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Doing businessin Estonia

Table of contents

Part one:

Estonia at a glance

Business climate

Economy of Estonia

Overview of the economy

Monetary policy

Trading

Transport and logistics

Banking sector

Information and

telecommunications

National support for businesses

Starting a business

Establishing a company

The main types of legal entities

Registration process

Accounting principles

Auditing

31

5

6

9

315

17

19

21

23

24

326

27

33

Part two:

Corporate tax system

Corporate income tax

Permanent establishment

Dividends

Interest

Royalties

Sale of real estate

Value added tax

VAT base

Non-established business

VAT payers

VAT rates

Returns and payment

VAT refund

VAT group registration

Social security payments

Social tax

Unemployment insurance

payments

Pension system

Voluntary schemes

Tax filing and payment

procedures

Non-resident employers

Totalization agreements

Other taxes

Land tax

Heavy goods vehicle tax

Local taxes

Gambling tax

Excises

Customs

Customs procedures

Authorized Economic Operator

(AEO) status

Part three:

Personal taxes

Income tax

Definiton of a resident

Income subject to tax

Employer-provided stock

options

Deductions

Rates

Tax filing and payment

procedures

Electronic declaration

Visas, work and residence

permits

Visas

Residence permits

Work permits

Doing business in Estonia

Doing business in Estonia 1

1. Estoniaat a glance

2 Doing business in Estonia

Estonia’s economicfreedom is rated as

ththe 16 freest in 2012

According to the Index of Economic Freedom published by the

Heritage Foundation in cooperation with The Wall Street Journal, th 1Estonia is rated as the 16 freest in 2012. Estonia enjoys high levels

of investment, financial freedom and property rights while the top

income and corporate tax rates are relatively low, compared with

other countries. According to the findings of Freedom House in its

latest edition of Freedom in the World, the annual survey of global

political rights and civil liberties, Estonia is ranked among the 47 2freest countries in the world and one of the top countries in Central

and Eastern Europe.

The global financial market crisis that started in 2007 has affected

the general economic growth in Estonia – economic expansion with

gross domestic product (GDP) growth approximately 10% per year

halted and the GDP decreased rapidly from 2008. However, the

consistent and stable economic policy has helped to bring the

economy out of recession, resulting in a national annual GDP growth 3of 7.6% in 2011.

Another recent significant achievement for Estonia is that it

managed to comply with Maastricht’s strict deficit rules and joined

the Eurozone on 1 January 2011.

The Estonian kroon was replaced with the euro (1 euro = 15.6466

kroons) on 1 January 2011. This accession has been a positive

landmark for Estonia, which will further enhance trade and tourism.

According to the Ernst & Young Eurozone Spring 2012 Forecast,

Estonian economic growth was the fastest in the Eurozone in 2011.

The forecasts show that, in 2012, there may be a slowdown in

growth pace, nevertheless Estonia will remain the fastest-growing

Eurozone economy in 2012.

Footnotes

1. 2012 Index of Economic Freedom, http://www.heritage.org/Index/Country/Estonia

2. Freedom House, http://www.freedomhouse.org

3. Statistics Estonia, 2012, http://www.stat.ee/57459

1. Estonia at a glance


Estonia at a glance

CapitalTallinn

(392,000 inhabitants)

Othercities

Tartu (98,000)

Narva (65,000)

Kohtla-Järve (43,000)

Pärnu (43,000)

GovernmentParliamentary

Republic

Majornaturalresources

Timber, oil shale, phosphorite,

peat, limestone, dolomite

LanguageEstonian;

English, Russian and Finnish

are also widely spoken

DistancefromTallinn

Helsinki 85km, Riga 307km,

St. Petersburg 395km,

Stockholm 405km,

Vilnius 605km, Warsaw 1,000km

Publicholidays

Low number of public holidays

(12)

Estonia is two hours ahead

of Greenwich Mean Time

(GMT +02);

in summer GMT +03

Timezone

Hours aheadof or behindEstonia

New York -7London -2

Helsinki 0Kyiv 0Tel Aviv 0

Moscow +1Beijing +5

Majoreconomicsectorsin Estonia

Information and communications

technologies (ICT)

