Employers in Estonia are required to make a significant contribution known as the Social Tax. The Social Tax Rate is 33% of the employee's gross salary. This tax covers various social benefits, including pensions, healthcare, and unemployment insurance.

Other Mandatory Contributions

Employers are also required to make other mandatory contributions. These include Unemployment Insurance, which is 0.8% of the employee's gross salary, and Funded Pension, which is 2% of the employee's gross salary. However, the Funded Pension is only applicable if the employee chooses to participate in the funded pension scheme.

Important Considerations

There are also important considerations that employers should be aware of. For instance, Social tax contributions have an upper limit. The exact contribution cap is adjusted annually.

In terms of reporting and payment, employers must withhold employee contributions, add their own contributions, and remit the total payments to the Estonian Tax and Customs Board.

In Estonia, a flat income tax rate is applied, accompanied by a basic tax-free allowance. The income tax rate is 20%, and the basic allowance is adjusted annually, currently set at 6,000 euros per year (or 500 euros per month). Income below the basic allowance is not subject to tax.

Social Tax

Employees in Estonia contribute to the Social Tax. The social tax rate is 33% of the employee's gross salary. This tax covers various social benefits, including pensions, healthcare, and unemployment insurance.

Other Mandatory Deductions

There are other mandatory deductions that employees need to be aware of:

• Unemployment Insurance (Employee): 1.6% of the employee's gross salary.
• Funded Pension (Employee): 2% of the employee's gross salary, applicable only if the employee chooses to participate in the funded pension scheme.

Important Considerations

There are some important considerations to keep in mind:

• Tax-Free Allowance: The basic allowance reduces the employee's taxable income.
• Withholding: Employers are responsible for deducting income tax and social security contributions from their employees' salaries.

The standard VAT rate (käibemaks) in Estonia is 20%. Reduced rates of 9% and 5% apply to specific goods and services such as books, certain medications, hotel accommodations, etc.

VAT Liability for Services

Determining if your services are subject to Estonian VAT depends on these factors:

• Place of Supply: The place of supply rules establish where a service is deemed to be supplied for VAT purposes. Different rules apply depending on the type of service, whether the customer is a business (B2B) or an individual (B2C), and the location of both parties.
• Reverse Charge Mechanism: The reverse charge mechanism might apply under certain B2B service transactions. In this case, the Estonian business receiving the service typically becomes responsible for reporting and paying the VAT.

Important Categories of Services

• Electronically Supplied Services: Providing digital services (software subscriptions, downloads, etc.) to customers in Estonia might trigger Estonian VAT obligations, even if your business is established outside of Estonia.
• Services Related to Immovable Property: Services with a significant connection to a property located in Estonia (e.g., construction, real estate services) usually fall under Estonian VAT rules.
• Professional Services: Consulting, accounting, and legal services generally are subject to VAT in Estonia when the place of supply is determined to be within the country.

VAT Registration and Reporting

• Registration Threshold: Businesses exceeding a specific revenue threshold within Estonia might be required to register for VAT.
• Filing and Payment: Registered businesses must file periodic VAT returns and make corresponding payments to the tax authorities in Estonia.

Estonia's unique corporate income tax system is generally favorable for businesses. The system only applies to distributed profits (dividends), meaning reinvested business earnings remain untaxed. This encourages growth and reinvestment. The corporate income tax rate in Estonia is a flat 20%, often divided into 14/20 for taxation upon distribution and 6/20 for tax withheld upon initial distribution.

Specific Incentives

Businesses in the start-up phase may benefit from various incentives and support programs designed to foster innovation. Estonia also offers tax deductions and credits for businesses engaged in research and development (R&D) activities. Furthermore, Estonia's e-Residency program might provide tax and administrative advantages for businesses founded by e-residents, particularly for fully digital companies.

Other Factors for Attractiveness

Estonia has a highly developed digital infrastructure, supporting e-commerce and digital service industries. Tax administration processes are often streamlined and efficient, thanks to Estonia's digital-first approach.

Important Considerations

Specific eligibility requirements usually apply to various tax incentives. It's important to ensure your business activities qualify. Tax incentives sometimes involve formal applications and approval processes.