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A country with a simplified, transparent tax system designed to encourage investment — that’s what taxes in Estonia are like!
This small Baltic country is known for its perfectly preserved streets and buildings, showcasing medieval architecture that is reflected in its castles, churches, and fortresses. It’s a place where safety, hospitality, and a relatively low cost of living compared to other European countries are felt. For these reasons, living here and starting a new project is an accessible opportunity for many. If this is your dream, it’s important to understand the taxes in Estonia to stay informed about the country’s fiscal obligations.
Next, we’ll explore the most important taxes imposed by the government of this Northern European country, known for having one of the most innovative and simplified tax systems in Europe. These taxes for individuals and businesses, with significant tax benefits, make Estonia an attractive location for foreign investment.
Taxes for Individuals in Estonia
Individuals residing in this country can benefit from Estonian taxes with a simplified, direct system, low rates, and transparency. This group includes employees, freelancers, digital nomads, retirees, students, etc., all of whom have rights and obligations according to the country’s laws. Let’s take a look at the main taxes for this group of people.
Income Tax
Income tax is one of the taxes in Estonia that applies to individuals and taxes their economic income and profits within the country: wages, investment earnings, rental income, and other benefits. Unlike many countries, only one fixed rate applies to any amount:
- Flat rate: 20% on individual income.
- Exemption: each resident is entitled to an annual exemption of €6,000 ($6,355).
- Example: A worker earning €30,000 ($31,047) annually will pay tax on €24,000 ($26,100) after subtracting the basic exemption. The calculation will be 20% on €24,000 ($26,100) = €4,800 ($4,967) in income tax.
Capital Gains Tax
Any individual who earns profits from the sale of real estate, stocks, or other assets must pay this tax. Like income tax, it also has a flat 20% rate on the transaction’s profit. For example, if you sell a property with a gain of €50,000 ($51,745), you will need to pay €10,000 ($10,350) for this tax.
Pension and Social Security Tax
The tax system in this country ensures pensions for residents, as well as healthcare and sick leave, through pension and social security taxes in Estonia. Part of this tax is paid by the worker, and another part is declared by the employer. Here are the rates:
- 2% rate: employees contribute 2% of their gross salary to the pension fund.
- 33% rate: employers pay 20% for social security and 13% for healthcare insurance.
- Example: If a person earns €2,000 ($2,069) gross per month, they will contribute €40 ($41.40) to the pension fund, while their employer will pay €660 ($683) in social contributions.
Value Added Tax (VAT)
In Estonia, VAT is known as käibemaks and works as in most European countries.It is an indirect tax applied to individuals for the sale or consumption of products and services. It consists of a fixed rate within the average European rate and also offers a reduced rate for certain products. We explain in more detail:
- Standard rate of 20%: for most goods and services (clothing, furniture, computers, appliances, etc.)
- Reduced rate of 9%: for medicine, books, and tourist accommodation.
- Exemptions: medical and educational services.
- Example: If you buy a television for €500 ($517), you’ll pay €100 ($103) in VAT, raising the total cost to €600 ($620).
Property tax
There are no property taxes in Estonia, but you must declare the value of the land where the property is located. If as an individual, you purchase a property in the country, you will need to declare between 0.1% and 2.5% of the assessed land value, depending on its location and use.
Taxes for Legal Entities or Companies in Estonia
If you’re thinking of starting a business in this country as a company or legal entity, there are also taxes in Estonia you should be aware of. The mandatory taxes for companies benefit from a reinvestment approach to profits and the simplicity of administrative procedures for completing the paperwork.
Additionally, this country is on average in line with European rates, and in some cases, it’s below the list of countries, as happens with the income tax. Here’s our post so you can check it in more detail: European countries ranking based on taxes to pay.
Corporate Income Tax
The great advantage of taxes in Estonia for companies is that they don’t need to tax profits as long as these remain within the corporation, nor do they tax money reinvested in the business. However, they must declare 20% on distributed profits, such as dividends, or on certain expenses unrelated to business activities.
For example, if a company earns €100,000 annually ($103,493) and decides to distribute €50,000 ($51,746) as dividends, they will pay 20% on the adjusted net base, which amounts to €10,000 ($10,350).