Electronics

Machinery and metalwork

Wood processing

Logistics and transport

Food

Bio- and medical technology

GeographyLocated in Eastern Europe

and at the heart of the

Baltic Sea Region

Area 245,227 km

Population 1.29 million inhabitants

Neighboringcountries

Finland

Latvia

Russia

Sweden

Flight times

Helsinki 35 min, Stockholm 1h,

Copenhagen 1h 30 min, Moscow

1h 40 min, Amsterdam 2h 20 min,

London 2h 45 min

8:00-17:00

Offices of major banks are

open until 18:00, sporadically

until 21:00 (incl. weekends)

CurrencyEuro (EUR)

1 euro = 100 cents

Memberships

The United Nations, the European

Union, NATO, World Trade

Organization (WTO), World Health

Organization (WHO), OECD.

Estonia has signed the Kyoto

Protocol and the Schengen Treaty

Businesshours

Estonia offers key opportunities for

businesses in a number of economic sectors,

some of which are widely renowned (e.g.,

ICT, wood processing, biotechnology).

Estonia has effective trade ties especially

with Finland, Sweden, Russia and Germany,

and due to low labor costs, the services and

manufacturing sectors have been

prosperous.


3


Estonia on the mapof Europe

Estonia is a country situated in the Baltic

Sea region. This small Eastern European

country is bordered to the north by the Gulf

of Finland, to the west by the Baltic Sea, to

the south by Latvia and to the east by

Russia. Besides these two neighboring

countries, Estonia has close ties with Finland

across the Gulf of Finland. Sweden is

Estonia's western neighbor across the Baltic

Sea.


4


Business climate

� Developed communication networks:

business can be done remotely from

any part of the world due to a wide

range of internet-based services

� Tax system supporting the holding

structure without any need for separate

and complicated tax accounting

� Transparent regulatory environment

� Excellent connection links with the

Nordic markets as well as with Russia

Reasons to invest in Estonia:

The overall freedom to conduct business in Estonia is well protected under

a transparent regulatory environment.

4For example, starting a business takes an average 7 days, compared

with the world average of 35 days. Foreign and domestic

investments are both equally treated under the law, and this makes

Estonia one of the leading countries in Central and Eastern Europe in

terms of attracting foreign direct investments (FDI). The World Bank thhas ranked Estonia as 24 out of 183 countries on the ease of doing

5business.

There is a growing number of industrial parks and supply of high-

quality commercial and office property. The establishment of free

zones at Muuga Port, in Valga, Sillamäe and Paldiski has further

enhanced Estonia's attractiveness to foreign investors. Many costs

such as energy, labor, transport services, telecommunications and

property expenses are considerably lower compared with other

countries in the Baltic Sea region.

Investors find that in Estonia they can achieve very high quality

levels without having to pay heavy costs, evidenced by the Estonian

leading position in Central and Eastern Europe in terms of FDI per

capita. The FDI stock per capita was EUR9,669 as at 31 December 62011; in total EUR12.7 billion was invested in 2011 in Estonia.

Footnotes

4. Doing Business, http://www.doingbusiness.org/data/exploreeconomies/estonia

5. Doing Business, http://www.doingbusiness.org/rankings

6. Bank of Estonia 2012


5


Estonia, the European Union entrant state from 2004, has a modern market-based

economy and one of the highest per capita income levels in Central Europe.

Economy of Estonia

Overview of the economy

Successive policies of governments have pursued a free market, a

pro-business economic agenda and have wavered little in their

commitment to pro-market reforms. The priority has been to sustain

high GDP growth rates – on an average 8% per year from

2003-07.

The economy benefits from the strong electronics and

telecommunications sectors as well as the close trade ties with

Finland, Sweden and Germany. The current government has pursued

sound fiscal policies, resulting in balanced budgets and low public 7debt.

Estonia's economy slowed down noticeably and fell into recession in

the middle of 2008, primarily as the result of an investment and

consumption slump, following the burst of the real estate market 7bubble. A modest recovery began in 2010, leading to fast economic

growth in the first quarter of 2011.

