Estonia Corporate Tax Guide

Estonia

Tallinn GMT +2

EY +372 611-4610 Rävala 4, 7th Floor 10143 Tallinn Estonia

Principal Tax Contact

 Ranno Tingas

+372 611-4578

Mobile: +372 511-1848 Email: ranno.tingas@ee.ey.com

International Tax and Transaction Services – International Corporate Tax Advisory

Ranno Tingas +372 611-4578

Mobile: +372 511-1848 Email: ranno.tingas@ee.ey.com Hedi Wahtramäe +372 611-4570

Mobile: +372 509-2665 Email: hedi.wahtramae@ee.ey.com

International Tax and Transaction Services – Transfer Pricing Jevgeni Semjonov +372 611-4616

Mobile: +372 520-0624 Email: jevgeni.semjonov@ee.ey.com

International Tax and Transaction Services – Transaction Tax Advisory

Hedi Wahtramäe +372 611-4570

Mobile: +372 509-2665 Email: hedi.wahtramae@ee.ey.com

People Advisory Services

Hedi Wahtramäe

Indirect Tax

+372 611-4570

Mobile: +372 509-2665 Email: hedi.wahtramae@ee.ey.com

Tõnis Elling +372 611-4500

Mobile: +372 502-8551 Email: tonis.elling@ee.ey.com

Legal Services

Pekka Puolakka +372 611-4610

Mobile: +372 5650-3399 Email: pekka.puolakka@ee.ey.com

The tax law in Estonia has been frequently amended, and further changes are likely to be introduced. Because of these frequent changes, readers should obtain updated information before engaging in transactions.

A. At a glance

Corporate Tax Rate (%)

0/14/20 (a)

Capital Gains Tax Rate (%) 0/14/20 (b)

Branch Tax Rate (%) 14/20 (a)

Withholding Tax (%) (d)

Dividends 0/7 (c)

Interest 0/20 (d)

Royalties 0/10/20 (e)

Rental Payments

(f)

(g) Salaries and Wages

(a) Resident companies and permanent establishments of nonresident companies are not subject to tax on their income. They are subject only to tax at a rate of 20% on the gross amount of distributed profits and certain payments made. The tax rate is applied to the net taxable amount divided by a specified per centage. A lower income tax rate of 14% is applied to regular dividends. For further details, see Section B.

(b) Resident companies and permanent establishments of nonresident companies are not subject to tax on their capital gains received. They are subject only to tax at a rate of 14% or 20% on the gross amount of distributed profits. Nonresident companies without a permanent establishment in Estonia are subject to tax at a rate of 20% on their capital gains derived from Estonian sources. For further details, see Section B.

(c) Withholding tax is not imposed on dividends paid to companies. Dividends are subject to 20% (or 14% in certain cases) corporate income tax at the level of the resident distributing companies only. Withholding tax at a rate of 7% is imposed on certain profit distributions to individuals. For further details, see Section B.

(d) Interest payments are generally exempt from withholding tax. Withholding tax at a rate of 20% is imposed on interest paid to resident individuals (including payments made by contractual investment funds on the account of the funds). Interest paid to nonresidents as a result of ownership of contractual investment funds is subject to a 20% withholding tax if more than 50% of the assets owned (directly or indirectly) by the fund during a two-year period preceding the date of the interest payment is real estate located in Estonia and if the inter est recipient has at least 10% ownership in the contractual investment fund at the moment of receiving the interest. Withholding tax is not imposed on inter est paid from the profits of contractual investment funds if the profits have already been taxed.

(e) Withholding tax at a rate of 10% is imposed on payments to nonresident individuals and companies. Royalties paid to companies resident in other EU countries or Switzerland are not subject to withholding tax if the provisions of the EU Interest-Royalty Directive are satisfied. A 20% withholding tax is imposed on payments to resident individuals.

(f) Withholding tax at a rate of 20% is imposed on payments to resident indi viduals and nonresidents.

