Doing business in Estonia as an international entrepreneur or e-resident requires understanding the local tax system, particularly corporate income tax obligations and VAT refund rules for expenses incurred across borders. This article provides clear examples of payments that trigger Estonian corporate income tax and explains how to claim VAT refunds on cross-border business expenses, helping foreign entrepreneurs stay compliant and optimize their tax position.
Which payments trigger corporate income tax in Estonia?
Unlike traditional corporate tax systems, Estonia’s CIT is triggered by making certain non-business-related payments, and tax is due on the net amount of such payments in the next month. These payments are effectively treated as non-deductible expenses for tax purposes.
To determine if a payment is subject to CIT, simply ask: “Is this expenditure necessary or appropriate for maintaining or developing my business activities?” If the answer is no, the payment typically triggers CIT.
Key examples of payments always taxable under Estonian law include:
- Fines and penalty payments imposed by law such as tax debt interest (contractual fines are exempt).
- Costs from property seized from the taxpayer under the Criminal Code regulations.
- Environmental charges paid at an increased rate and compensation for environmental damage caused by pollution or legal violations (rare for most e-residents).
- Bribes and gratuities, which are illegal and lead to a taxable charge whether paid in Estonia or abroad.
- Purchases unrelated to the business – for instance, an IT consultancy firm buying a yacht without solid business reasons.
- Enrolment or membership fees paid to non-profit associations unless membership directly relates to business activities.
- Payments lacking proper accounting documentation, such as no invoice or receipt, or if goods or services have not actually been received.
Maintaining correct invoices and source documents is crucial. Payments without proper records must be declared and taxed as non-business expenses.
VAT refunds for expenses paid in other EU member states
International entrepreneurs often acquire goods or services in countries outside Estonia within the EU, resulting in VAT paid abroad. When these expenses are for taxable business purposes in Estonia, the VAT paid in another Member State can be reclaimed via a VAT refund.
The VAT refund procedure is regulated by the EU VAT Refund Directive 2008/9/EC and administered through the Estonian Tax and Customs Board’s e-services portal (e-MTA).
Important points to know about VAT refund claims:
- Applications must be submitted electronically to the Estonian tax authority by 30 September of the calendar year following the refund period.
- The refund period can be a minimum of three months up to a full calendar year.
- The Estonian tax authority verifies your application and forwards it to the Member State where the VAT was paid.
- Minimum refund thresholds apply (50 euros per calendar year or 400 euros for shorter periods).
- Some Member States require scanned copies of invoices for amounts exceeding specific limits.
- The refund decision deadline ranges from 4 to 8 months; VAT is reimbursed shortly after refund approval.
- Interest is payable if refunds are delayed without justified reasons.
- Authorized representatives can also submit refund claims on behalf of companies using e-MTA.
Domestic VAT overpayment refunds and set-offs
If your company overpays VAT in Estonia, refunds or set-offs against other tax liabilities are generally processed within 60 days after filing the necessary applications or tax returns. You can also claim refunds without a specific application by offsetting overpaid VAT against other taxes, such as corporate income tax.
Why this matters for international entrepreneurs and e-Residents
Understanding which payments trigger corporate income tax and how to navigate VAT refunds is essential for e-residents and international business owners operating in Estonia.
Proper expense documentation, knowing when CIT applies, and effectively managing VAT paid abroad help avoid unexpected tax charges, improve cash flow, and maintain compliance with Estonian tax regulations.
