Taxes in Estonia – 2022 Tutorial
In this article, we’re going to discuss taxes in Estonia.
Taxes are and always will be an important topic and consideration for entrepreneurs everywhere.
Especially so if you’re operating internationally and have registered a company in a foreign jurisdiction. Or, when you’re considering registering a company in a foreign jurisdiction.
Estonia has long been considered one of the best tax jurisdictions in Europe. Not only that, but Estonia has also been number one on OECD’s tax competitiveness index for six years in a row.
That’s pretty darn impressive.
Still, Estonia is far from being a tax haven, especially considering the heavy salary taxes for local residents.
Let’s take a look at some of the most important taxes below. We are going to focus on company taxation, and will not cover all taxes which are applicable to Estonian residents.
None of the following is tax advice, and you should never take any general tax information as applicable to your specific situation.
Seek counsel from a local expert (get in touch with us) regarding your specific tax situation.
VAT Rules For Estonian Companies
The standard VAT (value-added tax) rate in Estonia is 20%. But we should first start with the question “Do I need a VAT number?”.
The mandatory threshold for obtaining a VAT number in Estonia is 40 000€ and in some cases, it is 10 000€, such as selling physical goods in the EU (e-commerce). For entrepreneurs only operating in the Estonian market, that would mean that it could make sense not to obtain the VAT number before hitting 40 000€ in annual turnover.
However, f you’re dealing with cross-border transactions, i.e you have clients and vendors in Europe, you should obtain the VAT from the very beginning.
Your suppliers and clients expect you to have a VAT number ( assuming it’s a B2B business), and it simplifies doing transactions as you can use a 0% VAT rate on invoices.
In some cases, for holding companies or investment companies, if the services and activities aren’t taxable, obtaining the VAT number probably does not provide many benefits.
Adding VAT to invoices
These are standard rules for adding VAT to the invoice. Please note that depending on your business there might be different tax rules that apply.
A) Your company has a VAT number
- Invoicing an EU company with a VAT number – you add 0% VAT to your invoice and add a clause “Reverse charged”.
- Invoicing an EU company without a VAT number – you add Estonian VAT 20% to your invoice.
- Invoicing EU consumer – you add Estonian VAT 20% to your invoice.
- Invoicing non-EU company – no VAT added
- Invoicing non-EU natural person – depends on the business. If you’re in accounting, consulting, advertising, data processing, etc business, then 0% VAT is added.
B) Your company does not have a VAT number
If your company does not have a VAT number, you do not add VAT to any invoice that you issue. However, this also means you can not claim back the VAT amount you have to pay on the invoices that you receive. This can become quite costly.
The tax rules for physical products are quite different.
Because physical products are delivered to consumers in different countries, and VAT by nature is a tax on consumption, you need to apply for a VAT of that Member State once you exceed the distant selling threshold.
1. It’s likely you will not become VAT liable in Estonia if products are not delivered to Estonia.
2. You need to apply for a VAT number in the countries where you have warehouses (countries where the products are physically stored and the turnover is created). For example, if you are using a German warehouse, you need to obtain a VAT number in Germany.
3. Once you reach the distant selling threshold, you need to obtain the VAT number of the country where the threshold is exceeded. Note, if you are using the (M)OSS scheme then VAT registration in each state is not required.
Please see the VAT thresholds per Member State below.
Digital Services VAT
There are separate rules for selling digital services in the EU. A digital service is an e-book, a software subscription, or a pre-recorded online course without a live tutor. It’s entirely automated.
If there’s any part of the service where human intervention is required or is part of delivering or offering of the product, then it doesn’t qualify as a digital service.
If you do sell digital services, you have to apply for a VAT from the start in order to use the MOSS scheme.
MOSS means a mini-one-stop shop for collecting the VAT on digital services that you sell.
It means you need to have a proper check-out system in place which collects the client data and calculates the correct VAT amount depending on which Member State the consumer resides in.
You will collect the VAT, and when you submit the MOSS report once per quarter to the Estonian tax office, they will distribute the VAT to each Member State according to the sales you’ve made.
It’s additional work for the accountant, but if your check-out system takes care of adding the correct VAT amount, then it’s something that your accountant shouldn’t have any problems with.
Assuming you’re working with a good service provider.
Special VAT rates
Moving on with the Estonian VAT taxation, there are special rates for certain services.
For example, educational materials, newspapers and other types of news publications, accommodation and some medications are taxed with a 9% VAT rate.
Salary Taxes in Estonia
Employee salary taxes
Operating an Estonian company it’s likely that you’d like to pay salary to yourself or to your employees.
