Taxes in Estonia now and tomorrwo: Value added tax | 18% | Social tax | 33% | Individual income tax 2004 | 26% | Individual income tax 2005 | 24% | Individual income tax 2006 | 23% | Individual income tax 2007 | 22% | Unemployment tax | 1.5% | Corporate Income tax | 0% | Income tax payable on dividend 2004 | 26% - 26/74 | Income tax payable on dividend 2005 | 24% - 24/76 | Income tax payable on dividend 2006 | 23% - 23/77 | | Income tax payable on dividend 2007 | 22% - 22/78 |
Taxes
Current Estonian Tax Legislation was mostly enacted during the first phase of the transition reforms. The existing Law on Taxation came into effect in 1994 and has since gone through several amendments.
The new Law on Income Tax, passed on 15th of December 1999, is effective from 1st of January 2000. A new Law on Social Tax came into effect in January 2001 and a new Law on VAT was passed in December 2003.
The Estonian tax system with its flat 24% rate (which wil be reduced to 22% by the year 2007) individual taxation is one of the most liberal tax regimes in the world. Moreover, the new Law on Income Tax provides that undistributed profits of the companies are not subject to income taxation, regardless whether invested or merely retained. Taxes
Current Estonian Tax Legislation was mostly enacted during the first phase of the transition reforms. The existing Law on Taxation came into effect in 1994 and has since gone through several amendments.
The new Law on Income Tax, passed on 15th of December 1999, is effective from 1st of January 2000. A new Law on Social Tax came into effect in January 2001 and a new Law on VAT was passed in December 2003.
The Estonian tax system with its flat 24% rate (which wil be reduced to 22% by the year 2007) individual taxation is one of the most liberal tax regimes in the world. Moreover, the new Law on Income Tax provides that undistributed profits of the companies are not subject to income taxation, regardless whether invested or merely retained. Taxes
Current Estonian Tax Legislation was mostly enacted during the first phase of the transition reforms. The existing Law on Taxation came into effect in 1994 and has since gone through several amendments.
The new Law on Income Tax, passed on 15th of December 1999, is effective from 1st of January 2000. A new Law on Social Tax came into effect in January 2001 and a new Law on VAT was passed in December 2003.
The Estonian tax system with its flat 24% rate (which wil be reduced to 22% by the year 2007) individual taxation is one of the most liberal tax regimes in the world. Moreover, the new Law on Income Tax provides that undistributed profits of the companies are not subject to income taxation, regardless whether invested or merely retained. Principal Taxes The system of taxation is described in the Law on Taxation. The existing state taxes are: income tax: 24%; value-added tax (VAT): 18%; social tax (social security contributions - state pension and health insurance): 33%; unemployment insurance tax: 0.5% employer + 1% employee; excise taxes (tobacco, alcoholic beverages, motor fuel, motor vehicles, packages); gambling tax; land tax.
Estonia does not impose any gift, inheritance or estate taxes. Various transactions may be subject to payment of state fees (stamp duties).
Local governments have the authority to impose local taxes, but effectively only few municipalities have introduced local taxes, in particular: sales tax, boat tax, advertisement tax, tax on closure of streets and roads, motor vehicle tax, entertainment tax, tax for keeping the animals and parking charge.
Income Tax
Income Tax The world-wide income of Estonian resident individuals is generally subject to 24% flat income tax. Estonian residents are individuals having a permanent home in Estonia or staying in Estonia 183 days or more in a calendar year. Credit is given for taxes paid abroad. Non-residents are subject to Estonian tax on their Estonian source income. The relatively low tax rate in Estonia is however balanced by the small number of allowable deductions for resident individuals. From January 2000, Estonia introduced its first CFC legislation.
However, from 1 January 2000, resident companies and permanent establishments of the foreign entities (including branches) are subject to income tax only in respect of all distributions (both actual and deemed), including: · dividends and other profit distributions;
· fringe benefits;
· gifts, donations and representation expenses; and
· expenses and payments not related to business. All distributions will be subject to income tax at the grossed-up rate of 24/76 of the amount of taxable payment. The transfer of assets of the permanent establishment to its head office or to other non-residents is also treated like distribution. Dividends paid to non-residents are additionally liable to withholding tax at the general rate of 24%, unless the non-resident legal entity holds at least 20% of the share capital of the distributing Estonian company. Various withholding taxes may apply also to other payments to non-residents, if they do not have a permanent establishment in Estonia or unless the tax treaties otherwise provide.
