Tax Card 2015: Personal income tax in Estonia

Structure

Personal income tax is imposed on income acquired by a natural person, and it includes:

• income from employment;
• business income (self-employed income);
• gains from transfer of property;
• rent and royalties;
• interest;
• dividends;
• pensions, scholarships and grants, benefits, awards and gambling winnings;
• insurance indemnities and payments from pension funds;
• income of a legal person located in a low tax rate territory.

Taxpayers

Personal income tax is paid by natural persons:

• domestic taxpayers (residents) who have obtained income in the Republic of Estonia and/or foreign states during the taxation period;
• foreign taxpayers (non-residents) who have obtained income in the Republic of Estonia during the taxation period (only Estonian source income is taxed);
• sole proprietors registered in the Commercial Register of Estonia  

Taxable objects

In Estonia from the residents income tax is charged:

• on all emoluments paid to an employee or public servant, also on remuneration or service fees paid on the basis of a contract for services, authorisation agreement or any other contract under the law of obligations;
• on all the business income of sole proprietor, considering that all certified expenses incurred by a taxpayer in relation to business during a period of taxation may be deducted;
• on reduction in the share capital and on redemption or return of shares or contributions, also in certain cases on liquidation proceeds received by a person upon the liquidation of a legal person (if the acquisition cost of the holding is exceeded);
• on gains from the sale or exchange of any transferable and monetarily appraisable objects;
• on royalties;
• on income the hire or lease of immovable or movable property or parts thereof, and consideration for constitution of right of superficies or encumbrance of immovable property with right of pre-emption, usufruct, personal right of use or servitude;
• on all interest accrued from loans, securities, leases, deposits and other debt obligations, except interest received from deposits with a credit institution which is a resident of a EU state or through or on account of a permanent establishment of a credit institution located in EU; the fine for delay (late interest) payable in the event of delay in performance of a monetary obligation is not deemed to be interest;
• on all dividends and other profit distributions received by a resident natural person from a foreign legal person in monetary or non-monetary form (except if income has been paid on the share of profit or income tax on the dividends has been withheld in a foreign state);
• on all pensions, benefits, scholarships and grants, cultural, sports and scientific awards, gambling winnings, parental benefits and compensation and daily allowances related to sports assignments and paid by an artistic association to creative persons for business trips relating to the creative activity of the creative persons;
• on benefits for temporary incapacity for work and on unemployment benefits, on funded pension payments, on amounts paid to a policyholder, insured person or beneficiary under a unit linked life insurance contract (insurance premiums deducted) and in some cases on an insurance indemnity;
• on the income of a legal person located in a low tax rate territory and controlled by Estonian residents, irrespective of whether the legal person has distributed any profits to taxpayers or not;

The basic exemption deductible from the income during a period of taxation (a calendar year) is 1848 EUR. Additionally it is possible to deduct additional 1 848 EUR granted to a parent starting from the second child aged 17 or less. Also it is possible to make deductions on housing loan interest, training expenses, gifts, donations, insurance premiums and acquisition of pension fund units etc. Deduction is limited to 1 920 EUR and amount deducted cannot exceed 50% of the taxable income.

In Estonia from non-residents the income tax is charged:

• on income derived by a non-resident natural person from work in Estonia if the payment was made by an Estonian state or local government authority or resident or a non-resident operating in Estonia as an employer or a non-resident through or on account of its permanent establishment located in Estonia, or if the person has stayed in Estonia for the purpose of employment for at least 183 days over the course of 12 consecutive calendar months;
• on emolument paid by a resident legal person to a non-resident member of a management or controlling body or a non-resident through or on account of its permanent establishment located in Estonia to a non-resident member of a management body of the permanent establishment for the performance of his or her functions;
• on business income derived by a non-resident in Estonia (business income as a sole proprietor);
• on gains derived by a non-resident from a transfer of property if the sold or exchanged immovable is located in Estonia or the movable subject to entry in a register was in an Estonian register prior to the transfer or the transferred real right or right of claim is related to an immovable or a structure as a movable, which is located in Estonia, or the transferred holding is a holding in a company, contractual investment fund or other pool of assets of whose property, at the time of the transfer or during a period within two years before transfer, more than 50 per cent was directly or indirectly made up of immovable or structures as movables located in Estonia and in which the non-resident had a holding of at least 10 per cent at the time of transfer;
• on reduction in the share capital, on redemption or return of shares or contributions, on liquidation proceeds received by a person upon the liquidation of a legal person (if the acquisition cost of the holding is exceeded) only if these payments are made to a non-resident by a resident legal person;
• on income derived from a commercial lease or royalties if the immovable subject to a commercial or residential lease or encumbered with limited real rights is located in Estonia, or  the property subject to a commercial or residential lease or encumbered with limited real rights is entered or is subject to entry in an Estonian register, or the payer of the royalties is the Estonian state, a local government, a resident or a non-resident through or on account of its permanent establishment located in Estonia;
• on interest received from the Estonian state, a local government or a resident, or from non-resident through or on account of its permanent establishment registered in Estonia, if it significantly exceeds the amount of interest payable on the similar debt obligation under the market conditions during the period of occurrence of the debt obligation and payment of the interest (in that case income tax is charged on the difference);