Value Added Tax (VAT)
As we saw earlier, VAT is one of the indirect taxes in Estonia applied to goods and services consumed by the customer. The role of companies in this tax is to collect it on behalf of the government through their invoices. Here’s a reminder of the applicable rates:
- Standard rate 20%: for most products and services.
- Reduced rate 9%: applicable to specific products like books and medicine.
- Exemptions: financial and educational services, among others.
- Example: If a company sells a product for €1,000 ($1,035), plus €200 ($207) of VAT, the total amount is €1,200 ($1,240), and the company must remit the €200 to the Estonian government.
The difference between Estonia and other countries is that companies with annual revenue exceeding €40,000 ($41,397) must mandatorily register for VAT, but those with lower revenues can choose to register voluntarily if they wish to apply VAT to their goods or services.
Mandatory Social Contributions
In the section about individuals, we saw how employers must contribute to their employees’ payroll with rates of 33% in total to ensure pension and healthcare services. For example, for a worker with a monthly salary of €2,000 ($2,069), the employer must pay 20% for social security and 13% for healthcare, a total of €660 ($683).
Property tax
For companies purchasing commercial properties in Estonia, such as warehouses, retail spaces, offices, or land, they don’t need to pay tax on the property value, but they will be taxed on the assessed value of the land where the property is built.
- Tax rate: ranges from 0.1% to 2.5% of the assessed land value, depending on its location and use.
- Example: If a warehouse is built on land valued at €200,000 ($206,985), the annual tax could range from €200 ($207) to €5,000 ($5,175).
Tax on Hidden Profit Distributions
If a company incurs expenses unrelated to its business activities, such as personal use of company assets, these expenses are subject to the same 20% corporate tax. It also applies to transactions or payments made that indirectly benefit the company’s owners or shareholders and aren’t declared as dividends. This tax ensures transparency and prevents companies from evading corporate income tax.
For example, if an entrepreneur takes €20,000 ($20,698) from the company’s funds to pay for a vacation with their family and the tax authority detects that the money isn’t related to business activity, they must pay 20%, totalling €4,000 ($4,140).
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Tax Benefits in Estonia
After covering the main taxes in Estonia for individuals and businesses, we now want to inform you about the tax benefits you can access. As you’ve seen, the Estonian tax system is easy to understand, with very competitive rates that encourage foreign investment and company formation. Additionally, there are the following advantages:
| Tax benefits | Details |
|---|---|
| Profit Reinvestment System | Allows companies to reinvest their profits into expansion, research, and development. |
| Ease of Company Formation | Company creation in Estonia is quick and can be completed online through the e-Residency system. |
| Incentives for Innovation and Research | Tax credits and grants for companies investing in research and development (R&D). |
| Double taxation treaties | Avoids double taxation on the same income in two different jurisdictions. |
| Benefits for Foreign Investors | Facilities to attract international talent through exemptions and deductions. |
| Incentives for Sustainability and Renewable Energy | Tax credits and grants for companies that implement clean energy projects. |
Tax benefits in Estonia.
Frequently Asked Questions about Taxes in Estonia
Companies operating in this country must pay 20% corporate income tax only on distributed profits. They must also pay VAT at the standard 20% rate and payroll taxes for their employees at a rate of 33%, among other taxes.
Estonia uses a tax system where undistributed profits of companies are not required to be declared. This is a great advantage, as it means these businesses can reinvest their profits without incurring tax burdens.
Companies must register for VAT in this country when their annual income exceeds €40,000 ($41,397). However, companies with lower incomes can register voluntarily if they wish to apply VAT to their goods or services.
Some of the benefits for foreign companies in Estonia include exemption from tax on retained profits, double taxation treaties, and incentives for research, development, and innovation activities. Additionally, with the e-Residency programme, companies can be formed without needing to reside in the country.
Yes, property taxes in Estonia only apply to the value of the land and range between 0.1% and 2.5%, depending on its location and use. Properties are exempt from property tax.
In addition to being able to create a company digitally, you can file taxes, access double taxation treaties, and apply for certain benefits from the Estonian tax system, such as the exemption from taxes on retained profits.