(g) The 20% rate applies to payments to nonresidents from low-tax jurisdictions (a low-tax jurisdiction is a jurisdiction that does not impose a tax on profits or distributions or a jurisdiction in which such tax would be less than ⅓ of the Estonian tax payable by resident individuals on a similar amount of business income). The 10% rate applies to payments to other nonresidents for services rendered in Estonia. A 0% rate may apply under double tax treaties.

B. Taxes on corporate income and gains

Corporate income tax. Resident companies (except for limited partnership funds) and permanent establishments of nonresidents are not generally subject to tax on their income (see below an exception in the case of exceeding borrowing costs and controlled foreign company [CFC] income). They are subject to tax on the following payments made to resident legal entities, non resident companies, resident individuals and nonresident indi viduals:

• Dividends

• Fringe benefits

Gifts

Donations

Business entertainment expenses

Distributions of profits

• Payments not related to the business of the payer

Income tax is charged annually on exceeding borrowing costs of resident companies and permanent establishments of

nonresidents (except for financial institutions) to the extent they exceed losses if such costs amount to at least EUR3 million and if they exceed 30% of the company’s earnings before interest, tax, depreciation and amortization (EBITDA).

Income tax is charged annually on resident companies and per manent establishments of nonresidents’ income from controlled foreign companies (CFCs) if the income was derived from ficti tious transactions of which the main purpose was to obtain a tax advantage using assets and taking risks related to controlling company key employees. The rule does not apply to resident companies if the CFC financial year profit does not exceed EUR750,000 and other business income does not exceed EUR75,000.

The exceeding borrowing cost and taxable CFC income must be reported by the 10th day of the 9th month following the finan cial year. The tax is payable by the same deadline.

Resident companies are companies registered (effectively the same as incorporated) in Estonia. European public limited liabil ity companies and European Cooperative Societies that have their registered office in Estonia are deemed to be Estonian tax resi dents. Nonresident companies without a permanent establishment in Estonia are subject to tax on their business income derived from Estonia.

Tax rates. Resident companies are subject to tax on the payments described in Corporate income tax at a rate of 20% of the gross amount of the payments. To calculate the corporate income tax for 2019, the tax rate is applied to the net taxable amount divided by 0.8.

Beginning with 2019, a lower income tax rate of 14% is applied to regular profit distributions. A regular profit distribution is the amount of the company’s last three years’ average dividend that is subject to tax in Estonia. The 20% tax rate is applied to the dividend amount exceeding the regular profit distribution. The dividend paid in 2018 is the first amount to be included in the three-year average calculation.

To calculate the corporate income tax on a regular dividend, the tax rate of 14% is applied to the net taxable amount divided by 0.86.

A 20% rate applies to income derived by nonresident companies without a permanent establishment in Estonia.

Tax incentive for shipping. On 16 December 2019, the European Commission approved the Estonian Tonnage Tax scheme under the European Union (EU) state-aid rules. The Tonnage Tax scheme is effective from 1 July 2020 and is available for resident shipping companies engaged in the international carriage of goods or pas sengers, and listed ancillary activities carried out with the eligible vessels.

Activities by tugboats and dredgers outside ports and Estonian territorial waters are eligible for the Tonnage Tax regime under certain conditions. Ship managers may also benefit from the Tonnage Tax scheme with respect to income derived from ship management activities.

Capital gains. Capital gains derived by resident companies and permanent establishments of nonresident companies are exempt from tax until they are distributed.

Nonresident companies without a permanent establishment in Estonia are taxed at a rate of 20% on their capital gains derived from Estonian sources.

Capital gains derived from sales of shares and securities by non residents are exempt from tax. However, if the shares of a company, contractual investment fund or other pool of assets are sold by a nonresident with at least a 10% holding and if at the time of the sale or at any other time during the two preceding years, real estate and buildings directly or indirectly accounted for 50% or more of the assets of the company, capital gains derived from the sale of the shares are taxable.

