Estonia increases VAT to 24%: What businesses must know

Dividends received by residents from resident companies are exempt from tax. However, dividends received from resident companies that are taxed at a lower rate under a special three-year distribution rule are included in the individual’s taxable income. This tax is not a withholding tax and is paid by the company in addition to the amount of dividends distributed. If you also pay taxes in Estonia, you must file an Estonian tax return using Form TSD, which covers income, social security, and health insurance payments. Estonia has a flat income tax rate of 20%, and social security contributions are divided equally between the employer and employee. It’s worth noting that Estonia has a tax treaty with the US to prevent double taxation.

Assistance with tax-efficient business solutions

Estonia is widely known for its digital innovation, ease of doing business, and simple tax system. But when it comes to personal taxes, many residents — both Estonian citizens and international professionals living here — still have questions. Estonia’s personal income tax system is designed to be simple and efficient, promoting economic growth and individual responsibility. Estonia has a proportional (i.e. flat) tax rate of 22%, which applies to all items of income derived by a resident taxpayer. Most items of personal income are taxed on a gross basis, mainly through withholding at source, whereas business income and capital gains are taxed on a net basis subject to certain conditions.

Why Personal Tax Considerations Matter

This tool is designed to provide a comprehensive assessment of your tax obligations, including income taxes and social security contributions. In Estonia, capital gains from the sale or exchange of assets are generally taxed on a net basis as part of ordinary income, but capital losses can only be offset against capital gains. Certain qualifying capital gains are exempt from income tax, such as the gain from the sale of a personal residence.

Selecting the right accountant or bookkeeper for your business in Estonia

• As a US expat living in Estonia, you must know the essential tax forms you must file.
• If one spouse does not fully utilise their tax-free allowance (due to low or no income), the unused portion can be transferred to the higher-earning spouse, reducing their taxable income.
• US expats in Estonia must know the tax treaty and how it may affect their tax obligations.
• Estonian tax residents are required to file an annual tax return using Form TSD.
• Tax planning is an important step towards tax optimisation and tax efficient investing, which you can do with the help of a duly qualified tax professional.

Estonia’s favourable company tax regime also allows companies to defer paying any taxes by reinvesting profits, thereby fuelling company growth. Because personal tax residency and which country you earn your money in influence where you owe tax – it’s important to consider your options and where you choose to spend your time wisely. Estonia provides most taxpayers with an income tax allowance of 1,728, which can be kept as a tax-free personal allowance. Estonia’s tax credit is a basic (fixed) allowance available to all (single) taxpayers without dependents. The basic tax-free allowance is the most common way to reduce taxable income. In 2024, this allowance is up to €654 per month (or €7,848 annually), depending on your total income.

Not all taxes are made equal, however, and certain taxes—or ways to levy them—are preferable to others. A principled tax system features simplicity, neutrality, and transparency across multiple areas of the tax code including corporate, individual, consumption, property, and cross-border taxation. Tax regulations should be easily understandable and permanent, and they should influence economic behavior as little as possible. Under the treaty, residents of one country can claim a credit for taxes paid in the other country to avoid being taxed twice on the same income.

The Estonian Startup Visa: From Innovation to Residence

It also has a relatively flat, 21 percent income tax rate, which is half of the OECD average top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. Below we take an in-depth look at personal income tax and the benefits and implications of being an Estonian e-⁠resident.

Social security and social tax in Estonia

This tax is applied annually, with rates ranging from 0.1% to 2.5% of the value of the land, depending on the municipality. Landowners are generally responsible for paying the land value tax, though in some cases, the person using the land will be responsible instead. Not only does Estonia have relatively low tax rates, it also provides an example of a neutrally structured tax system that does not discourage saving and investment. Considering where you owe personal tax and the tax rules that apply can help you to plan ahead and ensure tax optimisation and efficiency. Tax planning can also help you discover the optimal place to be a tax resident and how to take advantage of options like Estonia’s e-⁠Residency program. The impact of being taxed twice by two different countries that both have a claim to your income can be catastrophic.

When Are Taxes Due in Estonia?

• Rental payments and royalties paid to resident individuals are subject to withholding tax at a rate of 20%.
• Once the profits are distributed, they are generally taxed at a flat rate of 20%.
• The tax system in Estonia is characterized by its simplicity and favorability towards businesses.
• A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates., as explained in the Index.
• Land tax is levied on all landowners in Estonia, except for specific exemptions such as state-owned land, land used for public purposes, or protected areas.
• Instead, Estonia’s tax system is neutral between land holding and development.

Understanding tax laws in different countries can help you to optimise your tax liabilities and help ensure that you comply with all regulations. For e-⁠residents, it’s also important to understand the difference between your individual taxes and your company’s taxes. Estonia has one of the lowest income taxes in the world, charging a maximum income tax of 21.00%. Countries with similar tax brackets include Norway with a maximum tax bracket of 24.55%, Sweden with a maximum tax bracket of 25.00% and Spain with a maximum tax bracket of 27.13%.

Instead, the profit is potentially taxed as at Estonia’s 21 percent capital gains rate. If the business reinvests its $100 profit, it is probable that the value of the business estonia flat tax would increase and, with it, the value of a shareholders shares. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. Businesses operating in Estonia will typically be tax resident in Estonia (subject to CFC rules, permanent establishments in other countries, and taxation treaties). In contrast, e-⁠residents of Estonia will generally not be liable to pay income taxes in Estonia as they will not be tax residents here.