• on all pensions, scholarships and grants, cultural, sports and scientific awards, benefits and gambling winnings and parental benefits paid by the Estonian state, a local government, a resident or a non-resident through or on account of its permanent establishment located in Estonia, on insurance indemnities paid by the Estonian Health Insurance Fund, Estonian Unemployment Insurance Fund or a resident insurance company, and on payments made from a pension fund registered in Estonia, on remuneration paid to a non-resident artist or athlete in connection with his or her performance or competition in Estonia or the presentation of his or her works in Estonia; income tax is also charged on remuneration paid to a non-resident third person in connection with the activities of a resident or non-resident artist or athlete in Estonia;

Withheld unemployment insurance premiums shall be deducted from the income during a period of taxation. In certain cases non-residents can make also deductions allowed for residents.

Tax rate in Estonia

The tax rate is 20% from personal income. In certain cases income tax rate 10% applies. To get more information on reduced tax rates, please contact Gencs Valters Law Firm.

Tax is calculated and paid into the bank account of Tax and Customs Board:

Taxes related to salary and other employment payments of the payer are withheld and paid by the employer (even if employer is non-resident) monthly.

Rest of the personal income tax generally is paid after submission of tax declaration (annually) and receiving respecting tax notice from Tax and Customs Board (Tax and Customs Board calculates the payable tax amount and sends tax notice to payer). Due date of the tax payment in general is July 1 of the following year after the taxable period (calendar year). 

A sole proprietor who derived business income during a previous period of taxation is required to make advance payments of income tax during the period of taxation. The size of an advance payment is one-quarter of the total amount of income tax calculated on the business income derived by the person during the previous period of taxation. Advance payments shall be made into the bank account of the Tax and Customs Board in equal amounts by the fifteenth day of the third month of each quarter, starting from the quarter following the due date for submitting the income tax return. Advance payments need not be paid if the quarterly payment does not exceed 64 EUR. A taxpayer who derives business income is not required to make advance payments of income tax during the first period of taxation.

Tax declarations

Resident and non-resident natural persons shall submit an income tax return to the regional structural unit of the Tax and Customs Board concerning the income of a period of taxation not later than by 31 March of the year following the period of taxation.

It is possible to submit an income tax return through the e-service of the Tax and Customs Board as of 15 February of the year following the period of taxation.

Regarding non-residents, in the case of transfer of an immovable, the income tax return shall be submitted after receiving the gains. If payments for a transferred immovable are made by instalment, a tax return concerning the agreed transaction price is also submitted within one month after receiving the first instalment.

A non-resident who derives business income which is subject to taxation in Estonia is required to submit an income tax return concerning business income within six months following the period of taxation. If engagement in business is terminated before the end of the period of taxation, the income tax return shall be submitted within two months following the termination of activities.

A natural person who has not been resident during the whole period of taxation shall submit an income tax return concerning only income received during the period when the person was resident and may make deductions for the same period of time. A resident natural person who received income which, pursuant to respective law or an international agreement is exempt from income tax in Estonia is required to declare such income.

The Tax and Customs Board shall complete the income tax return concerning the income of a resident natural person during a period of taxation and the deductions on the basis of the data at the disposal of the Tax and Customs Board and make the pre-completed tax return available to the taxpayer through the e-service and at the regional structural unit of the Tax and Customs Board as of 15 February of the year following the period of taxation. If the taxpayer uses the pre-completed tax return, he or she is required to verify the correctness of the data contained in the tax return and submit an amended and supplemented tax return in event of incorrectness or deficiency of the data.

Tax relief

The following persons are not required to submit an income tax return:

• a resident natural person whose income does not exceed the rate of basic exemption or whose income of the period of taxation is not subject to additional income tax;
• resident natural person whose only income was pension (from Estonia or EU);
• resident natural person whose only income was compensation for work accident or occupational disease if this compensation did not exceed 768 EUR or if income tax has been already declared and withheld from the compensation;
• non-residents, if income tax from payments is withheld (in general from payments for non-residents the income tax is withheld and paid by the payer);

Budgetary Competence  

11,4 per cent of the taxable income of a resident natural person is received by the local government of the taxpayer's residence. Rest of the income tax and income tax paid by a non-resident is received by the state.

Taxation treaties

In Republic of Estonia are in force and are applied Taxation treaties with more than 50 countries. 

For full TAX CARD 2015: Personal tax in Baltics click below: