Taxation of Non-Resident Income in Estonia

With its unique tax system, Estonia captures the interest of many foreign investors and entrepreneurs. Yet, non-residents earning income in the country should account for certain notable considerations and benefits. Join us as we delve into the key taxation rules that apply to non-residents in Estonia and discover strategies to mitigate double taxation through tax agreements.

Taxation of residents and non-residents: a closer look at Estonia’s tax system

In Estonia, individuals, regardless of their residency status, are subject to a flat income tax rate of 20%. Nevertheless, notable exceptions and peculiarities that warrant attention do exist.

Source of income location

For residents, the scope of income tax covers global income, whereas non-residents are solely taxed on income generated within Estonia.

Dividends

The dividend tax rate in Estonia is 7% for both residents and non-residents, given that the company pays a reduced corporate tax rate of 14%. However, double tax treaties may include provisions that exempt individuals from the above tax obligation. 

Interest

Residents of Estonia are subject to a 20% tax rate on interest payments, while non-residents are exempt from this tax obligation. Exceptions do exist though, when non-resident investors receive interest from Estonian funds or other asset pools. The above rule applies if 2 conditions are met:

1. Over 50% of the fund’s or pool’s assets, either at the time of interest payment or at any point in the previous 2 years, consist of immovable property located in Estonia. This includes both direct and indirect holdings.
2. The non-resident held a minimum of 10% ownership in the fund or pool at the time of payment.

In such cases, non-residents’ interest income is taxed at a rate of 20%.

Royalties

Royalties paid to resident companies in Estonia are not subject to withholding tax at the source. If the recipient is a resident individual, a 20% tax is applied to the income. Non-residents, on the other hand, benefit from a lower tax rate of only 10% on royalties. The rule comes with several exceptions such as cases where the tax rate is reduced or tax exemptions are granted under a double tax treaty. 

Technical service fees

In Estonia, technical services are subject to a tax rate of 10%. In certain situations, however, this tax does not apply:

1. Services are rendered outside of Estonia.
2. Estonia and the service provider’s country of tax residency signed a double tax treaty, which grants an exemption from the above tax.

Find a comparative table that highlights the differences in taxation between residents and non-residents in Estonia below:

Tax	Residents	Non-residents
Income	20%	20%
Dividends	0%/7%	0%/7%
Interest	20%	0%
Royalties	20%	10%
Technical service fees	0%/10%	0%/10%

Residents of Estonia

Let’s take a closer look at who can qualify for residency in Estonia. As provided for under Estonian laws, residency is granted to individuals if they meet the conditions listed below:

• Those who have a registered permanent address in Estonia.
• Individuals whose total stay in Estonia exceeds 183 days within a consecutive 12-month period.
• Estonian government officials who are temporarily stationed or assigned to work abroad.

When determining tax residency in Estonia, every part of a day is considered a full day, regardless of how long an individual stays in the country. Even if it’s just 1 or 2 hours, it is counted as an additional day towards tax residency.

In situations where an individual resides and works in 2 countries for a prolonged period, they may be recognized as a tax resident in both countries. Hence, to accurately establish a person’s tax obligations, their center of vital interests is taken into account. If their home, family, or business is abroad, the income of such an individual will be taxed as that of a non-resident.

How can I save on taxes in Estonia as a non-resident?

Here are some fresh ways to minimize your tax burden in Estonia:

1. Optimize the tax-free allowance. Estonia provides a generous tax-free allowance of EUR 6,000 per year. If your income falls below this threshold, you can enjoy tax savings by being exempt from personal income tax.
2. Maximize private pension contributions. By making regular contributions to a private pension fund, you will reduce your taxable income in Estonia. Beware of the limitations though: the above contributions should not exceed 15% of your income or EUR 6,000 per year (whichever is lower).
3. Capitalize on eligible business expenses. If you run a business in Estonia, take advantage of deducting specific expenses from your taxable income. This includes items like office rent, transportation costs, and business travel expenses. With this, you will successfully optimize your tax position and taxable income.
4. Explore startup tax benefits. Estonia offers enticing tax incentives for investors who fund startups. By investing in these innovative ventures, you will potentially reduce your taxable income by up to 50%, fostering both growth and tax savings.
5. Harness double tax treaties. Estonia has made 60 bilateral agreements to avoid double taxation. Leveraging these agreements can help mitigate tax liabilities that arise from international transactions and income earned in multiple jurisdictions. As a result, you will enjoy smoother cross-border operations.

Tax deductions for non-residents in Estonia: what are your available options?

Tax legislation affects residents and non-residents in Estonia differently. Besides, there are significant disparities in tax rules and benefits based on the individual’s country of tax residency.

Non-residents of EEA member states

We are talking about non-resident individuals of European Union member states, Iceland, Liechtenstein, and Norway. They enjoy the rights and obligations similar to those of Estonian residents. In essence, residents from these countries are free to claim deductions from their taxable income sourced locally, following the same principles as Estonian residents.

To qualify for tax deductions from their standard personal allowance, non-resident individuals need to provide the following documents to the paying company or entrepreneur:

1. Request for tax deductions from the standard personal allowance.
2. Residency certificate authenticated by the tax authority of the non-resident’s country of residence.

Non-resident individuals may generally claim different tax deductions from their income in proportion to the part of the income derived from sources in Estonia.

