Corporate income tax in Estonia
It is important to bear in mind that in Estonia in contrast to a number of European countries there is no systematic monthly corporate tax. Instead a resident company shall pay income tax on profits distributed as dividends or any other profit distributions in monetary or non-monetary form upon their payment. With regard to the distribution the income tax is not charged on profit distributed by the way of a bonus issue.
Furthermore there are several exception situations where taxation on the corporate level is applied. In accordance with Estonian legislation such corporate income tax can be imposed on the resident legal person or a non-resident legal person that has a registered permanent establishment in Estonia. A legal person is considered a resident if it is established in accordance with Estonian law.
The period of taxation of non-resident legal person’s income from which the deductions allowed pursuant to law have been made is one calendar year. The period of taxation of fringe benefits for resident and non-resident legal persons as well as for distributed profit, gifts, donations, costs of entertaining guests and expenses and payments not related to business regarding resident and non-resident legal persons is one calendar month.
Following tax rates are applied during provided periods of taxation:
- 21/79 = 26,58% in 2014
Payments that are not profit distributions
Payments made upon reduction of share capital or contribution, redemption of shares or liquidation of a legal person shall be taxed pursuant to the procedure of taxation of gains from transfer of property. The payments may be considered dividends if the value of transaction conducted between a resident legal person and a non-resident or natural person associated with the resident legal person differs from the value of similar transactions conducted between non-associated persons. In such case a tax administrator may, determining the income tax, apply value of transactions applied by non-associated independent persons under similar conditions.
Fringe benefits and taxation
An employer that is a resident legal person or a non-resident legal person having a permanent establishment has to pay income tax on fringe benefits granted to its employees. Fringe benefits may include goods, services, different forms of remuneration and monetary benefits that are given in connection to employment service or contractual relationship, membership in the management. In order to draw a line it is important notice that fringe benefits do not include cash payments regarded as salary, wages, supplementary remuneration and payments, remuneration of a management as well as payments for goods or services.
Taxation of Gifts and donations
Resident legal person shall also pay income tax on all gifts and donations that have not been taxed under fringed benefits or have not been subject to withholding tax. Regarding those incomes there is a list of non-profit associations and foundations approved by the Government as well as a number of religious associations, hospitals, cultural, scientific, and educational, sports, law enforcement and social welfare institution which have been granted a tax relief.
Taxation of payments that are not business-related
Resident legal person may be subjected to taxation of expenses not related to business. In accordance with the Estonian legislation following expenses can are classified as not being related to business:
- Fines and penalty payments imposed on the basis of law;
- The cost of property seized from the taxpayer;
- Payments related to environmental issues;
- Gratuities and bribes;
- Entrance and membership fees, payments for services and obligations not related to business;
- Representation costs.
Furthermore a number of payments including acquisitions of property, securities, payment of a fine for delay or a contractual penalty or granting a loan may be considered as payments not related to business and subjected to income taxation, especially if connected to law tax rate territories.
A permanent establishment of a non-resident legal person that is registered in Estonia shall be charged with income tax. All fringe benefits, gifts, donations and costs of entertaining guests granted by a non-resident to its employees or members of the management shall be taxed regardless of whether the recipient is a resident or non-resident. The income tax is also imposed on the cost of property taken out of a permanent establishment, exceeding the total amount of the cost of property of the permanent establishment located in Estonia, payments made through or on account of a permanent establishment to the head office or any third party and remittance of goods for which no return compensation of any value is received. Yet the distribution in question may be tax-free if the receiver owns at least 10% of the shares, stocks or votes of the distributing permanent establishment situated in contract state unless it is considered a low tax rate territory.
Kati Kruut, attorney at law of the Gencs Valters Law Firm in Tallinn.
Practising in fields of Value Added Tax Law .
T: +372 61 91 000
F: +372 61 91 007