Estonian Tax Rates explained to e-resident founders
Starting a business can be complex, but understanding Estonian tax rates does not have to be. You can consider this to be a beginner’s guide, written in a simple language we like at Unicount when helping e-resident founders navigate the Estonian ecosystem.
After reading you may want to move here to benefit from the Estonian tax rates available to individuals and companies residing here. The country needs founders and top talent for technology companies and is a country with a thriving startup scene.
Corporate Income Tax Only on Distributed Profits
Here is what makes Estonia unique among OECD countries. Companies pay tax only when profits are paid to shareholders and at a rate of 20/80 which is 25% of the amount paid out as dividends. This incentivizes reinvestment and growth, aligning perfectly with the Estonian entrepreneurial spirit ever since 2000 when this unique bill was introduced. To make it simple, every 80 euros of dividends distributed to shareholders means 20 euros paid to the government by the company the next month.
Paying Estonian corporate income tax is a legal obligation when distributing dividends to any shareholder. Keep in mind that your e-resident business may be subject to tax in the country you operate or reside in. In this video, the Estonian e-Residency programme explains how cross-border taxation works for e-residents.
Flat Personal Income Tax Rate
Even though personal income tax would only apply to you after you become an Estonian tax resident you may still want to know that in Estonia, the personal income tax rate is a flat 20%. This figure has been constant since 2015 now but it will change in 2025.
The flat rate makes individual tax returns a five-minute affair for individuals and sole proprietors alike. And of course, nearly all tax returns are submitted online.
Starting from 1 January 2025, the Estonian income tax will be 22 per cent. This means that all the income you earn as an individual will be taxed higher. Your effective tax rate may though be affected by the annual basic exemption that will be available to top earners again.
As a fun fact, the Reform Party promised to reduce income tax to as low as 12% by 2015 in the 2007 economic boom era elections. This was stopped by the 2009 economic crisis at the then-standing 21% level. The current income tax rate was last changed in 2015 when the Reform Party-led coalition government dropped it by 1%.
Annual Basic Exemption
Estonia believes in keeping a portion of your earnings tax-free to reduce the tax burden on lower-income earners. For 2023, this non-taxable income can reach up to 7848 euros annually which is 654 euros per month. However, it’s regressive: the higher your income climbs above 14 400 euros the lower this exemption dips and disappears completely at 25 200 euros of income. It is largely a monument for PM Jüri Ratas’ first government of 2017-2019 and is based on his Centre Party vision for keeping society more balanced. Opponents have called it a progressive income tax that disincentives earning more.
After the Reform Party won the 2023 elections they had to live up to the promise to remove the regressive annual basic exemption so that top wage earners would also have an annual basic exemption of 8400 euros per year with all the rest starting from 2025. It was a very expensive campaign promise which made them increase other Estonian tax rates such as the Standard VAT rate and income tax rate while the Estonian economy was already in recession due to problems in export markets.
Value Added Tax (VAT)
With a VAT registration threshold set at 40 000 euros of taxable supplies, Estonia gives small businesses room to grow before they need to calculate and submit monthly VAT returns. It’s one less thing to worry about as you start scaling up. If you are not sure what is taxable supplies you can check with your accountant. Unicount started providing accounting services at the beginning of 2023 to its virtual office clients.
Starting from 1 January 2024, the standard VAT rate will be 22 per cent. This means that all the VAT-included services you buy in Estonia will be 2% more expensive unless you can deduct outgoing VAT. This is possible when your company has an Estonian VAT number. Estonian companies can also register for VAT in their actual country of operations. This may mean that you can get EC reversed VAT invoices from your Estonian suppliers.
Paying Your Team and Yourself
Paying taxes on your employees or yourself as a director is the moment where we would recommend hiring a professional accountant. Several taxes need to be withheld, declared and paid monthly by the 10th calendar date for payments made in the previous calendar month. Individuals cannot pay their taxes in Estonia and legal persons are responsible for paying all the necessary taxes for their employees, directors and contractors.
You as a company director can receive a board member’s fee and pay Estonian personal income tax in Estonia while declaring and paying social tax in another EU member state or a country with a signed treaty for social security.
Social Tax on Wages Paid to Resident Employees
Estonia’s social tax stands at 33% of the gross wage, covering both universal health insurance and pensions. It’s a significant number but think of it as investing in the country’s collective well-being. Considering the ageing population and soaring healthcare bills it is the tax that is the hardest to reform for any government without heavily subsidizing the underlying costs from other budget sources. There was a half-hearted attempt to reduce the 33% social tax on employment income by half per cent in 2017 but it was unwinded before coming into force.
