Income tax
The income tax rate in Estonia is 20%, both for individuals and legal entities. Nothing special, right? There is, however, a unique feature that makes Estonian corporate tax system extremely attractive, in the opinion of entrepreneurs. The fact is that the company’s profit is not subject to income tax – only the distributed part of the profit is being taxable.
Such a system gives the company an opportunity to independently determine the time and size of the tax burden. If the profit remains undistributed (for example, is reinvested), then the company does not have any tax liabilities – this system allows you to engage in business development without having to pay corporate tax, while completely legally. That makes that there is no need for artificial understatement of profits, which in turn makes the company attractive to potential investors.
How does the European Union feel about such a system? At the stage of Estonia’s accession to the EU, the issue of the compliance of the Estonian tax legislation with the applicable directives was raised, but, fortunately, the Estonian system still found support in the European Court of Justice and is not subject to change.
Value added tax
The general VAT rate in Estonia is 20% (9% and 0% rates also apply). If the above-described system of corporate taxation in Estonia distinguishes it favourably from other countries, then the national turnover tax system, being part of the fully harmonized EU VAT system, does not fundamentally differ from any other EU country.
Note that the topic of value added tax is relevant only for companies registered as VAT liable. The obligation to register in Estonia arises if the taxable turnover in the country exceeds 40,000 euros per year. In certain cases, the company may have obligations to register and pay VAT in other EU countries.
Social tax
The social tax rate in Estonia is 33%. Social tax is imposed on the income of an individual received as a result of vigorous activity – as a rule, this is a salary in a direct or indirect (a special benefit) form. The company will have to deal with this type of tax only if there are employees working in Estonia.
Other taxes
The Estonian taxation system also includes a number of less common taxes that the vast majority of companies are unlikely to face. These include excise taxes, customs duties, gambling tax, land tax, heavy vehicle tax, and a number of local taxes imposed by regional authorities.
Summary
Definitely, Estonia is not a tax haven. Nevertheless, its unique corporate tax system is ideal for doing business. This is confirmed by the fact that for seven years in a row Estonia has been ranked first in the rating of tax competitiveness, published annually by the International Tax Foundation and showing how well the country’s tax system contributes to the development of entrepreneurship.