In general, residents pay taxes in their home state on their international income. This implies that the nation to which you submit your yearly individual income tax returns often seeks to tax revenue that you have earned from all around the world. When income has already been taxed in the source state, both domestic and bilateral mechanisms are typically in place to prevent or alleviate double taxation. To show your local levy authorities proof of taxes paid or taxes withheld in Estonia, you should have it easily available. Each sort of income (dividends, salaries, directors’ fees), as well as the terms of the levy treaty your country has signed with Estonia, may receive a different local tax treatment.
Tax residency for corporations
A straightforward rule in Estonia states that if a company is incorporated following Estonian legislation, it is a levy resident in this country. Your business is an Estonian levy resident and is liable for Estonian taxes once you have registered your Estonian OÜ. To determine if a corporation is a levy resident, different procedures apply in some nations. It is typical for tax residence to also be determined by the location of effective management in addition to the place of incorporation. If your company is based in a nation with such regulations, it may end up with dual tax residence. This situation arises when two states each assume that the company is subject to taxation in their respective jurisdictions. If this corporation operates internationally or is managed from outside Estonia, foreign earnings will be taxed in their respective locations, with Estonia preventing double taxation. A list of all Conventions for the avoidance of double taxation is available on the website of the Estonian government. But when it comes to taxes, never rely on broad advice. International tax regulations may be complicated and based on the particulars of your company’s operations and location.
Tax simplification via Estonian e-residency
Having an e-residency can simplify and increase transparency in the levy payment process thanks to Estonian e-services, notwithstanding the complexity of international taxation. If you owe corporate taxes in the country, for instance, you can declare all of your taxes online.
Estonian taxation
In Estonia, annual profits are not subject to income tax. Only when gains have been distributed, such as when you pay dividends, is income tax assessed monthly. The standard company levy rate is a flat 20%, which is determined by subtracting 20/80 from the taxable net payment. Since 2019, a reduced rate of 14/86 may be used provided regular dividends are handed out. E-residents who operate enterprises in Estonia must also take into account the following Estonian taxes in addition to corporate income tax:
- 20% income tax from the director’s fee
- 33% social tax is deducted from the director’s fee
Again, this is a generalization, and depending on your particular business, exceptions may also apply. As such, talk to your business service provider.
VAT registration
Businesses in Estonia must register for VAT if their yearly sales reach the government’s established threshold, which is currently €40,000. It is a crucial component of the Estonian tax system since, once registered, businesses must collect VAT on their sales and can subtract the VAT they paid on their purchases.
Tax identification number
In Estonia, there is no corporation tax ID. All institutions and services in this country should accept your 8-digit company registration code and your 11-digit personal identity code (isikukood). There is no other number to offer than your registration code if you are asked to provide your unique taxpayer number (also known as TIN) someplace else in the world. In Estonia, you are not obligated to have a VAT registration number until your business exceeds certain turnover thresholds. Additionally, having a VAT registration number is not a mandatory requirement for using services, whether they are domestic or international.
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