Footnotes

7. “The World Factbook”, Central Intelligence Agency website,

https://www.cia.gov/library/publications/the-world-factbook/geos/en.html

Sources: Statistics Estonia 2012, http://www.stat.ee/29958

Bank of Estonia 2012, http://statistika.eestipank.ee

“The World Factbook”, Central Intelligence Agency website,

https://www.cia.gov/library/publications/the-world-factbook/geos/en.html

Key factors of 2011

ExportsEUR12billion

ImportsEUR12.6

billion

GDP percapita

EUR15,972

GDP growth7.6%

Inflation5.1%

Public debt

5.8% of GDP

Un-employment

12.5%

Labor force

704,400


6

Monetary policy Banking sector

As from January 2011, Estonia joined the Eurozone. Estonia's The banking system in Estonia, with its Scandinavian connections, is

accession to the Economic and Monetary Union provides the stability modern and efficient, encompassing the major banks in the region.

and low inflation level of the currency in circulation. The accession to Commercial banks provide domestic and international services,

the Eurozone gives Estonia the opportunity to participate in the including internet and telephone banking, at very competitive rates.

European monetary policy decision-making process. Estonia has highly advanced electronic channels: 98% of total 8payment transactions are made via internet banking systems.

TradingInformation and telecommunications

Estonia's main export partners are Finland, Sweden, Russia, other

Baltic countries, Germany and the USA. The main partners for Foreign investors have made considerable investments into high

imported goods and services are Finland, Russia, Sweden and technology and communication networks in order to modernize the

Germany. Estonia's major export articles are machinery and infrastructure of IT communications in Estonia. As a result, the

equipment, mineral products, wood and wood products. Estonia's Estonian information and telecommunications sector is one of the

main imports are machinery and appliances, mineral products and most developed in Central and Eastern Europe. Consequently, a wide

transport equipment. range of high-quality voice, data and internet services are available

throughout the country.The 2012 Global Enabling Trade Report by the World Economic

Forum, ranked Estonia as the twelfth (out of 132 countries) in their Due to the fact that internet services are widely available, schools,

customs services index and rated Estonia highly in the efficiency of libraries and other public places are connected to the internet.

import and export procedures. Seventy-six percent of the population aged 16 to 74 are internet 9users. A large percentage of the population files income tax returns

Transport and logistics online (92% of personal tax returns in 2010); and online voting was

used for the first time in the local elections of 2005. Estonia has also Estonia's excellent transportation links and geographic location make made progress in implementing IT services in the medical sector — it a good base for production and distribution. Estonia has a the state's Health Information System and digital prescriptions have considerable share of transit trade through the Baltic Sea with the been implemented. Most shops, restaurants and other service deepwater port and free zone of Muuga, which has created providers accept bank or credit cards for payment. Also, it is advanced communication links in the region. The newly established common that public places offer free internet via wireless.multifunctional port with the free zone at Sillamäe is the most

eastern port of the European Union. It is capable of handling all Estonia is also characterized by a large number of telephone cargo groups from oil products and dry bulk to containerized cargo, connections both via fixed landline and mobile telephones (117

9and has access to the most cost-effective transit corridors in the mobile subscriptions per 100 inhabitants).region. Paldiski Northern Port and free zone in northwest Estonia is a

rapidly developing private-owned port, which specializes in handling

rolling cargo, including new cars, containers, general cargo and

oversized project cargo. Estonian ports are ice free and easily

navigable all year round.

Freight and passenger links enable sea crossings across the Baltic

Sea, and air connections provide easy access to Tallinn from the

major European cities. Estonian railways use the same gauge as

throughout Russia, making Estonia an attractive center for bulk

shipment of goods from the Eastern area.


Footnotes

8. Estonia.eu, Economy & IT

9. Statistics Estonia, 2010


7

National support for businesses

Besides offering a favorable business environment for attracting FDI,

Estonia also presents a range of national support schemes.

Enterprise Estonia (EAS) is one of the largest institutions within the

national support system for entrepreneurship, providing financial

assistance, advisory, cooperation opportunities and training for

entrepreneurs, research establishments, public and the third sector.

