Last updated on 7 de April de 2023
Estonia is one of the fastest growing economies in the European Union. We analyze the most important taxes in Estonia to understand how much workers, investors, and companies pay.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Real Estate Purchase Tax
- Estonia Public Finances
With a population of barely 1.3 million people, Estonia is one of many success stories that have taken place in Eastern Europe since the fall of communism just over three decades ago.
As a matter of fact, Estonia was a mere republic within the Soviet Union until 1991, not having any real sovereignty. However, things have changed a lot since.
Estonia has already overtaken many Southern European countries on a real GDP per capita basis. And it has done so while maintaining its public finances in a very heathy state.
Since 2004 the Baltic country has been a member of the European Union. 7 years later, in 2011, it joined the euro zone.
One of the things that Estonia has managed best has been precisely its tax policy. This has been instrumental in attracting companies and skilled workers to develop and grow the local economy.
Even digital nomads have become very interested in Estonia in recent years thanks to its taxes.
Taxes on Earned Income
Labor income in Estonia is subject to social security payments and income tax:
Both employers and employees have to make contributions to the Estonia social security. However, most of the burden falls on the former.
Thus, employers must pay the equivalent of 33.8% of the employee’s gross salary in social security contributions. Of that percentage, 0.8% goes for unemployment insurance.
The other 33% is goes to the pension system. 29% of that is used to finance the existing system, while 4% is put into a personal retirement accounts for the employee.
When it comes to employees, they must contribution 1.6% of their gross salary to finance unemployment insurance.
And those born after 1983 must also contribute 2% of their gross salary to their allocated personal retirement account. As a result, 6% of the employee’s salary is put away for retirement every year.
In aggregate, people born in or before 1983 will contribute 1.6% of their salary to the Estonian social security, while those born after 1983 will contribute 3.6%.
Income tax in Estonia is both moderate and easy to understand. All earned income is subject to a flat tax rate of 20%.
No matter how much money a person earns, their tax bill will be equivalent to 20% of their gross salary. The simplicity of the system also increases compliance when it comes to paying the taxes.
Self-employed people, including digital nomads, also have to pay 20% of their gross income in income taxes in if they reside in Estonia.
Capital Income Taxes
Let us analyze what taxes apply to income from savings and investments:
The interest we receive from bank deposits or investments in fixed income instruments is subject to a tax rate of 20% in most cases.
As for dividends, their tax treatment will depend on whether we collect them from a company headquartered in Estonia or abroad.
If the company is based out of Estonia, the dividends we receive will be subject to a tax rate of 20%. This will also be the total tax burden, since the company will not have had to pay any corporation tax before distributing the money to the shareholders.
This contrasts with how dividends are taxed in most countries, where double taxation does exist. This is because profits are first taxed at the corporate level and, whatever is left and distributed to shareholders, will have to pay income tax.
Dividends received from foreign companies will not be subject to taxes if that money has already been subject to corporate taxes.
Net rental income will be taxed at the same flat tax rate of 20%. This means all costs associated with the ownership and upkeep of our properties are tax deductible.
Realized Capital Gains
Capital gains from our financial investments will be subject to a tax rate of 20%. However, we will only have to pay tax when we withdraw money from our investment account. If we keep it there, to reinvest it in the future, we will not have to pay anything.
As for capital gains from our real estate investments, a 20% tax rate will apply in most situations. The exception would be the sale of our main residence which would be exempt from taxation.
Corporate tax in Estonia works differently than it does in most other countries.
This is because, in Estonia, profits that are not distributed to shareholders in the form of dividends but retained by the company to be reinvested and finance future growth will not be taxed. In other words, the rate will be 0%. This allows businesses and the economy to grow.
In other words, the tax policy in Estonia aims to maximize the long-term growth of the country as opposed to next year’s fiscal revenue.
If corporate profits are distributed to shareholders in the form of dividends, an income tax rate of 20% the shareholder level will apply.
The consumption of goods and services in Estonia is subject to VAT, and different rates exist.
The general VAT rate is 20% and used for all those purchases not explicitly subject to any of the reduced rates.
A reduced VAT rate of 9% applies to certain products and services, such as medicines and medical equipment, hotels, books, and newspapers.
International transport is exempt from VAT.
Real Estate Purchase Tax
When buying a property in Estonia, a small property transfer tax will have to be paid. Though it can be considered negligible.
Thus, the purchase of any real estate asset, such as a house or apartment, is subject to a tax of 0.4% of the value of the transaction.
This means that, for a purchase of €300,000, we would have to pay €1,200 in taxes.
Estonia Public Finances
There is little need to comment on the state of Estonia’s public finances, beyond stating that they are in perfect order. The small Baltic country has almost no public debt.
Estonia finished the year 2019 with public debt equivalent to 8.4% of its GDP. And by the end of 2021, after almost two years of heavy recession, public debt was still below 20% of GDP.
As we can see in the graph below, Estonia is a country that does not consider public debt as a normal tool to finance public spending:
Estonia’s solid public finances indicate that the country will be able to continue to offer attractive tax rates and a business-friendly environment in the years to come.
Estonia has been able to achieve an incredible level of economic growth in just three decades, and that has led to a massive improvement in the standard of living of its population. This has been made possible to a great extent by its tax policy.
The existing tax system encourages workers and businesses to produce and generate wealth. And it does so while making it easier to adhere to its rules and regulations.
As a result, it should not be surprising that Estonia attracts so much interest from foreign corporations, digital nomads, and even nomad capitalists.
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And if you want to read about taxes in another business-friendly country, check out this link:
Taxes in Singapore – A Complete Guide