If a resident company is deleted from the Estonian commercial register without liquidation and its economic activities are ended, the holding of a nonresident in the company is taxed as a capital gain, which is equal to the market value of the holding less the acquisition cost. The taxation is postponed if economic activities are continued through another resident company or a permanent establishment remains in Estonia.

Administration. The tax period is a calendar month. Tax returns must be filed and income tax must be paid by the 10th day of the following month.

Advance rulings. Taxable persons may apply for advance rulings from the tax authorities. Advance rulings may relate only to ac tual planned transactions, as opposed to theoretical questions. The advance ruling is binding on the tax authorities and recommended for the taxable person. The taxable person must inform the tax authorities of the execution of the transaction described in the advance ruling. A time limit for the binding nature of the ruling is set based on the taxpayer’s evaluation of the time needed for the execution of the transaction.

The processing of the advance ruling may be suspended if a similar transaction is simultaneously being reviewed in challenge proceedings (administrative proceedings involving a dispute be tween the taxpayer and the tax authorities) or court proceedings and if the expected decision in such proceedings is crucial for the determination of the tax consequences. Advance rulings may not be issued with respect to the determination of transfer prices (determination of value of transactions between related parties).

For the advance ruling to be binding, the taxpayer must present detailed and accurate information before the beginning of the relevant transactions. If the tax laws are amended after the ad vance ruling has been issued but before the transaction is carried out, the advance ruling is no longer binding. The deadline for issuing an advance ruling is 60 calendar days beginning with the date of acceptance of the application. By a motivated decision (a decision that includes arguments supporting the decision) in writ ing, the deadline may be extended for an additional 30 calendar days. A state fee is payable for the processing of the advanceruling application.

A summary of the ruling, except for information protected by the tax secrecy clause (the tax authorities are bound to maintain the confidentiality of information concerning a taxpayer that was acquired in the course of their activities; certain exceptions apply), is published on the tax authorities’ web page. The taxable person may prohibit the disclosure of specific information.

Reporting of intragroup loans. Resident companies and the per manent establishments of nonresidents (except public limited funds and credit institutions) are required to report the following information on loans granted to other group companies:

• Amount of the loan

• Increase in principal balance

• Extension of term or change of other material terms

The reporting must be done on a quarterly basis.

Dividends. Withholding tax is not generally imposed on dividends paid. A 7% withholding tax is imposed on dividends paid to in dividuals if the corporate income tax of 14% has been paid by an Estonian company on the share of profits out of which the divi dends are paid. Payers of dividends must pay corporate income tax at a rate of 20% or 14% on the gross amount of dividends paid. This income tax is treated as a payment of income tax by the distributing company and not as tax withheld from the re cipient of the dividends.

Dividends received are not included in taxable income (see Foreign tax relief).

The following payments are also taxable as dividends at the level of the company:

• Decrease of share capital (if the decrease exceeds paid-in equity capital)

• Redemption of shares and the payment of liquidation proceeds in an amount that exceeds the monetary and non-monetary pay ments made into the equity capital

Interest. Interest payments are generally exempt from withholding tax. Withholding tax at a rate of 20% is imposed on interest paid to resident individuals (including payments made by contractual investment funds on the account of the funds). Interest paid to nonresidents as a result of ownership of contractual investment funds is subject to a 20% withholding tax if more than 50% of the assets owned (directly or indirectly) by the fund during a twoyear period preceding the date of the interest payment is real es tate located in Estonia and if the interest recipient has at least 10% ownership in the contractual investment fund at the moment of receiving the interest. Withholding tax is not imposed on inter est paid from the profits of contractual investment funds if the profits have already been taxed.

Foreign tax relief. Dividends distributed by an Estonian company and a permanent establishment of a foreign company that had received dividends from a foreign company (except from a com pany located in a low-tax jurisdiction) are exempt from income tax if the following conditions are satisfied:

• The dividends are received from a taxable company resident in the European Economic Area (EEA) or Switzerland, or foreign

tax has been paid on or withheld from the profits out of which the dividends were paid.

