Taxes in Estonia: A Competitive Tax Environment

Estonia is highly competitive and offers a unique and attractive tax system that is particularly beneficial for businesses and investors. Let's see what are the types of taxes in Estonia and where does Estonia stand in comparison to other top tax environments in Europe.

Read more about tax rates in Estonia.

What are the Taxes in Estonia?

• Estonian Corporate Tax Rate: Estonia's corporate tax system is distinctive. Rather than taxing profits as they are earned, Estonia imposes a 22% corporate tax on distributed profits. This means that reinvested profits are not taxed, providing significant incentives for companies to reinvest earnings into business growth.
• Estonian Personal Income Tax: Estonia has a flat personal income tax rate of 22%, which is competitive compared to many other EU countries.
• Estonian VAT: The standard VAT rate in Estonia is 22%, with reduced rates of 9% for certain goods and services.

Unique Advantages of Estonia's Tax System

1. Reinvestment Incentive: The zero tax on reinvested profits encourages businesses to invest more in development, innovation, and expansion without the immediate tax burden.
2. Simplified Tax Administration: Estonia is renowned for its digital governance and e-services, making tax administration straightforward and efficient. The country's e-Residency program further simplifies business operations for non-residents.

Taxes in Estonia: Comparison with Top 5 EU Countries with Lowest Taxes

While Estonia's headline tax rates may not be the lowest in the EU, its unique approach to corporate taxation and the business-friendly environment make it an attractive option, especially for businesses looking to grow and reinvest profits. Here’s a brief comparison:

• Corporate Tax Rate:
  • Bulgaria: 10%
  • Hungary: 9%
  • Ireland: 12.5%
  • Cyprus: 12.5%
  • Lithuania: 15%
  • Estonia: 20% (on distributed profits)
• Personal Income Tax:
  • Bulgaria: 10%
  • Hungary: 15%
  • Ireland: 20% - 40%
  • Cyprus: 20% - 35%
  • Lithuania: 15% - 32%
  • Estonia: 20%
• VAT:
  • Bulgaria: 20%
  • Hungary: 27%
  • Ireland: 23%
  • Cyprus: 19%
  • Lithuania: 21%
  • Estonia: 20%

Corporate Income Tax Rates in Europe:

Source: Tax Foundation (https://taxfoundation.org/data/all/eu/corporate-tax-rates-europe-2024/)

Corporate Income Tax: Revenue vs. Distributed Profit in Top 5 EU Countries

In the context of corporate income tax, most countries tax profits rather than revenue. Revenue refers to the total income generated by a company from its operations, while profit is the revenue remaining after all expenses, including operating costs, salaries, and other deductions, are subtracted. Let's look at how the top five EU countries with the lowest taxes apply corporate income tax:

1. Bulgaria

• Corporate Income Tax: Bulgaria taxes corporate profits at a flat rate of 10%.
• Basis of Taxation: Profits. Bulgaria's corporate tax is applied to net profits after allowable expenses have been deducted from total revenue.

2. Hungary

• Corporate Income Tax: Hungary has the lowest corporate tax rate in the EU at 9%.
• Basis of Taxation: Profits. Hungary taxes corporate net profits, not revenue, meaning the tax is applied to profits remaining after expenses.

3. Ireland

• Corporate Income Tax: Ireland taxes corporate trading income at a rate of 12.5%.
• Basis of Taxation: Profits. Ireland's corporate tax is levied on net profits, specifically from trading activities, after deducting business expenses.

4. Cyprus

• Corporate Income Tax: Cyprus imposes a corporate tax rate of 12.5%.
• Basis of Taxation: Profits. The corporate income tax in Cyprus is applied to net profits after deducting all operational expenses.

5. Lithuania

• Corporate Income Tax: Lithuania taxes corporate profits at a rate of 15%.
• Basis of Taxation: Profits. The tax is levied on net profits after deducting allowable expenses from total revenue.

Taxes in Estonia: A Different Approach

As a point of comparison, Estonia's system is unique within the EU:

• Corporate Income Tax: Estonia taxes distributed profits at a rate of 22%.
• Basis of Taxation: Distributed Profits. Unlike the other countries mentioned, Estonia does not tax retained earnings or reinvested profits. The tax is only applied when profits are distributed to shareholders, such as through dividends.

Summary of Taxes in Estonia

To summarize, the corporate income tax in the top EU countries with the lowest rates is based on net profits rather than revenue. This means businesses are taxed on the profit remaining after all allowable expenses are deducted from their total revenue.

Estonia has a distinct system where only distributed profits are taxed, which can be particularly advantageous for businesses focused on reinvesting profits to fuel growth. This system encourages reinvestment and expansion without the immediate tax burden on profits that are not distributed.

Contact Wisor Group to understand the Estonian tax system better.