Thinking beyond borders
For business travelers, income tax obligation generally arises after staying in Estonia for more than 183 days in any 12-month period.
An individual’s liability for Estonian tax is determined by residence status. In Estonia, a flat rate of 20 percent is imposed on personal income, including salaries, emoluments and other remuneration paid to employees and members of management or controlling bodies.
According to the Estonian Income Tax Act, a resident is an individual whose place of residence is in Estonia, or who stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia and shall, from thereon, pay income tax on all income derived by the individual worldwide. A non-resident for tax purposes in Estonia is generally an individual who spends less than 6 months in Estonia and does not have a permanent home in Estonia.
If an individual does not qualify as a resident, his or her income from Estonian sources will still be taxable if:
The remunerations paid by Estonian resident legal individuals to members of management or controlling bodies for the performance of their official duties are always taxable in Estonia.
According to the general rule, social security taxes are paid when an individual works in Estonia, regardless of the length of the working period. The Estonian social security system is based on three taxes: social tax, unemployment contributions and contributions for mandatory funded pension.
Under the European Economic Area (EEA)/Swiss social security regulations, the exemption from social security taxes can be applied for a worker posted to Estonia or who has simultaneous employment.
A certification (form A1) of the competent authorities confirming that the person is covered with the social security system of his or her home country is necessary to benefit from the regulations.
Estonia has signed social security conventions that regulate the application of social security systems, including matters of taxation, with the Ukraine and Canada. Also, Estonia has signed a Social Security Agreement with Australia. The Agreement will commence when all treaty legislative and administrative processes are completed in both countries.
According to the main principle of the conventions, the remuneration of the Ukrainians and Canadians working in Estonia is taxable with Estonian social security taxes.
However, the treaties differ in some areas. Similarly to EU regulations, according to the Ukrainian convention, persons working in both countries are taxed in their home country. The convention signed with Canada does not include such a rule.
Persons assigned from Ukraine do not have to pay social security taxes in Estonia if the duration of the assignment does not exceed a 24-month period. In the Canadian convention, the ceiling has been set at 60 months.
Employees coming from countries other than EEA/Switzerland, or countries with which Estonia has totalization agreements, are generally fully subject to social security payment in Estonia.
Compliance obligations for resident individuals
Resident individuals are obliged to submit an annual income tax return by 31 March of the year following the period of taxation. It is possible to submit an income tax return electronically. Resident individuals whose income does not exceed the rate of basic exemption provided, or whose income in the period of taxation is not subject to additional income tax, are generally not required to submit an income tax return. However, in the case of foreign income, submitting the income tax return is mandatory.
If the submission of a tax return is not mandatory, it is still recommended in order to apply for the additional exemptions or deductions provided.
Individuals who have not been resident during the whole year shall submit an income tax return concerning only income received during the period when the person was resident.
Compliance obligations for non-resident individuals
If the income tax is withheld by an employer, an employee usually does not have to submit a tax return. However, a non-resident who derives income from Estonian sources subject to withholding tax (but from which income tax has not been withheld) is required to submit a tax return by 31 March of the year following the period of taxation.
A non-resident is required to submit an income tax return concerning the capital gains derived from Estonian sources during the calendar year to the Tax and Customs Board no later than 31 March of the following year. In the case of transfers of immovable assets, the income tax return shall be submitted within 1 month after receiving the gains.
A non-resident who derives business income which is subject to taxation in Estonia is required to submit an income tax return concerning business income derived during the period of taxation. The income tax return shall be submitted within 6 months following the period of taxation. If engagement in business is terminated before the end of the period of taxation, the income tax return shall be submitted within 2 months following the termination of activities.
Employers are required to submit an income and social tax return (form TSD) by the 10th day of the month following the payment and transfer withheld income tax, contributions to a mandatory funded pension, unemployment insurance payments and social tax to the bank account of the Tax and Customs Board by the same date as submitting the return. No additional year-end return is required.
At present there are 57 effective double taxation treaties that Estonia has concluded: Albania, Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Bulgaria, Canada, the Czech Republic, China, Croatia, Cyprus, Denmark, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, the Isle of Man, Italy, Jersey, Kazakhstan, Korea, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Mexico, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Singapore, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Thailand, Turkey, Turkmenistan, the United Kingdom, the United States, Ukraine and Uzbekistan, the United Arab Emirates, South Korea and Vietnam.
The treaties generally follow the Organization for Economic Co-operation and Development (OECD) model of tax treaties.
The permanent establishment (PE) issue is vaguely regulated in Estonia. There are no court practices or guidelines which would explain how to determine the PE in Estonia. In the meaning of the Estonian Income Tax Act, a PE is defined as a business entity through which the permanent economic activity of a non-resident is carried out in Estonia. A PE is created as a result of economic activity which is geographically enclosed or has a mobile nature. Also, a PE may be created as a result of economic activity conducted in Estonia through a representative authorized to enter into contracts on behalf of the non-resident.
