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Taxation in Estonia

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.

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