Pursuant to the accession of Estonia to the European Union, EAS

became one of the implementing units of the European Union

structural funds in Estonia. Today, most of the EAS programs and

grants offered are co-financed from the EU structural funds. EAS has

foreign representative offices in Hamburg, Helsinki, Kyiv, London,

Moscow, Shanghai, Silicon Valley, Stockholm, St. Petersburg and

Tokyo.

Businesses can also get support from the Credit and Export

Guarantee Fund KredEx in Estonia. The support schemes are, for

example, a start-up loan to finance investments and working capital

of starting businesses; a business loan guarantee for companies

whose collateral property value or self-financing is not sufficient for

getting a bank loan or who do not have a long history of operation;

and a subordinated loan for sustainable companies oriented on

growth that the banks are not ready to finance due to insufficient

self-financing and collaterals.



8


The formation and regulation of business entities in Estonia are determined by the

Commercial Code. The most common forms of business entities in Estonia are private

limited companies, public limited companies and branches of foreign entities. General and

limited partnerships are rarely formed.

Starting a business

Establishing a company

All enterprises are required to be entered in

the Commercial Register. The Commercial

Register is a public register, which means

that everyone is entitled to examine the

register and the business files and to obtain

copies of registry cards and documents in

the business files.

To enter a company in the Commercial Register, the founders must submit the memorandum

of association, which includes the following information:

The business name and official addressThe names and residences or seats of the foundersThe proposed amount of share capitalThe number and nominal value of shares and, upon issue of more than one class of

shares, the rights attached to the shares and the division of shares among the foundersThe amount to be paid for shares, the procedure, time and place of paymentIn case a share is paid for by a non-monetary contribution, the item of the non-monetary

contribution and its valuation methodInformation on the members of the Management Board, the Supervisory Board and the

auditorInformation on procurators (authorized persons), if appointedThe projected costs of foundation and the procedure for payment thereof

With the conclusion of the memorandum of association, the founders shall also approve the

articles of association of the limited liability company as an annex to the memorandum of

association. The memorandum of association and the articles of association approved

thereby shall be notarized and signed by all founders.


9


� Limited liability companies

Limited liability companies are liable

for their obligations only to the extent

covered by their assets. Shareholders

are liable up to the issue price, which

is to be paid for all the shares that

they have subscribed for.

Shareholders are not personally liable

for the obligations of the company. If

the members of the Supervisory

Board or Management Board cause

any damage to the company, the

company can claim compensation for

damages from the latter.

Private limited liability companies (osaühing, OÜ)

The minimum share capital of an OÜ is

EUR2,500. If the intended share capital of

an OÜ does not exceed EUR25,000 when

establishing the company, the shareholders

may prescribe in the memorandum of

association that payment for shares by the

founders is not needed; however, the

payment is necessary at a later date. This

regulation only applies when the founders

are natural persons. The minimum number

of shareholders is one. The transfer of

shares must be confirmed by a notary,

except if the shares are registered in the

Central Register of Securities. In this case,

the transfer of shares may be executed by

transfer from one securities account to

another, e.g., by using internet banking

services.

Public limited liability companies (aktsiaselts, AS)

The minimum share capital of an AS is

EUR25,000. The minimum number of

shareholders is one. There is no maximum

number of shareholders. The shares of an

AS must be registered in the Central

Register of Securities. Registered shares

may be freely transferred. The articles of

association may prescribe that, upon

transfer of shares to third persons, other

shareholders have a pre-emptive right that

applies to each transfer of shares for a

payment.

� Full liability companies

General partnerships (täisühing, TÜ)

General partnership is a legal person and its

shareholders’ liability for the company’s

obligations is unlimited. A partnership is

established on the basis of a joint activity

agreement by the partners who are jointly

liable for the obligations of the general

partnership with all their assets. Partners

can be both legal and natural persons.

Limited partnerships (usaldusühing, UÜ)

Limited partnership has both general and

limited liability members. The liability of

general liability members is unlimited. The

liability of limited liability members is limited

to their share property. A limited liability

partner does not have the right to manage

the limited partnership but can participate as

a general partner in the decision-making

process.