Unemployment Insurance for Employees
Employees contribute a modest 1.6% of their gross salary to unemployment insurance, with employers adding another 0.8%. It’s a small price for a significant safety net. Keep in mind that the company directors do not need to pay this as they are not eligible for unemployment insurance.
Anyone else who has lost their job in Estonia can apply for unemployment insurance benefits thanks to the contributions made by employers.
Contribution to funded pension
A contribution to the funded pension is withheld from the gross salaries of resident employees and board members when making payments to anyone who has joined the funded pension scheme. Anyone born after 1983 had to join while all the rest had a chance to do it voluntarily. Therefore employers need to withhold 2% from the monthly gross salary for these persons. The Estonian government will double that by adding 4% more to the funded pension. This 4% is taken from your social tax, so a person earning 3000 euros gross salary would get 60 euros from their employer and 120 euros from the government to their funded pension account each month.
Lending money to and from your company
Estonian Commercial Code does not allow lending company funds to shareholders and board members. You as a shareholder can always finance the company with interest-free loans. When interest is applied you should follow market terms and the company needs to withhold income tax on interest payments made to individuals. All loans given to company employees should be made on market terms to avoid taxation. The base interest rate set by the European Central Bank has risen sharply, so it is worth reviewing any loan agreements to bring the interest rate closer to market conditions.
Deductible Business Expenses
Estonia rewards sensible business spending while fringe benefits are taxed heavily identically to wages. Investments in technology, operational costs, and even some representational expenses are non-taxable. If your company has expenses that are not directly related to its business activity, it will be taxed with Estonian income tax. A pro tip is, that income tax is also applied when you lose mandatory expense documents for any cost made.
Those e-resident founders who are not hiring a professional accountant might miss out on the benefits and opportunities provided to them in the Estonian tax laws because they simply do not have sufficient knowledge.
The good news is that having tax-deductible business expenses is not related to your company having sales turnover. Some companies may be unprofitable for years while developing their products and services. To make it even better, a board member without a monthly salary is entitled to similar tax-deductible business expenses as a company employee on a monthly payroll.
All the Estonian Tax Rates
While we did our best to write an easy article about taxes in Estonia you still may benefit from seeing all the important tax rates in a table with annual comparisons. We will do our best to update it regularly. Please note that all the upcoming years may be subject to changes if anything gets passed in the parliament.
|Corporate Income Tax|
|Corporate Income Tax Rate||20/80||20/80||22/78|
|Regular Dividend Tax Rate||14/86||14/86||–|
|Reduced Tax Rate||10%||10%||10%|
|Personal Income Tax|
|Tax on Regular Dividends||7%||7%||–|
|Monthly Basic Exemption||654€||654€||700€|
|Annual Additional Non-taxable Income for Second Child||1848€||0€||0€|
|Annual Additional Non-taxable Income for Third Child||3048€||0€||0€|
|Annual Additional Non-taxable Income for Spouse||2160€||0€||0€|
|Tax-free educational Expenses and Donations||1200€||1200€||1200€|
|Annual Supplementary Funded Pension Exemption||6000€||6000€||6000€|
|Minimum Monthly Wage||725€||820€||Unknown|
|Social Tax Monthly Basis||654€||654€||Unknown|
|Minimum Social Tax||215,82€||215,82€||Unknown|
|Employee’s Unemployment Insurance Premium||1.6%||1.6%||Unknown|
|Employer’s Unemployment Insurance Premium||0.8%||0.8%||Unknown|
|Funded Pension Payment||2.0%||2.0-6.0%||2.0-6.0%|
|Tax-free Per Diem (up to 15 days per month)||50€||50€||Unknown|
|Tax-free Personal Car Compensation||0.30€/km, up to 335€/month||0.30€/km, up to 335€/month||Unknown|
|Monthly Tax on Company Car in Mixed Use||1.96€/kW, cars over 5 years 1.47€/kW||1.96€/kW, cars over 5 years 1.47€/kW||Unknown|
|Monthly Tax-free Limit for Representation Expenses||32€ + 2% of gross wages||32€ + 2% of gross wages||Unknown|
Our Conclusions on Estonian Tax Rates
In essence, Estonia’s tax system is designed to be simple and encourages reinvesting your profits. Both personal and corporate tax returns should not take more than minutes for an accounting professional, well individuals do not even hire an accountant for their annual tax return as it is mostly prefilled with the data from their employer and tax office.
It’s part of why we at Unicount believe in Estonia’s digital and entrepreneurial ecosystem, and why we’ve made setting up here as simple as registering a domain name. So, whether you’re a seasoned entrepreneur or a budding startup enthusiast, Estonia’s tax system is ready to welcome you with efficiency and clarity.
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