If you’re not an Estonian tax resident, then salary taxes (paid as employee salary) aren’t taxed in Estonia. Any salary that you receive as an employee salary is taxed in the country of residence.
You’re a German tax resident managing an Estonian company. You want to pay a salary to yourself for doing the work for the company. This salary is not taxed in Estonia, but you do need to declare your salary in Germany.
Any taxes that you need to pay in Germany should be enquired from the local tax authority or discussed with a local tax advisor.
Board Member Salary
As a general rule, the Estonian tax office expects you to spend a portion of your time on the management duties. This means paying a board member’s salary.
The recommended ratio is 30 / 70. 30% of salary paid as a board member salary and 70% of salary paid as an employee salary.
These numbers are not set in stone, and you can have a different ratios. However, it’s good to pay something as a board member’s salary, because this salary is taxed in Estonia.
There are some additional benefits to using the board member salary, for that you can read about it from our post about the lesser-known opportunity over the benefit of being taxed as a Board Member in Estonia.
Taxes on board members salary
The income tax on board member salary is 20%.The social tax on board member salary is 33%.
For example – if you pay yourself a board member salary of 1000€ per month gross, you’ll need to pay 330€ to the tax office for social tax, and income tax 200€, receiving 800€ to your bank account. Your total expenditure as a company would be 1330€.
Hiring Estonian employee?
What if you want to hire an employee from Estonia? What kind of taxes do you have to pay? Let’s say you’re paying 1000€ salary per month (gross).
Additionally to social tax and income tax, you also have to pay unemployment insurance and pension contribution.
Salary in Estonia is always agreed on a gross amount basis, from which the employer withholds all the required taxes. The accountant calculates the payable taxes, and the employer pays out the net amount to the employee.
For some employees, there is no funded pension or the tax-free income is 0€ (the employee can also choose to not use the tax-free income due to other income streams).
Here’s a sample calculation:
The above sample is done using kalkulaator.ee – you can find the link here and calculate your Estonian employee salary taxes by inserting values to the right fields.
Dividend taxes in Estonia
Dividend tax is another crucially important type of tax for e-residents or for any type of entrepreneur running an Estonian company.
Dividend tax is 20% on gross dividends. This means, that if the gross dividend is 100 000€, you’ll pay 20 000€ to the Estonian government, and will receive 80 000€ as a shareholder.
Some people say that the Estonian dividend tax is actually 25% – it’s also correct, but it depends on how do you want to calculate it. On net amount (80 000€), 20 000€ is 25%.
Either way, it’s pretty simple to understand the dividend tax rate…
Unless you’re a regular dividend payer and your company is owned by another legal entity. If you pay dividends regularly, you may qualify for a 14% dividend tax rate. This does not apply to natural persons as shareholders.
To explain it very easily, if you pay 100 000€ dividends three years in a row, in the fourth year you have a chance to pay 100 000€ dividends with a 14% tax rate.
If you want to pay 500 000€ dividends in the fourth year, you can pay 100 000€ with a 14% tax rate, and 400 000€ with a standard 20% tax rate on gross dividends.
Fringe benefits are additions to compensation that companies give to their employees. These are the benefits that are provided to the people related to the Estonian company.
These people can be board members, employees, close relatives of the employees, etc.
There’s a monetary value to fringe benefits, and this value can be taxed. Before we talk about taxation, it’s important to differentiate which benefits are taxed and which are not.
For example, if you’re a taxi company, and you’ll purchase a car for your employee so he or she can drive people and earn revenue, then this is not a fringe benefit. It’s not taxed as a fringe benefit. The same applies to other tools such as a laptop or a phone for a salesperson.
Any tool that is necessary to perform the work assignments are just a company expense and are not qualified as a benefit.
This also includes accommodation during work trips, taxis, conference tickets, etc. Assuming these expenses are reasonable – if you’re renting a Lamborghini and staying at a lavish penthouse during your conference, then part of the expense can be taxed as a fringe benefit.
Another example could be that you sell jewellery. If you give a gold necklace to your employee for free (as compensation or a bonus), then this is a fringe benefit and taxed according to its market value.
How are fringe benefits taxed?
When you provide fringe benefits to your employees or any other related party of your company, you’ll need to pay income tax and social tax on the value of that benefit.
For example, your employee gets a benefit with a net value of 100€. The gross value of the benefit is 125€ ( 25€ is the income tax). You also have to pay the social tax, meaning 41,25€ will come as an addition.
The total cost of that 100€ benefit for the employer is 166,25€.
When it’s not a fringe benefit?
It’s not a fringe benefit when the benefit is not directed to your employee or any related person to the company.