• The Estonian company receiving the dividends owns at least 10% of the shares or votes of the foreign company when the dividends were received.

• The transaction or a chain of transactions is actual (a transaction or a chain of transactions is not actual if its primary purpose or one of its primary purposes is to obtain a tax advantage), and the distributing subsidiary cannot deduct the distributed profits. The tax exemption applies to the extent that a transaction or a chain of transactions is carried out for business purposes, the economic content of which is necessary and appropriate for the business activities in question.

The following profits are also exempt from tax:

• Profits allocated to a permanent establishment of an Estonian company in an EEA country or Switzerland

• Profits allocated to a permanent establishment of an Estonian company in another foreign country if foreign tax has been paid on the profits

Profits received from a permanent establishment by an Estonian resident company remain exempt if a transaction or a chain of transactions is actual (a transaction or a chain of transactions is not actual if its primary purpose or one of its primary purposes is to obtain a tax advantage).

Any foreign tax paid or withheld can be credited by an Estonian company against income tax payable on dividend distribution.

C. Determination of trading income

Because resident companies and permanent establishments of nonresident companies registered with the Estonian authorities are not subject to tax on their income, they do not need to deter mine their trading income for tax purposes.

Profits of Estonian contractual investment funds from immovable property are taxed immediately when profits are earned.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax, on goods and services, excluding exports 9/20

Social security tax 33 Mandatory funded pension contributions 2 Land tax 0.1 to 2.5

Unemployment insurance contributions (2022 rates); paid by Employer 0.8 Employee 1.6

Other significant taxes include excise duty, stamp duties, heavy vehicles tax, charges on the use of Estonian natural resources and pollution charges.

E. Miscellaneous matters

Foreign-exchange controls. The official currency in Estonia is the euro (EUR).

Enterprises registered in Estonia may maintain bank accounts abroad without any restrictions.

Debt-to-equity rules. In certain cases, exceeding borrowing costs of resident companies and permanent establishments of nonresi dents are subject to corporate income tax. See Corporate income tax in Section B.

Anti-avoidance legislation. Under the Taxation Act, if it is evident from the content of a transaction or act that the transaction or act is performed for the purposes of tax evasion, the actual eco nomic substance of the transaction applies for tax purposes. If a fictitious transaction is entered into in order to conceal another transaction, the provisions of the concealed transaction apply for tax purposes. Also, see Foreign tax relief in Section B.

Under the general anti-avoidance rule contained in the Income Tax Act, a transaction (or chain of transactions) is not considered for income tax purposes if the main purpose or one of the main purposes of the transaction is obtaining a tax advantage that is contrary to the purpose of the tax law or an international agree ment and that is fictitious. A transaction (or chain of transac tions) is considered to be fictitious if it is not done for actual vital or business purposes that reflect the economic substance of the transaction.

Exit tax. From 2020, an exit charge at the rate of 20% is imposed on the unrealized capital gains created in Estonia arising from transferring assets to a foreign permanent establishment or mov ing the tax residency of the company out of Estonia. The exit tax base is calculated as the difference between the fair-market value and the book value of the respective assets. The following assets are excluded from exit tax:

• Assets in regard to the financing of securities

• Collateral assets

• Assets moved to meet prudential requirements or manage liquidity

• Assets that are reverted to Estonia within 12 months

Hybrid mismatches. The rules against hybrid mismatches are effective from 1 January 2020. The rules cover double non-taxation caused by differences in the characterization of financial instruments, payments and entities for tax purposes in different jurisdictions, or the allocation of payments between the head office and permanent establishments. To eliminate double non-taxation or deduction without inclusion into taxable income, income tax is imposed on the relevant payment or cost, or exemption is denied for income that has been deducted or exempted in another jurisdiction.

