +

Profit earned in

2011

1000 EUR

Dividend /

liquidation 640 EUR

Exemption method

Taxable amount

640 – 100 = 540

CIT (21/79) 27

CIT (21/79) 80

CIT (21/79) 53

CIT (21/79) 144

Credit method

144 – 10 = 134

Total CIT liability 294

Time

Corporate income taxThere are 3 main methods introduced in the Estonian Income Tax Act, the goal of which is to minimize the possibilities for tax fraud and evasion

– CFC (Controlled Foreign Corporation) rules: residents have to declare and pay tax on the income of off-shore companies under their control

– Stricter regulations for minimising the use of transfer-pricing schemes

– Withholding tax of 21% on all payments to so-called off-shore companies for services


Avoidance of double taxation

Companies and non-resident’s PEs

• Exemption method for qualified (threshold 10%) profit distributionsthe income tax will not be charged on dividends or on payments upon reduction of share capital or contributions, redemption of shares or liquidation of a legal person on certain conditions.

• Credit method for all other types of foreign income

Structure of declared corporate income tax 2003-2018

0

100

200

300

400

2003 2005 2007 2009 2011 2013 2015* 2017*

Payments to non-resident legal personsNon-business expensesCharitable gifts and donations exceeding non-taxable amountFringe benfitsDistributed profit (dividends paid out)

million EUR


Social tax

Social tax

Tax Base• Employers' payments to individuals

(wage income) – tax payable by employers• in cash • in kind (fringe benefits)

• Business income of self- employed– tax payable by self- employed persons

Social tax

Period of taxation

• Calendar month for wage income• Calendar year for business income of

self- employed

Social tax

• Tax rate is 33 % of the taxable amount

• Social tax payable is personificated and will be taken into account in making pension payments or health insurance benefits.

• Tax allocation IF the person has joined the II pension pillar (compulsory for the persons who have born in 1983 or later; voluntary for older people)

Social tax

Social tax, rate 33% (payable by employer

or self employed person)

State health insurance

system

13% 16%

State pension insurance system (I pillar)

Personal pension account of the

person (II pillar) 2% + 4%= 6%

4%

Contribution to the II pillar (made by employee)

2%

Social tax revenue and structuremillion €

0

500

1 000

1 500

2 000

2 500

3 000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014*2016*2018*

Employers' payments to natural persons Fringe benefits

State (according to social tax law §6) Business income of sole proprietors

Social tax

million EUR


Indirect taxes

Indirect taxes

• Value added tax• Alcohol excise duty• Tobacco excise duty• Energy products excise duty• Packaging excise duty (budget

revenues insignificant) • Heavy goods vehicle tax• Gambling Tax

Value-added tax (VAT)

Taxable person• Person whose taxable supply (excluding import) exceeds 16 000 EUR in a calendar year

• Voluntary compliance possible for anyone, who carries out economic activity in Estonia

VAT

Tax base VAT is charged on:

• transactions of goods and services within Estonia

• intra-Community acquisitions of goods and services

• importation of goods and services• provision of services which are taxable in Estonia, supplied by the foreign taxable person

VAT

Tax rates • Standard rate is 20%.• Reduced rate is 9% (books,

newspapers, medicines, accommodation).

• Zero rated: export; intra-Community supply; vessels and aircrafts used on international routes, including equipment and fuel; goods and services for consumption supplied on board of vessels and aircrafts.

VAT

Exempted goods and services are: • postal services • health services • social services • insurance services • services for the protection of children • transportation of sick, injured or

disabled persons• supply of immovables• the leasing and letting of immovables,

etc.

VAT

VAT revenue 1994-2018million €

0

500

1 000

1 500

2 000

2 500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*

million EUR


Excise duties

Excise duties

Excise duties are levied on:• Alcohol• Tobacco• Fuel• Electricity• Packaging

Duty rates on alcohol, tobacco and energy products meet the EU minimum levels

Excise duty rates on alcohol

Unit

Excise duty rates 01.01.2014

EU minimum excise duty

rates Wine and fermented beverage

Hectolitre

(up to 6 %): 36,71 EUR

(> 6 %): 84,67 EUR

0

Beer

1 % alcohol in

hectolitre

6,28 (yearly production up to

3000 hl): 3,14 EUR

1,87 EUR

Intermedi-ate product

Hectolitre

180,81 EUR

45 EUR

Other alcohol

Hectolitre of pure alcohol

1643 EUR

550 EUR

Excise duty rates on tobacco products

Product Excise duty rates 01.01.2014

EU minimum excise duty rates

CIGARETTES:

46,50 EUR 90 EUR per 1000 cigarettes, but not less than 60% from weighted average price of cigarettes

Specific rate (1000 cigarettes)

Ad valorem rate (% of the retail selling price)

34 %

Minimal amount of excise to pay (1000 cigarettes)

90,00 EUR Unlimited

CIGARS, CIGARILLOS (1000 cigars or cigarillos)

211 EUR

12 EUR or 5% from the retail selling price

SMOKING TOBACCO (1 kg )

