Estonia Tax & Business Guide - Deloitte

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Basic facts
Population 1.4m Inflation 4.1% (2005)*
Main languages Estonian, Russian, other GDP per head US$9,450*
Currency Estonian kroon (EEK) GDP growth 8.7% (2005)*
Economic communities European Economic Area, EU, WTO
GDP sources 4.0% agriculture, 28.9% industry, 67.1% services
*Economist Intelligence Unit.
Political environment

Estonia regained independence with the disintegration of the Soviet Union in 1991. It is a unicameral parliamentary democracy, with members of the Riigikogu (parliament) chosen in direct elections. In March 2005 the previous coalition government collapsed and was replaced with a majority coalition comprising the liberal Reform Party, the left-leaning Centre Party and the rurally oriented Estonian PeopleÌs Union. At the same time, Andrus Ansip replaced Juhan Parts as prime minister. The president, Arnold Ruutel, was elected in September 2001.

The next presidential election is due in 2006, and the parliamentary election in 2007. Estonia joined the EU in May 2004, along with nine other countries.
Foreign trade and investment
Exports US$7.5bn (2005)* Imports US$9.3bn (2005)*
*Economist Intelligence Unit.

Leading export markets: Finland, Sweden, Germany and Latvia.

Primary exports: Machinery and equipment, wood and paper, and clothing and footwear.

EstoniaÌs trade regime is liberal. Trade has been diversifying.

Attracting foreign investment is a priority; investors face few restrictions. Certain sectors have licensing requirements (for example, utilities, telecommunications and banking), but they apply equally to domestic and foreign investors.
Business and financing
Business forms Private and public limited companies

Foreign investors most often use private and public limited companies, but the Commercial Code also provides for general partnerships, limited partnerships, co-operative associations and sole proprietorships. Foreign firms can also establish branch offices.

There are no restrictions on the foreign ownership of firms registered in Estonia. Foreigners may acquire property.

The capital city of Tallinn is the financial centre.
Labour environment
Unemployment rate 8.5% (2005)* Minimum wage EEK2,690 (monthly)
*Economist Intelligence Unit.

The national minimum wage for the private sector was raised to EEK2,690 per month in 2005, an increase of 8% from 2004. The rate is set annually. (Some public-sector employees with a higher education are eligible for a higher monthly minimum wageÛEEK5,960 as of early 2005.)

EmployersÌ social security contribution is 33% of gross wages (20% for social security and 13% for health insurance); employees make no social security contribution. Unemployment insurance contributions are 1% for employees and 0.5% for employers.
Taxation
Corporate tax
Main rate Distribution tax, 23/77 of net dividend (2006)

Companies are not taxed on their profits but pay a distribution tax on distributed profits, amounting to 23/77 of the net dividend in 2006 (that is, 23% of the gross distribution). Undistributed profits are therefore not subject to taxation. The distribution tax applies to resident companies and to permanent establishments of foreign companies. Certain income of non-resident companies is taxed by withholding. A company is considered to be resident in Estonia if it is founded under Estonian law. The distribution tax is reduced from 24% of the gross distribution in 2005 to 23% in 2006 and by a further 1% each year until it reaches 20% in 2009. Dividends received from foreign companies are exempt where the Estonian company has a 20% shareholding in the paying company, subject to certain conditions.
Individual tax
Flat rate of 23% (2006)

Resident individuals are taxed on their worldwide income; non-residents are taxed on Estonian-source income only. Individuals are considered to be resident in Estonia for tax purposes if they have a place of residence there or if they stay in Estonia for 183 days in any 12-month period. Individual income tax is charged at a flat rate of 24% in 2005, which is reduced to 23% in 2006 and by a further 1% each year until it reaches 20% in 2009.
Capital gains
Taxed as income; company gains taxed when distributed

Gains of companies and individuals are generally taxed as income. Capital gains of companies are taxed as part of the distribution tax payable when a distribution is made. Individuals are exempt from tax on a capital gain on the sale of their main residence.
Indirect tax
Standard rate 18% Lower rate 5%

Value-added tax (VAT) applies to most transactions at a standard rate of 18%. Registration is compulsory for businesses with an annual turnover above EEK250,000. A lower 5% rate applies to some books, medicines and certain supplies of heating and energy. Exports and supplies relating to international transport are zero-rated. Exemptions include leasing of immovable property, services of financial and credit institutions, insurance services, and medical and educational services.
Tax administration and compliance
Tax year Corporations: monthly periods for distribution tax; Individuals: calendar year

Monthly returns are due by companies in respect of the corporate distribution tax, to be submitted together with any tax due by the tenth day of the following month. Employment income of individuals is taxed by withholding. Individuals registered as sole proprietors and having business income make quarterly advance payments of tax. An individual tax return is due by March 31st following the tax year, and a final payment of tax is due by July 1st following the tax year.
Additional tax information
Withholding taxes Dividends 0% (for individuals and non-resident companies owning more than 20%) or 24% (for non-resident companies owning less than 20%), Interest 0%, Royalties 15%. Rates may be reduced by tax treaties or EU directives.
Tax treaties Estonia has concluded 33 tax treaties.
Dividends Distribution tax on the payer at 23/77 of net dividend (in 2006); dividends not taxed on shareholder. Foreign dividends are exempt where the Estonian recipient company has a 20% shareholding in the payer.
Revenue protection There is transfer-pricing legislation, some anti-haven (CFC) rules and general anti-avoidance provisions, but no thin-capitalisation rules.
Groups There is no provision for group taxation.
Incentives There are no tax incentives.
Other taxes Business registration fees, Capital duty, Customs duties, Gambling tax, Land tax, Local sales tax, Municipal boat tax.