In a previous article on our blog, we gave you a comprehensive overview of the corporate tax landscape in Estonia, so by now you know that the Baltic country is a very appealing place to run your business from!
To quickly recap, Estonia has embraced simplicity and transparency with regards to its tax system and doing business there. It also uses an innovative approach to taxation. This is in contrast to a lot of other countries that still grapple with complex and ever-changing corporate tax regulations.
In this article, we’ll take a closer look at Estonia’s corporate income tax system and see why the country now has a reputation as being a business-friendly tax haven. This information will be handy for you whether you’re an aspiring entrepreneur, a small business owner or a multinational corporation.
Why choose Estonia?
We’ve touched on this previously, but it is worth remembering why Estonia is a popular place with favourable tax conditions for businesses. The country has forward-thinking policies, is digitally innovative, and is committed to simplicity.
Historically Estonia has also always embraced change and been able to adapt to new economic realities. After gaining independence from the Soviet Union in 1991, the country underwent a remarkable transformation. It embraced market-oriented reforms, invested in education and technology, and rapidly transitioned to a digital society.
The digital revolution
One of Estonia's most remarkable achievements is its pioneering approach to digital governance. The country introduced electronic ID cards and digital signatures, making it possible to conduct nearly all government-related transactions online. This digital infrastructure not only streamlined administrative processes but also laid the foundation for a business-friendly tax environment.
Simplicity and transparency
Unlike a lot of countries who follow complex tax codes, Estonia has a straightforward and fair approach to corporate income tax. There is minimal confusion when trying to understand and pay your taxes – everything is set up to be as simple and transparent as possible. Essentially, businesses are taxed on profits when the profits are shared as dividends. Any earnings that are reinvested or kept will remain untouched by corporate income tax.
This approach means there is less planning necessary when figuring out your taxes. Businesses can therefore focus more on growth instead of navigating complex tax structures. It sounds super simple, but is refreshing in contrast to many other tax structures worldwide.
Understanding corporate income tax in Estonia and how to pay it
Let’s get into some more details on Estonia's corporate income tax (CIT) system and look at the practicalities of how to pay corporate income tax in this business-friendly country.
Corporate income tax essentials
Usually corporate income tax is levied by governments on companies’ profits. However, as we’ve mentioned, Estonia has a unique model for corporate income tax that sets it apart from other countries. Let’s take a look at some things that stand out:
0% tax on retained and reinvested profits
Estonia’s corporate income tax system stands out because it doesn’t impose any tax on profits that are kept or reinvested into a company. This means that when a business chooses to reinvest its earnings instead of distributing them to shareholders, those earnings remain untouched by corporate income tax. This unique approach encourages businesses to channel their profits back into growth and innovation without immediate tax implications.
Taxation upon profit distribution
Corporate income tax comes into play in Estonia when there is profit distribution. Businesses must pay a flat rate of 20% tax only when they decide to distribute profits as dividends to shareholders. Estonia’s tax system encourages fiscal responsibility and also empowers companies to reinvest their profits (while at the same time avoiding immediate tax burdens). This is in contrast to the more traditional approach of “double taxation” where profits are taxed at the corporate level and then again when shareholders receive their dividends.
Understanding "permanent establishment"
Estonia's corporate income tax system also takes into account the concept of "permanent establishment." This refers to when a foreign company does ongoing business in Estonia. The foreign company then becomes liable for Estonian corporate income tax on its income generated within Estonian borders. This “permanent establishment” concept aligns with international tax norms and makes sure that all businesses operating in Estonia (local or foreign) will contribute their fair share to the country’s revenue.
Paying corporate income tax in Estonia
Now that we know how much and when businesses pay corporate income tax in Estonia, let’s find out more about how they go about paying it.
Calculate tax liability: You will need to calculate the tax liability of your business. This involves figuring out the profits that will be distributed to shareholders and then applying a 20% tax rate to that amount.
Register for taxation: All businesses working in Estonia must register with the Estonian Tax and Customs Board. You will receive a taxpayer ID number and will be legally recognised for tax purposes.
Prepare and submit tax returns: Companies must submit annual tax returns by a specific deadline. The returns must include details of distributed profits and relevant tax payments.
Pay tax: After submitting your tax return, you'll need to make the tax payment to the Estonian Tax and Customs Board. There are various payment methods so make sure to follow the guidelines.
Keep accurate records: Make sure you keep accurate financial records to support all your tax calculations. Estonia values transparency and expects businesses to keep on top of these records.
Seek professional guidance: Because of the uniqueness of Estonia’s corporate income tax system, we advise you to use tax professionals or consultants who know the country’s tax regulations. This will help you be sure that you’re tax compliant and also optimise your tax strategy.