For example, if you give a gift to your client. In that case, you are obliged to pay the income tax on the value of the gift (100€ gift, then 25€ is paid as an income tax).
Using your home as an office?
Many e-Residents and digital nomads are working from home. The obvious question is can you pay your rent from your company account?
You can, but only partially. The amount of expense that the company covers should be proportional to the workspace.
For example, if you live in a 100m2 apartment, and you have an office room which is 20m2, then the company can cover 20% of the overall rent cost.
Generally, it’s been acceptable to the Estonian tax office that 30% of the rental fee is covered by the company if it’s a home office.
If you have a type of business where 80% of the space is used for business, then you have the option to cover 80€ of the rental cost with your company, but you have to be able to prove that.
The daily allowance is a tax-free sum which you can pay to yourself or your employees during work trips.
For example, you plan to go to a conference in Vancouver, Canada. The conference is 4 days long, and you have additional business meetings for two additional days.
Total, you’re on the road for 6 days. This means you can pay 6 x 50€ = 300€ to yourself, tax-free.
The tax-free daily allowance amount is 50€ for the first 15 days of a month, and 32€ for the remaining days of the month. Meaning, if you have a 3-week trip, then for the first 15 days your daily allowance is 50€ per day, and 32€ after that.
While it’s always good to get tax-free money out of the company, then 50€ a day can barely cover your expenses in more expensive places, unless you’re carefully planning out where you eat, etc.
As mentioned before, accommodation, Uber/taxi/train, etc costs can be paid directly with the company card, but the daily allowance should cover eating and similar expenses.
And last but not least, all expenses during trips (Uber/taxi/train, etc) must be properly documented and reasoned. Get and keep a receipt for all company expenses.
Tax treaties, CFC & Permanent Establishment
If you’re setting up an Estonian company, then you shouldn’t forget that there are tax treaties in place between the countries.
In these tax treaties, the most important thing is to look at the clause that talks about “permanent establishment”.
A German e-Resident operating an Estonian company should take a look at the Estonia – Germany tax treaty, and understand what kind of tax consequences there might be if the German authorities claim that the Estonian company has a permanent establishment in Germany.
In general, if the company management board resides elsewhere, then this can always be the basis for the permanent establishment. Permanent establishment means that a company can be taxed as a local company in the jurisdiction of the management board.
It’s not very often that it happens, but it could happen, especially if you start making serious money.
If tax optimization is one of the main reasons you’re interested in running an Estonian company, we recommend considering moving your personal tax residency to Estonia as well, unless you’re already residing in a good tax jurisdiction.
You can always contact us to discuss your specific tax situation for more clarity.
We’re not going to write much about CFC in this article, because Estonia is not an offshore jurisdiction and it’s not applicable.
However, it might be applicable if your Estonian company has relations with low tax jurisdictions (for example, a shareholder of the Estonian company is a legal entity in a low-tax jurisdiction).
In short, CFC stands for a controlled foreign company. CFC rules are anti-tax avoidance measures to prevent minimizing domestic tax liabilities.
We have a longer article on this topic, which you can read here.
Conclusion about Estonian taxes
Tax topic is and will be one of the crucial conversations for entrepreneurs everywhere. It’s likely that taxes are one of the biggest expenses you’ll have over the lifecycle of your business.
As an e-resident, you have to know at least the basics of taxation in Estonia, as it will help you to avoid costly mistakes, and also see opportunities where you can save money.
We recommend working with a service provider who has a great understanding of how Estonian taxes work, and who can communicate these things to you in a clear way.
If you have any questions about Estonian taxes, please get in touch with us to schedule a consultation. You can contact us here.
Do I have to pay salary taxes in Estonia?
No, unless you’re an Estonian tax resident. E-Residency does not create a tax residency in Estonia. Board member salary taxes are taxed in Estonia.
How much tax do I have to pay on the board member’s salary?
20% income tax and 33% social tax.
Do I have to pay a board member’s salary?
No, it’s not required by the law, but it’s an expectation from the tax office as some of your time is spent on managing the company. The standard ratio between employee salary and the board member salary is 80/20 (80% paid as normal employment salary, and 20% paid as a board member salary).
How much is dividend tax?
Dividend tax is 20% on gross dividends. If the total amount is 100 000€, then 20 000€ is paid to the Estonian government, and 80 000€ is received by the shareholder.
How much is the Estonian VAT rate?
20% is the standard VAT rate in Estonia.
How are company expenses taxed?
Company expenses are not taxed. If the company spends money on non-business related goods or services, then these expenses are not considered to be a business expense and are taxed with income tax and social tax if applicable.
How much is the Estonian corporate tax?
Corporate tax in Estonia is 0%
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