The main types of legal entites

� Branches of foreign companies (filiaal)

If a foreign company wants to permanently offer goods or services in its own name in

Estonia, it can enter a branch in the Commercial Register. A branch is not a legal person.

The main company shall be liable for the obligations arising from the activities of the branch.

As a rule, the branches registered in Estonia are considered as permanent establishments for

taxation purposes.

� Personal enterprise or sole proprietorship (füüsilisest isikust ettevõtja, FIE)

A sole proprietor can be entered in the Commercial Register and has unlimited liability for its

obligations. The sole proprietorship cannot be regarded as a private company. Sole

proprietorships are widely used by individuals for smaller-scale entrepreneurial businesses.


10


ComparisonBranch of foreign entity Private limited company Public limited company

A foreign company shall appoint a director

or directors for the branch. At least one

director has to be a resident of Estonia,

another EEA Member State or Switzerland.

Management board (MB)

MB may have one or several members, who need not be shareholder(s).

A foreign company is liable for the

obligations of the branch.

Liability

A company is liable with all of its assets.

Not required.

Supervisory board (SB)

Required if prescribed by the articles of

association.

At least three members, who need not be

shareholders. A member of the MB shall

not be a member of the SB.

Minimum capitalN/A

Minimum capital

EUR2,500 EUR25,000

Not required.

Auditing

The annual report must be audited if, at

the balance sheet date of the accounting

year, the limits of at least two of the

following criteria have been exceeded: see

"Auditing" section p.14.

Required.

If the formation of the reserve capital is

prescribed by the articles of association, it

shall not be less than 1/10 of the share

capital. At least 1/20 of net profit of the

financial year shall be entered in the

reserve capital until it has reached the

amount provided by the articles of

association.

The amount of the reserve capital is

prescribed by the articles of association

and it shall not be less than 1/10 of the

share capital of the financial year. At least

1/20 of net profit of the financial year shall

be entered in the reserve capital until it has

reached the amount provided by the

articles of association.

Not required.

Reserve capital

Not regulated.

Decrease of assets

If the net assets are less than half of the share capital or less than the minimum capital

requirement of EUR2,500 regarding private limited liability companies and EUR250,000

regarding public limited liability companies, the shareholders must decide on:(1) The implementation of measures as a result of which the net assets would form at least half of the share capital and minimum capital requirement Or(2) Dissolution, merger, division, transformation of the company Or(3) Submission of a bankruptcy petition


11


Branch of foreign entity Private limited company Public limited company

Not regulated.

Prohibited loans

A company shall not grant or guarantee a

loan to:(1) One of its shareholders whose share

represents more than 5% of share capital(2) A shareholder or member of its parent

company whose share represents more

than 5% of the parent company's share

capital(3) A person to acquire its shares(4) A member of its MB or SB or

procurator (authorized person)

A subsidiary may grant or guarantee a loan

to its parent undertaking or a member of

the same group if this does not harm the

financial status of the company or the

interests of creditors.

A company shall not grant or guarantee a

loan to:(1) One of its shareholders whose shares

represent more than 1% of share capital(2) A shareholder or member of its parent

company whose share represents more

than 1% of parent company's share capital(3) A person to acquire its shares(4) A member of its MB or SB or

procurator (authorized person)

A subsidiary may grant or guarantee a loan

to its parent undertaking or a member of

the same group if this does not harm the

financial status of the company or the

interests of creditors.

Not regulated.

Prohibition on competition

Without the consent of shareholders or SB, a member of the MB or SB shall not:(1) Be a sole proprietor in the area of activity of the company(2) Be a partner of a general partnership or a general partner of a limited partnership

that operates in the same area of activity as the company(3) Be a member of the managerial body of a company, which operates in the same area

of activity, except if the companies belong to one group

A foreign company must maintain separate

accounts concerning the branch. An

unattested copy of the audited and

approved annual report of the foreign

company must be submitted to the

Commercial Register of the location of the

branch not later than one month after the

approval of the annual report or seven

months after the end of the financial year.

