Head of International Corporate Law and Fintech Practice
Expert in fintech, crypto, and international corporate law with over 20 years of experience. Specializes in crypto licensing (VASP/CASP), iGaming business support, and international structuring, asset protection, and OSINT analytics for risk assessment and due diligence.
TAX CONSULTATION IN ESTONIA
Estonia is known for its unique and progressive tax system, which is significantly different from most European countries and creates favorable conditions for business development.
A feature of the Estonian tax system is the absence of classic taxation of corporate profits until their distribution.
This allows businesses to reinvest earned funds without additional tax burden, stimulating the development and growth of enterprises.
The Estonian corporate tax system is based on the principle of taxation of capital withdrawn, not of profit received.
This means that a company’s profit is not subject to corporate income tax (corporate tax) as long as it remains in the company and is used for its development. Tax liabilities arise only in the case of distribution of profit or non-business expenses.
When do you have to pay taxes?
Corporate tax liabilities in Estonia arise in the following cases:
- Dividend payments to company shareholders are taxed at a standard rate of 22/78 of the net amount paid (from January 1, 2025). Previously, a preferential rate was in effect for regular dividends, but it will be discontinued from 2025. When paying dividends in the amount of €10,000, the tax will be €2,200.
- A reduction in a company’s share capital is taxable to the extent that it is increased through a share issue, not through actual shareholder contributions. This prevents schemes to convert retained earnings into capital and then reduce it to avoid taxation.
- The distribution of assets remaining after the liquidation and termination of the enterprise is also taxed in the part exceeding the initial capital contribution. This ensures that the capital accumulated during the company’s operation is taxed upon its closure.
- Non-business expenses and payments are also subject to tax at a rate of 22/78 of their amount. This applies to entertainment expenses, gifts, donations, and any other expenses that are not directly related to the company’s business activities.
How to determine the costs of a company’s activities:
The key principle for determining taxable expenses is to answer the question: “Are these expenses necessary or appropriate to support or develop my business?”
If the expenses are not related to the business activities of the company, they are subject to immediate taxation, which obliges the company to pay 22/78 of the amount of such payment and declare it in the monthly tax return.
It is important to understand that in the Estonian system, unlike traditional corporate tax systems, there is no concept of deductible expenses. Instead, expenses related to business activities do not have an immediate tax effect, as profits are not taxed until they are distributed. However, expenses not related to business activities immediately give rise to tax liabilities.
It should be noted that the assessment of whether an expense is related to business activity is made on a case-by-case basis. What is a necessary business expense for one company may be considered an expense unrelated to the activities of another company, depending on the nature of their business. This is the position often found in the responses of the Estonian Tax Service.
Social payments:
In addition to corporate tax, Estonia also has a number of other taxes and mandatory payments:
- Social tax is 33% of wages, of which 20% goes to social insurance and 13% to health insurance. This tax is paid entirely by the employer and provides social guarantees for employees.
- The unemployment insurance tax is divided between the employer (0.8%) and the employee (1.6%), forming a fund for unemployment benefits.
- The contribution to the funded pension fund is 2% of the salary and is withheld from the employee. This contribution forms pension savings that supplement the state pension.
For companies engaged in international trade, it is important to obtain an EORI (Economic Operators Registration and Identification) number.
This unique identification code allows companies to freely export, import and transit goods within the European Union. Having an EORI code simplifies the filling out of customs declarations and the process of passing customs control at EU borders.
It is also worth paying attention to value added tax (VAT). In Estonia, the standard VAT rate is 22%, but there are reduced rates for certain categories of goods and services. VAT registration is mandatory if the company’s turnover exceeds a certain threshold, but voluntary registration is also possible.
Contact the law firm Prikhodko & Partners and we will accompany you through all stages of registering your European company.
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