Estonia

Basis – Corporate income tax is levied on worldwide income.

Tax rate – Undistributed profits are tax exempt. Profits distributions are usually subject to a 20% tax (20/80 of the net distributed amount).

A lower rate of 14% may apply for companies making regular profit distributions: payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years.

Capital gains – Capital gains are considered ordinary income and taxed when they are distributed. A participation exemption on the disposal of shares may be availed of if the underlying company is tax resident in the EEA or Switzerland, and the Estonian company holds at least 10% of the shares or votes of the company prior to such disposal. This exemption also applies if the subsidiary is a non-EEA/Switzerland resident and profits have been previously taxed in the foreign jurisdiction. This exemption may also apply if the entity is a non-EEA/Switzerland resident and profits have been previously taxed in the foreign jurisdiction.

Dividends – Dividends are considered ordinary income and taxed when they are redistributed. However, corporate income tax will not apply to redistribution of dividends if the underlying dividends are received from a subsidiary that is tax resident in EEA or Switzerland, and the Estonian company holds at least 10% of the shares or votes of the distributor. This exemption may also apply if the subsidiary is a non-EEA/Switzerland resident and profits have been previously taxed in the foreign jurisdiction.

Interests – Interests are treated as ordinary income and taxed when company profits are distributed.

Royalties – Royalties are treated as ordinary income and taxed when company profits are distributed.

Withholding Taxes – There is no withholding tax on dividends. However, if dividends are subject to the reduced corporate income tax (14%) and are distributed to individuals (residents or non-residents), they may be subject to a 7% withholding tax, unless it is reduced due to a tax treaty.

There is no withholding tax on interests unless interests are derived by a non-resident investor from an Estonian contractual fund or other pool of assets (10%).

Royalties paid to non-residents are subject to a 10% withholding tax unless the tax rate is reduced under a tax treaty or exempted via the EU interests and royalties directive.

Foreign-source income – Foreign-source income is generally subject to corporate tax.

Losses – As taxes are levied on distributed profits, there are no adjustments to accounting profits for tax purposes.

Inventory - As taxes are levied on distributed profits, there are no adjustments to accounting profits for tax purposes.

Anti-avoidance rules – Transfer pricing rules are applicable to all types of transactions between related persons, which must be conducted at arm’s length.

Undistributed profits of a CFC may be attributed to the Estonian company. A CFC is defined as any non-resident enterprise in which the resident company alone or together with its related parties holds more than 50% of the voting rights or capital, or is entitled to receive more than 50% of the profits. A foreign PE of an Estonian company is also considered to be a CFC.

In order for the tax obligation to be triggered, the following conditions will have to be met:

• The underlying transaction or chain of transactions generating the profit of the CFC was fictitious.
• The principal aim of the underlying transaction or chain of transactions was gaining a tax advantage.
• The CFC is effectively managed by key employees of the shareholder of the controlling company that created the opportunity to make a profit.

An exception allows the company to exclude from the scope of the provision a CFC that simultaneously meets the following two conditions:

• The accounting profit of the previous financial year did not exceed EUR 750,000.
• Other revenues of the foreign company, such as profits from subsidiaries, affiliates, and financial investments, interest income, and other financial income (i.e. non-trading income) did not exceed EUR 75,000 during the same period.

Labor taxes – Employers must pay social tax on certain payments to individuals at the rate of 33%. Additionally, employers and employees must pay unemployment social contributions at 1% and 2%, respectively.

Tax credits and incentives – There are no additional tax credits or incentives.

Personal income tax – An individual is considered a tax resident in Estonia if he or she has a permanent residence and/or stay more than 182 days in Estonia in a 12-month period.

Tax residents are subject to income tax on their worldwide income at a flat rate of 20%. Non-residents pay taxes on their income accrued in Estonia.

Capital gains are considered ordinary income and taxed at standard income tax rate. Investment income is usually taxed at normal rates. However, a tax deferring may be available under an investment account scheme where individuals can reinvest investment income and capital gains tax-free.

Domestic dividends are exempt from taxation, dividends obtained abroad are exempt provided that were taxed on source. Interests from financial institutions of the EEA are tax exempt.

Rental income and royalties are considered ordinary income and therefore taxed at the applicative tax rate.

Other taxes – V.A.T. standard rate is 20%. Reduced rates of 9% and 0% apply to certain goods and services.

Lands are subject to a property tax that ranges from 0.1% to 2.5%, except for residential lands. There are no transfer, inheritance and net worth taxes in Estonia.