Exceptions apply to companies of the

states, which are parties to the EEA

Agreement.

Reporting at the end of the financial year

A company is required to prepare the annual report that consists of the annual account

(balance sheet, income statement, cash flow statement, statement of changes in owner’s

equity and accompanying notes), the management report, the auditor’s report (if

required) and the profit distribution proposal. Within six months after the end of the

financial year, the company is required to submit a signed copy of the entity’s annual

report together with the auditor’s report, if applicable, the profit distribution proposal and

the list of shareholders (in public limited company shareholders owning over 10%)

electronically to the Commercial Register for permanent retention.


12

Registration process Accounting principles

As a rule, the registration of an entity into the Commercial Register The generally accepted accounting principles (GAAP) of Estonia are

of Estonia takes five working days. based on the internationally accepted accounting and reporting

principles, the main requirements of which have been stipulated in The owners of an ID card in Estonia, Finland, Belgium, Portugal and the Accounting Act of the Republic of Estonia. These have been the mobile ID owners in Lithuania can use the internet for: supplemented by the guidelines issued by the Estonian Accounting

Standards Board.Registering a new legal entity

Estonian legislation allows entities to prepare their financial reports in Changing the registry information of an already existing legal accordance with the IFRS. In general, there are no significant entity differences between the Estonian GAAP and the IFRS, except for:

Filing annual reports Annual reports prepared in accordance with the IFRS are more

detailed, because those standards require considerably more All documents shall be provided via the e-portal of the Commercial

information to be disclosedRegister and there is no need to execute any notarization

proceedings. Unlike the IFRS, the Estonian GAAP does not allow using the

revaluation method for fixed assetsA private limited company can be created within two hours via the

internet, without notarization, in an accelerated procedure. The IFRS does not allow entities to choose whether they will capitalize loan interests, but the Estonian GAAP does allow it Additional information regarding operating in the Commercial

(to capitalize or record in the income statement)Register via ID card or mobile ID is available at

http://ariregister.rik.ee. The Estonian GAAP does not describe deferred tax accounting

in detail

Unlike the IFRS, the Estonian GAAP describes the transactions

(business combinations) under common control

There are also some minor differences. If an entity prepares its

financial reports according to the Estonian GAAP and it has an

accounting issue that is not described in the Estonian Accounting

Standards Board regulations (RTJ), the IFRS framework should be

followed.



13


Auditing

Generally, all companies subject to audit are required to submit their

audited financial statements to the Commercial Register within six

months of the end of the financial year. A few specific types of

companies such as banks, insurance companies and investment

funds have particular reporting requirements.

Auditing is obligatory for public limited companies (AS). Other

entities need to be audited if, at the balance sheet date of the

accounting year, the accounting entity exceeds the limits of at least

two of the three following criteria:

Sales revenue (net turnover) in the case of a company, orincome in the case of other accounting entities — EUR2m Total assets as of the balance sheet date — EUR1m Average number of employees — 30

Or if one of the three following criteria is exceeded:

Sales revenue — EUR6m Total assets as of the balance sheet date — EUR3m Average number of employees — 90

According to the Auditors Activities Act, smaller companies are

subject to audit if two of the three following indicators are

exceeded:

Sales revenue or income — EUR1m

Total assets as of the balance sheet date — EUR0.5m

Average number of employees — 15

Or if one of the three following indicators are exceeded:

Sales revenue or income — EUR3m

Total assets as of the balance sheet date — EUR1.5m

Average number of employees — 45

The auditing process in Estonia is regulated by the Estonian Auditing

Standards, which are based on the International Standards of

Auditing issued by the International Federation of Accountants.



2. Corporatetax system

15


2. Corporate tax system

Corporate income tax is not based on accrual accounting, but on payments and expenses on

a cash basis calculation. There are neither thin capitalization nor interest cap rules.

Participation exemption is applied for dividends from subsidiaries to parent companies and

for profit from permanent establishment (both from the EU and third countries). Estonia has

few withholding taxes and can therefore be a favorable holding jurisdiction.

