Estonia’s taxation system is comprised of national and local taxes but it is very attractive to foreign investors for setting up companies due to the corporate tax that is applied to profits only after they are distributed.
As mentioned above the Estonian corporate tax is applied to corporations only on distributed profits and it has a flat rate of 21% on the gross amount and it is calculated at 21/79 on the net value of the dividend. If the profits have not been distributed yet, the corporate tax rate is zero. Estonian companies will pay the corporate tax rate on their incomes made all over the world, but foreign companies will only be taxed on the earnings they make in the country. It is also important to know that Estonia has signed double tax treaties with other countries in order avoid the corporate tax being applied twice and to attract foreign investors.
In 2009 Estonia removed the withholding tax that applied to dividends. However, a withholding tax of 10% is applied on royalties. The same tax rate applies if foreigners provide any type of service in Estonia. As with the corporate tax, in case a double tax treaty is enforced the withholding tax may be reduced.
Estonian residents paying interests to foreign individuals or legal entities usually are not required to pay any withholding tax, but the tax could be applied if the foreign investor obtains any gain from Estonian contractual funds and even if the withholding tax is not levied the transfer pricing rules apply.
Foreign investors will also be required to pay a tax if they make profit after renting a real estate property in Estonia, or a withholding tax on royalties from using intellectual property rights. However, royalties will not be taxed if the shareholder is a company registered in an EU member state and holds at least 25% of the company’s share capital.
The Estonian taxation system imposes a tax on real estate property that has a variable rate of 0.1% to 2.5% and that is applied on the presumed value of the land plot the property is built on. Companies must also pay a social security tax that is made of the social and health insurance tax rate of 33%.
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