Transfer pricing. Under a transfer-pricing measure in the income tax law, pricing between resident and nonresident associated companies should be at arm’s length. The tax authorities may

adjust to an arm’s-length amount the profit of a company engag ing in transactions with nonresident associated persons. Persons are considered associated if they have a common economic inter est or if one person has a prevalent influence over another person. The transfer-pricing measure also covers transactions between nonresident legal entities and their permanent establishments in Estonia. Transfer-pricing documentation is required for the fol lowing entities:

• Entities with more than 250 employees (together with related parties)

• Entities operating in certain industries

• Entities that had turnover, including the turnover of related par ties, of at least EUR50 million in the preceding financial year

• Entities that had consolidated net assets of at least EUR43 mil lion in the preceding financial year

• Parties to a transaction if one of the parties is a resident of a low-tax jurisdiction

Country-by-Country Reporting. Estonia has implemented legis lation requiring the parent undertakings of multinational enter prises (MNEs) with a consolidated turnover of at least EUR750 million to submit to the tax authorities’ annual groupwide reports for each entity and jurisdiction in which the MNE group operates (Country-by-Country Reporting).

The report is due on 31 December of the year following the end of the financial year. Notification about the MNE group and the reporting entity is required to be submitted within six months after the end of a financial year.

Interest on tax arrears. The tax authorities suspended the calcula tion of default interest on tax arrears for the COVID-19-related emergency period with retroactive effect from 1 March 2020 until the end of the emergency period on 17 May 2020. After the emergency period, the default interest rate was lowered from the usual 0.06% per day to 0.03% per day until 31 December 2021. From 1 January 2022, the interest rate is calculated again at 0.06% per day.

Mandatory Disclosure Regime. The Council of the European Union has revised Council Directive 2011/16/EU on administra tive cooperation in the field of taxation, resulting in a Mandatory Disclosure Regime (MDR) that came into effect on 25 June 2018. Automatic exchange of information on cross-border schemes imposes an obligation on tax advisors and taxpayers to inform the tax authorities of cross-border tax planning schemes. The MDR applies to all types of direct taxes.

The Estonian Tax and Customs Board had to be informed for the first time on 28 February 2021 of the schemes, which started to be implemented between 25 June 2018 and 30 June 2020. Schemes started from 1 July 2020 to 31 December 2020 had to be notified within 30 days of 1 January 2021. For marketable arrangements, the first reporting date was 30 April 2021.

The disclosure must include details of relevant taxpayers, their associated parties (as defined) and the cross-border arrangement in question. The criteria for cross-border arrangements is stipu lated in the Minister of Finance Regulation No. 1 passed on 17 January 2020.

Reportable schemes with the main benefit, or one of the main benefits, of obtaining a tax advantage are the same as provided by the EU Directive on Administrative Cooperation (DAC) 6 and include the following:

• Confidentiality clause

• Success fee

• Standardized documentation or structure

• Acquired loss-making company and losses used outside the business of the acquired company

• Income converted into capital and categories of revenue with a more beneficial tax treatment

• Round tripping of funds using conduits and entities without substance

• Deductible cross-border payments to associated enterprises subject (when received) to a zero or almost zero tax rate, a full tax exemption or a preferential tax regime

Reportable schemes with the main benefit, or one of the main benefits, of not obtaining a tax advantage include the following:

• Payment to an associated stateless enterprise or associated enterprise in a prohibited list jurisdiction

• Same asset subject to depreciation in more than one jurisdiction

• Multiple claims of relief for double taxation

• Transfer of assets with a material difference in the price used for tax purposes

• EU legislation or any equivalent agreements on the automatic exchange of financial account information circumvented

• Nontransparent legal or beneficial ownership chains used

• Unilateral transfer pricing safe harbor rules used

• Transfer of rights to hard-to-value intangibles

• Restructuring resulting in significant profit shifts (50%) fol lowing the transfer of functions, risks or assets between associ ated enterprises

Income tax liability of hybrid entity. Starting in 2022, in certain situations, Estonia will tax trust fund income. In general, a trust fund is considered transparent for Estonian tax purposes, mean ing that the trust fund income is considered to be shareholder income respective to the proportion of the shareholders’ owner ship in the trust fund and taxed on shareholder level.