However, the activity of assigned persons should not usually constitute a PE in Estonia if they work for the interest of an Estonian company.
The standard rate of value-added tax (VAT) is 20 percent in Estonia. A reduced rate of 9 percent is applied to books, periodic publications, workbooks used as learning materials, medicinal products and accommodation services.
General transfer pricing rules are effective from 1 January 2000 in Estonia. Amended rules together with documentation requirement are effective from 1 January 2007. Methods and documentation requirement are established with the Decree of Minister of Finance referring to the OECD guidelines.
In relation to international business travelers, it should be noted that if an Estonian entity receives services which are rendered intra-group, these services are likely to attract the tax authorities’ interest. In order to avoid tax liability arising from related-party transactions, the values of those transactions have to be at arm’s length.
According to the new wording of Estonian Income Tax Act 29 (2) effective of 1 January 2015, personal income tax at a flat rate of 20% is charged on the remuneration to the members of the management or supervisory board (hereinafter directors´ fees) paid to them for the fulfilment of their professional duties as members of the management or supervisory board of an Estonian company, irrespective of whether the payer is a resident or a non-resident entity and regardless of the individual’s physical presence in Estonia.
As a result of remuneration payment, a non-resident entity may become liable to register as a non-resident employer in Estonia to withhold the income tax from the remuneration paid. Also payment can trigger social tax payment in Estonia. For most European residents the social tax obligation can be avoided by acquiring form A1 from their home social security authority. In case the income tax is not withheld from the remuneration paid, the management board member is obliged to submit an Estonian personal income tax in order to declare the Estonian-source income.
The regulation of staying in Estonia and working in Estonia is different depending on whether the person is an EU citizen (citizens of EU, EEA countries and Switzerland are considered as EU citizens) or a non-EU national.
EU citizens have the right to stay and work in Estonia on the basis of a valid travel document or identity card without a registration for up to 90 days. After 90 days and EU/EEA citizen must contact the local government authority nearest to his/her place of residence in Estonia and register his/her residence. The document certifying the right of residence in Estonia, is the Estonian ID-card. Generally, an EU citizen who has resided in Estonia permanently for 5 successive years on the basis of the right of temporary residence shall obtain the right of permanent residence. A work permit is not necessary for the EU citizens.
Non-EU nationals can work in Estonia without a work permit for a short term (not exceeding nine months per year) provided he/she has registered the short-term work with the Police and Border Guard Board (PPA). The registration of the short-term employment shall be applied by the employer.
If the person concerned is a non-EU national and the planned stay/work in Estonia exceeds the 9-months per year limit, he/she can apply for a residence permit for employment.
If the non-EU national works as an assigned person, in the meaning of the working conditions of the Workers Posted to Estonia Act, the residence permit without the consent of the Estonian Unemployment Insurance Fund, public competition or fulfilling the salary criterion.
Under the Estonian Aliens Act, the Estonian company where the employee performs his/her work will have certain sponsor’s obligations (such as to inform the PPA of the commencement of employment by an alien holding a residence permit for employment, of amendments to the working conditions and termination of the employment contract that is the basis for setting forth the working conditions in the work permit, to ensure that the employee is staying/working in Estonia legally, to guarantee employee’ accommodation and bear the costs of the stay of the employee in Estonia and of his or her departure from Estonia, etc.).
According to the amendments to the Aliens Act, from 1 January 2016 it is allowed to work for several employees at the same time, however, the employer determined in the residency permit is obliged to fulfill the criterion (e.g. salary criterion) determined in the permit. The employer not determined in the permit has an obligation to notify the PPA about the employment.
Also, a 90-day transitional period is allowed for the foreigners living in Estonia under a residence permit after the residency permit has expired. During the period, the foreigners are allowed to apply for a new working is allowed before the new permit is granted.
Foreigners are allowed to work in Estonia as temporary agency workers. Therefore, employers are allowed to employ temporary agency workers working in Estonia under a residence permit or based on registration of short-term working. Also, there are specific permits for employees who start working in Estonian start-up companies, intra-corporate transfers and foreigners who start working as rental employees.
The Personal Data Protection Act was adopted in Estonia in 2003.
There are no exchange controls in Estonia.
Deductions provided for local residents are, in some cases, available for residents of other EEA member states. However, the amount of deductible costs may be limited. Also, the amount of deductible costs may be limited for Estonian residents who receive most of their income from abroad.
Deductions from income of non-resident individuals
Residents of an EEA member state who received at least 75 percent of his or her annual taxable income in Estonia can make the deductions from their income taxable in Estonia in proportion to its share in his or her taxable income for the year.
If the resident of an EEA member state received less than 75 percent of their annual taxable income in Estonia, only the amount of basic exemption proportional to the amount of income from Estonian sources compared to total income may be deducted.
Deductions from income of resident individuals
If a resident individual received at least 75 percent of their annual taxable income in a foreign state, the amount of deductions may be limited, depending on the method used for avoiding double taxation.
In certain cases a foreign entity should register as a non-resident employer in Estonia.