As the tax period of corporate entities will be a month, the income tax must be returned and paid monthly by the 10th day of the following month.
Under the income tax legislation, therefore, the corporate entities are exempt from income tax on undistributed profits, regardless of whether these are reinvested or merely retained.
As there is no annual net taxation of corporate profits, the corporate entities are also not subject to tax depreciation rules.
Capital gains realised by a resident corporate entity (including non-resident permanent establishment) are not taxed until the actual or hidden distributions, which are subject to 24/76 income tax on a monthly basis. Estonia does not have any thin capitalisation rules. Value Added Tax The principal mechanism for collecting the VAT requires the VAT registered person to charge VAT on the goods or services supplied, to take credit for VAT paid on business expenditure and pay the net VAT over to the authorities. Input VAT is recoverable to Estonian VAT registered entities and in certain cases also to foreign legal entities that do not have a permanent establishment in Estonia.
VAT is charged at the rate of 18% (reduced rates of 0% and 5% apply to certain goods and services) unless the goods or services are outside the scope of VAT or exempt from VAT. The tax rate for exports is zero. However, the VAT treatment for the export of services is subject to the restricted list of services established by the Ministry of Finance.
The excess input VAT is refunded within 30 days from the due date of the VAT return. Taxable persons are individuals and legal entities having a taxable supply as a result of conducting business. With respect to importation, an importer is a taxable person, whether or not he is engaged in a business. Special procedures apply to the temporary importation of goods. Taxpayers with annual supplies of less than EEK 250,000 are not required to register for VAT purposes.
Under certain conditions, temporary importation procedure may be applied with the consent of the Customs Authorities. In such a case, the import VAT is not applied to the goods imported temporarily, which must be processed and exported in due time from Estonia. The processing of such goods under written service agreement is generally subject to zero-rated VAT.
Foreign legal entities are generally not registered for VAT purposes. However, the permanent establishments of foreign entities must register in the same manner as local legal entities. Provided that the foreign country grants reciprocal rights to Estonian residents, under certain conditions Estonian VAT is refunded to non-resident legal entities, which have incurred input VAT in relation to purchasing goods or services in Estonia. Social Tax Employers registered in Estonia (including permanent establishments of the foreign entities) must pay social tax on all payments made to employees, except on those specifically exempted by law. In case of an individual engaged in business and registered as such with the Tax Authorities, social tax liability lies with the individual. Fringe benefits and the income tax thereof are also included in the taxable base. Currently only employers and individuals engaged in business are liable to make social tax contributions. Employees are not required to pay social tax.
The rate of social tax is 33% (20% for social security and 13% for health insurance).
Other Taxes
Land Tax is levied on the taxable value of all land (other than that, which is specifically exempt) based on an official valuation. The owners of the land are liable to land tax. The annual land tax rate varies between 0.1% and 2.5% of the assessed value of the land. The council of the local authority is authorised to establish the rate of land tax.
Excise Duties are levied on tobacco, alcoholic beverages, motor fuel, motor vehicles and packages.
A customs procedure fee is in most cases a flat state fee of EEK 100 on each customs declaration submitted by a legal person.
Accounting Principles The Law on Accounting (valid from 1 January 2003) regulates basic accounting functions in all business entities registered in Estonia. It does not regulate accounting for taxes, which are regulated by other laws and acts. The essence of the law is framed in compliance with International Accounting Standards (IAS). With a few exceptions, the use of IAS was acceptable prior to 1 January 1995.
Compared with International Accounting Standards the major differences are: 1) no consolidation is required (equity method is used to account for subsidiaries); 2) notes to financial statements are usually fewer.
In addition to the Law on Accounting there are a number of regulations issued by the Estonian Accounting Committee which interpret and amend the law. Each business entity may also establish additional rules regulating some aspects of its own accounting and reporting.
A fiscal year is twelve months long. A business entity can choose a fiscal year ending on 31 March, 30 June, 30 September or 31 December. If a company wishes to use any other fiscal year, permission from the Ministry of Finance is required. The law also prescribes that a parent company and its subsidiary should have the same financial year, which may also be a fiscal year.