Because there are other jurisdictions that consider a trust fund as a taxable person, there may be cases where trust fund income is not taxed in the other country nor in Estonia. To avoid double non-taxation resulting from hybrid mismatches, an amendment to the Estonian Income Tax Act was adopted, stipulating that a trust or its manager shall pay income tax on the income that would have been attributed to a shareholder of the trust in proportion to the shareholder’s share in the trust if the shareholder of the trust meets the following conditions:

• The shareholder is a nonresident-affiliated undertaking that directly or indirectly owns at least 50% of the shares in a trust.

• The shareholder is located in a jurisdiction that treats the trust as an income taxpayer, and this income is not taxed as accord ing to Estonian legislation (as nonresident income taxable in Estonia) or the legislation of another jurisdiction.

F. Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the rate under Estonian domestic law.

Dividends (a)(g) Interest (b) Royalties (c) % % %

Albania 0 0 5

Armenia 0 0 10

Austria 0 0 5/10 (d)

Azerbaijan 0 0 10

Bahrain 0 0 0

Belarus 0 0 10

Belgium 0 0 0/10

Bulgaria 0 0 5

Canada 0 0 0/10

China Mainland 0 0 10

Croatia 0 0 10

Cyprus 0 0 0

Czech Republic 0 0 10

Denmark 0 0 0/10

Finland 0 0 0/10

France 0 0 0/10 Georgia 0 0 0 Germany 0 0 5/10 (d)

Greece 0 0 5/10 (d)

Guernsey 0 0 5

Hong Kong SAR 0 0 5

Hungary 0 0 0/10

Iceland 0 0 0/10

India 0 0 10

Ireland 0 0 0/10

Isle of Man 0 0 0

Israel 0 0 0

Italy 0 0 0/10

Japan 0 0 5

Jersey 0 0 0 Kazakhstan 0 0 15

Korea (South) 0 0 5/10 (d)

Kyrgyzstan 0 0 5

Latvia 0 0 5/10 (d)

Lithuania 0 0 0

Luxembourg 0 0 5/10 (d)

Malta 0 0 10

Mauritius 0 0 0/5

Mexico 0 0 10

Moldova 0 0 10

Netherlands 0 0 0/10

North Macedonia 0 0 0

Norway 0 0 0/10

Poland 0 0 10

Portugal 0 0 10

Romania 0 0 10

Serbia 0 0 5/10 (e)

Singapore 0 0 7.5

Slovak Republic 0 0 10 Slovenia 0 0 10

Dividends

Spain

Thailand

Turkey

Turkmenistan

United Arab

United

United States

Uzbekistan

Non-treaty

(d)

(d)

(d)

(h)

(f)

(a) Dividends paid to corporations are not subject to withholding tax under Estonian domestic law.

(b) Interest is not subject to withholding tax under Estonian domestic law except for interest paid in certain circumstances to nonresidents as a result of owner ship in foreign contractual investment funds (see Section B).

(c) Royalties paid to a company resident in another EU country or Switzerland are not subject to withholding tax if the provisions of the EU Interest-Royalty Directive are satisfied.

(d) The lower rate applies to royalties paid for the use of industrial, commercial or scientific equipment.

(e) The lower rate applies to royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works, including cinematographic films, but excluding software payments.

(f) The 20% rate applies to rental payments to nonresidents. The 10% rate applies to royalties, including royalties paid for the use of industrial, commercial or scientific equipment.

(g) Withholding tax at a rate of 7% is imposed on certain profit distribution to individuals (for further details, see Section B). This withholding tax rate is reduced to 5% (Bulgaria, Israel and North Macedonia) and to 0% (Bahrain, Cyprus, Georgia, Isle of Man, Jersey, Mexico and the United Arab Emirates).

(h) The lower rate applies to royalties paid for technical services; that is, for managerial, technical or consultancy services, including the provision of services by technical or other personnel.