61 EUR

47 EUR or 43% from the retail selling price

Excise duty rates on motor fuels

ENERGY PRODUCT

Excise rates in Estonia 01.01.2014

EU minimum excise duty rate

Unleaded petrol

422,77 EUR/1000 l

359 EUR/ 1000 l

Leaded petrol 422,77 EUR/ 1000 l

Gas oil 392,92 EUR/1000 l

330 EUR/ 1000 l

Gas oil for specific purposes

110,95 EUR/1000 l

21 EUR/1000 l

LPG 125,26 EUR/1000 kg

125 EUR/1000 kg

Petroleum 330,1 EUR/1000 l

330 EUR/ 1000 l

Excise duty rates on heating fuels and electricity

Energy product

Excise rates in Estonia

01.01.2014

EU minimum excise duty rate

business non-business

Light fuel oil

110,95 EUR/ 1000 l

21 EUR/1000 l

21 EUR/1000 l

Heavy fuel oil

15,01 EUR/ 1000 kg

15 EUR/1000 kg

15 EUR/1000 kg

Petroleum 330,1 EUR/ 1000 l

- -

Natural gas

23,45 EUR/ 1000 m3

0,15 EUR/ GJ 0,3 EUR/ GJ

Coal, coke and oil shale

0,3 EUR/ GJ 0,15 EUR/ GJ 0,3 EUR/ GJ

Electricity 4,47 EUR/ MWh

0,5 EUR/ MWh

1 EUR/ MWh

Excise duty revenue 1994-2018million €

0

100

200

300

400

500

600

700

800

900

1 000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*

Alcohol Tobacco Fuel

million EUR


Packaging excise duty

Object of taxation:

Excise duty on packaging shall be imposed on packaging of goods placed on the market in Estonia or acquired in and imported from another Member State of the European Union.

Packaging excise duty

Exemption from excise duty incidentally are:

1) packaging concerning which a deposit has been established under the Packaging Act, except metal packaging of beverages, and from which at least 85 percent of each class of packaging material is recovered as of 1 January 2012;

2) metal packaging of beverages of which of which at least 50 percent is recovered as of 1 January 2010;

3) as of 1 January 2009, other packaging recovered to the extent provided for in § 36 of the Packaging Act.

Gambling Tax

Gambling Tax Objects of gambling tax

1) gambling tables and gambling machines used for organising games of chance and on gambling machines used for organising games of skill;

2) in the event of organising a lottery, the total amount received from the sale of lottery tickets;

3) in the event of organising a commercial lottery, the winning pot whose value exceeds 10 000 euros;

4) in the event of organising a toto (betting + totalisator), the total amount net revenue of bets;

5) in the event of organising an online game of chance or an online game of skill, the net revenue of bets;

6) in the event of organising a tournament of a game of chance, the total amount of participation fees.

Gambling tax is paid by gambling operators.

Gambling Tax

Tax rates:

1) for the gambling table – 1 278.23 euro per table in month;

2) for the gambling machine – 447.38 euro per in month euro per gambling machine;

3) 31.95 euro per gambling machine of game of skill;4) 18 % from the sale of lottery tickets; 5) 18 % from the winning fund of the commercial

lottery;6) 5 % for the toto, amount received from net

revenue; 7) 5 % for the online game, amount received from

net revenue;8) 5 % for the tournament of a game of chance

(amount received from participation fees).

Plans for the future

Future Plans for Tax Policy

• Lower labour-related taxes and increase consumption-related and other indirect taxes– increase of excise duties– increase of environmental taxes– decrease of income tax

• Maintaining the current simple tax system

• Broadening the tax base and reducing tax incentives

• Improving tax administration

Background information

Average Economic Growth in 2001–2011

Estonian real convergence with the EU

76

7069

3035404550556065707580

1995 1997 1999 2001 2003 2005 2007 2009 2011

% of EU27

GDP per capita in PPSComparative price levelLabour productivity per person employed

Growth expectations

GDP growth, %

Consumer price index, %

2014 2015 2014 2015 IMF 2.4 3,2 3,2* 2,8* OECD 1,3 3,3 0,8* 1,7* European Commission 1,9 3,0 1,5* 3,0* Ministry of Finance (April 2014) 2.0 3.5 1.7* 2.9*

* Harmonised Consumer Price Index (HICP)

General Government budgetary balance 2003-2018

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014* 2015* 2016* 2017* 2018*-4

-2

0

2

4

1.8 1.6 1.6

2.42.4

-3.0

-2.0

0.2

1.1

-0.3 -0.2-0.7 -0.8

-0.7-0.1

0.9

Central Government Local GovernmentSocial Security General Government

% of GDP


General Government tax burden 1995-2018

36,334,3 34,3 34,0

32,531,0 30,2 31,0 30,8 30,6 30,6 30,7 31,4 31,9

35,934,0

32,3 32,5 32,3 32,4 31,9 31,6 31,6 31,7

0

10

20

30

40

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013* 2015* 2017*

Direct taxes Indirect taxes Social security contributions Tax burden

% of

General Government debt in 2012

9,80

20406080

100120140160180

Est

onia

Bul

garia

Luxe

mbo

urg

Rom

ania

Swed

en

Lith

uani

a

Latv

ia

Den

mar

k

Cze

ch R

epub

lic

Slov

akia

Finl

and

Slov

enia

Cro

atia

Pola

nd

Mal

ta

Net

herla

nds

Aus

tria

Hun

gary

Ger

man

y

Spai

n

Cyp

rus

Uni

ted

Kin

gdom

Fran

ce

Bel

gium

Irel

and

Port

ugal

Ital

y

Gre

ece

% of GDP

Tax rate on low wage earners: Tax wedge on labour cost (single, 67% average wage)

32

34

36

38

40

42

44

46

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* 2018*

%

Estonia Latvia Lithuania EU 27

Estonian taxes and tax structure (april 2014)

Economy & Finance

Transcript of Estonian taxes and tax structure (april 2014)