All accounting records should be maintained for seven years. Contracts, business plans and other documents, necessary for reconstructing business transactions should be maintained for ten years. Auditing Standards All companies registered in Estonia are required to submit their audited financial statements to the authorities within 6 months of the end of the fiscal year.
An audit is not required for a private limited company if its share capital is less than EEK 400,000 and if its the net sales in the previous fiscal year did not exceed four times the mandatory VAT registration limit set in the Law on Value Added Tax. This currently equals EEK1,000,000.
An audit is not required for sole proprietorships or for partnerships, provided the partners are neither public nor private limited companies nor business cooperatives.
The auditing process is regulated by Estonian Standards of Auditing. General requirements concerning auditing are regulated by the Accounting Law and the Commercial Code. Estonian Auditing Standards are sanctioned by the Estonian Auditing Committee on September 1994.
Estonian Auditing Standards are composed in accordance with generally accepted auditing standards and are based on the standards of the International Federation of Accountants (IFAC), International Standards on Auditing (ISA) as well as on the standards of the American Institute of Certified Public Accountants (AICPA). Currently, all major international accounting firms are present in Estonia.
Tax Treaties Estonia has effective tax treaties with Armenia, Austria, Belarus, Belgium, Canada, China, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Kazakhstan, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Sweden, Switzerland, Ukraine, United Kingdom, USA.
Under the double tax treaties a significant reduction of withholding taxes on various payments to non-residents is available. In order to apply the lower tax treaty rates, the residence certificate of the recipient of income must be submitted to the Tax Authorities by the 10th day of the month following the payment. Overview:
Employer taxes Employee taxes Tax Exempt Minimum | Monthly average | Total annual | 2005 | 1 700 EEK | 20 400 EEK |
Tax Payments Dates VAT – by the 20th date of the following month Social Tax and Income Tax – by the 10th date of the following month Late payment interest – 0.06% per day (ca 22% per year) Term for lodging annual returns: 6 months from the end of the financial year. Gifts, Donations, Representational Expenses Income tax on gifts and donations, representational expenses above 500 EEK per month + 2 % of the amounts taxable by social tax as well as other expenses not related to enterprise, in general: 24/76. Fringe Benefits Income tax on fringe benefits: 24/76, plus 33% Social Tax. (Fringe benefit mean, E.g.: payment of personal holiday trips or restaurant bills by the company, or use of a company car for private purposes). Taxation of Company Cars All VAT paid in relations with purchasing, rent and maintenance (incl. fuel) can be reclaimed (the same is applicable to any other vehicles as well). Only the employees of the company who are paid salary, and/or the members of the management board may use a car at the expense of the company. If other persons are using the car, then all the expenses related to that car are considered salary income, and both the individual income tax and social tax are payable on these amounts. The tax rate applicable to company cars, which are also used for private purposes, is calculated as follows: The value of the fringe benefit received by a private individual is set at 2000 EEK, which is regarded as net income of the person. Net | | 2000 | Income tax | 2000 x 24/76 | 632 | Social tax | (2000 + 632) x 33% | 869 | Not returned VAT | 2000/1,18-2000 | 305 | Total taxes | | 1806 |
If the car is not used for private purposes, and the company keeps a log recording all trips, then the tax needs not be paid. Use of private cars for job purposes If employees use their own cars for job purposes, it is permissible to pay the employee a non-taxable compensation in the monthly amount of 1000 EEK. If the person keeps a log of the use of the private car for job purposes, the non-taxable compensation amount is 4 EEK/km, but not more than 2000 EEK/month. Compensation of all expenses (exceeding 2000 EEK) related to the use of a private car for job purposes is permissible provided that the company pays the car related taxes stated above (in 2005 – 1806 EEK). Dividend Taxes 2005The dividend is taxed with income tax equaling to 24/76 of the dividend paid. Sample: The aggregate sum of dividend payable to the shareholders from the profit of the financial year of 2004 (or earlier) is 100 000 EEK. Allocated dividend amount | 100 000 EEK | Income tax 100 000 x 24/76 | 31 579 EEK | The shareholder receives | 100 000 EEK | The company pays | 131 579 EEK |
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