Third-country non-residents

Non-residents from countries outside the European Economic Area face certain restrictions. This applies to tax residents of nations like the United States, Mexico, Ukraine, and more. Here’s what they are not permitted to do:

• file a declaration for personal income tax as a resident individual in Estonia.
• deduct expenses from taxable income in Estonia.
• claim the standard personal allowance as a deduction from their taxable income.

If the income tax has been correctly deducted at the applicable rate as stipulated by the Income Tax Act or the Double Tax Treaty, non-resident recipients of income are not required to submit a personal income tax declaration in Estonia. However, if the tax has not been deducted or the above tax has been deducted at an incorrect rate, the recipient is obliged to declare their income. For that purpose, they shall use one of the specified forms, depending on the income type:

• Form A1 (for income that tax has not been deducted from)
• Form V1 (for income from property disposal)
• Form E1 (for income from entrepreneurial activities).

Tax deductions in Estonia

Individuals who generate income in Estonia while being residents of a country within the European Economic Area have an array of tax advantages and incentives at their disposal:

Standard personal allowance

Individuals in Estonia have an opportunity to benefit from specific tax deductions when calculating their annual gross income. Among these tax deductions is the standard personal allowance, which is set at EUR 6,000 (equivalent to EUR 500 per month). The tax deduction amount is directly influenced by the individual’s income:

• For incomes up to EUR 14,400, the full amount of EUR 6,000 may be deducted.
• For incomes ranging from EUR 14,400 to EUR 25,200, the standard personal allowance is calculated as follows: 6,000 – (6,000/10,800) x (income amount – 14,400).
• If the income exceeds EUR 25,200, the standard allowance equals zero, and no tax deduction is applicable.

Rental income deductions

Since 2016, Estonia has introduced a tax deduction specifically for income derived from property rentals. It allows individuals to deduct 20% of their rental income, which may be used to cover property maintenance expenses. An interesting aspect of this tax deduction is that there is no requirement to provide supporting documents for these expenses when you claim the deduction.

Practical implementation of double tax treaties for non-residents in Estonia: real-life examples

Non-residents have the opportunity to decrease the tax burden on their income by taking advantage of double tax treaties. Here are a few illustrations of how these double tax treaties operate:

Case 1

Anna is a Finnish citizen and tax resident. She is employed by a Finnish company with a branch in Estonia. As part of her job, Anna frequently travels to Estonia for business purposes. She receives her income as a salary directly from the Finnish company for the work she performs in Estonia.

Under Estonian tax laws, Anna is obliged to pay a 20% personal income tax on income earned from local sources. However, thanks to the double tax treaty between Estonia and Finland, Anna is eligible for tax exemptions in Estonia if she meets the following conditions:

• Anna’s stay in Estonia does not exceed 183 days within any 12 months.
• Her salary is paid by the Finnish company and not by the Estonian branch.
• Anna’s salary is not treated as an expense of the Estonian branch.

Case 2 

Boris, a Polish citizen and tax resident, actively engages in the Estonian market by investing in a contractual fund. The latter specializes in local real estate. Through his investments, Boris receives periodic interest income.

According to Estonian tax laws, Boris is obliged to pay tax on the interest income earned from the Estonian contractual fund at the standard tax rate of 20%. Thanks to the double tax treaty between Estonia and Poland, Boris has the opportunity to benefit from a reduced tax rate of 10%. For this purpose, he shall submit a valid certificate confirming his Polish tax residency.

In the above scenario, the Estonian fund will deduct 10% of the interest income as tax and remit the amount to the Estonian treasury. Boris is required to declare his income and fulfill tax obligations under the relevant regulations and per the tax rates established by the Polish authorities. Notably, Boris is free to offset the tax payment made in Estonia and thus optimize his overall expenses.

What advantages does tax residency in Estonia offer?

Why would individuals from third countries choose to establish tax residency in Estonia, even though the income tax rate is the same, i.e., 20%? The reason is straightforward. As tax residents of Estonia, they may take advantage of the tax allowance of EUR 6,000 (EUR 500 per month).

Let’s illustrate this with an example. If someone earns a salary of EUR 1,200, they are free to exempt EUR 500 from tax. Consequently, a tax resident, considering this allowance, would have an income of EUR 1,060 in hand, while a non-resident would only get as much as EUR 960.

Additionally, non-residents in Estonia are not eligible to participate in the 2nd pension pillar. The above pillar involves an additional 4% contribution from the salary made by the employer to the pension fund.

The tax laws and regulations of a different country can be quite intricate and challenging to navigate. Therefore, if you are considering a business in Estonia or planning to relocate to this remarkable country, seek the guidance of a specialist. By consulting an International Wealth expert, you will develop and implement effective tax strategies tailored to your specific needs and circumstances. Feel free to share your contact details with us via info@offshore-pro.info. The International Wealth team of experienced professionals will promptly reach out to provide you with valuable tax advice and recommendations.

Here are just a few examples of the Estonia-related services we offer to our clients, covering a wide range of needs and requirements:

• The Swiss-Hanseatic Connection: A Swiss Commercial Bank Account Based on Company Registration and Substance in Estonia;
• Corporate Account in Estonia for Estonian Сompanies.

Reach out to International Wealth, and our team of experts will assist you in discovering a tailored solution to optimize both your business and personal life in international settings.