The cost-based Estonian tax system with its

. Deferral of taxation shifts the time of taxation from the moment of earning the profits to that of their distribution. Thus, undistributed profits are not subject to income taxation, regardless of whether these are reinvested or merely retained.

flat rate of 21% is considered one of the most unique and simple tax regimes in the world

IcelandIrelandIsle of ManIsraelItalyJerseyKazakhstanLatviaLithuaniaLuxembourgMacedoniaMaltaMoldovaThe NetherlandsNorwayPolandPortugalRomania

AlbaniaArmeniaAustriaAzerbaijanBelarusBelgiumBulgariaCanadaChinaCroatiaCzech Republic

DenmarkFinlandFranceGeorgiaGermanyGreeceHungary

SerbiaSingaporeSlovakiaSloveniaSpainSouth KoreaSwedenSwitzerlandTurkeyUkraineUnited Arab

EmiratesUnited KingdomUnited States

Estonia has effective agreements on the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes

on income and capital with 49 countries:

The agreements on the avoidance of double taxation have been

signed but are not yet in force with the following countries:

Bahrain, Bosnia and Herzegovina, Cyprus, India, Indonesia, Mexico,

Morocco, Russia, Oman, South Africa, Thailand, Turkmenistan and

Uzbekistan.

Tax rates:

�

�

�

�

�

�

�

�

�

�

Corporate income tax on profit distribution

Capital gains tax(paid upon distribution)

Branch tax

Withholding tax on: Interest Royalty Dividends

Service fees**

Land tax

VAT

Personal income tax

Social security tax

Obligatory funded pension

Unemployment insurance (employer)

(employee)

21% (21/79 net)

21%

21% (21/79 net)

0%; 21%*0%; 5%; 10%

0% 0%; 10%; 21%

0.1%—2.5%

20%; 9%; 0%

21%

33%

2%

1.4% 2.8%

* 21% withholding tax applies to interest paid to

non-residents on the amount exceeding the fair

market interest.

** 10% withholding tax applies on service fee

payments to non-residents if services were

provided in Estonia and no double tax treaty

applies.21% withholding tax applies on service fee

payments to legal persons located in a low tax

rate territory, irrespective of where the services

were provided or used.

16



Corporate income tax

There is no traditional corporate income tax system in

Estonia. The profit of an Estonian entity will not be taxed until

distribution.

Estonian companies do not have to pay income tax on the profit

derived from their business on an earnings basis. Instead of taxation

on the profit earned by resident companies, actual and deemed

profit distributions (usually in the form of dividends) are taxed at

the rate of 21% on the gross amount of distribution. The transfer of

profits from a permanent establishment to its head office or to other

non-residents is also treated as a taxable distribution. Capital

contributions to the equity of an Estonian company (upon formation

or increase of share capital) may be repaid free of Estonian tax. The

assets attributed to the Estonian branch by the headquarters are

treated equally for tax purposes with the capital contributions to the

equity of a limited liability company.

A company's tax liability arises at the moment when it makes

distributions, not the moment when the profits are earned.

Therefore, the main feature of the Estonian corporate income tax

system different from the tax systems in other countries is the

timing of tax liability.

Certain costs that, under a traditional corporate income tax system

would be non-deductible for tax purposes, are subject to corporate

tax in Estonia. For example:1)Fringe benefits2)Gifts3)Donations4)Representation expenses (e.g., cost of entertaining guests)5)Expenses and payments not related to the business

Corporate income tax at the rate of 21/79 is applied on the net

amount of the above-mentioned payments, i.e., 21% of gross

amount.

Estonia's simple system is based on a cash-basis tax calculation, and

therefore, there is no need for tax depreciation rules.

The period of taxation in the case of corporate entities is a calendar

month; the income tax return must be submitted and the income tax

paid by the 10th day of the following month.

17



Permanent establishment Interest

A foreign enterprise is considered to have a permanent As a rule, interest paid to non-residents is not subject to withholding

establishment in Estonia if: tax. An exception applies to the portion of interest that significantly

exceeds the market interest rate — a tax rate of 21% is applied to the It has an economic unit through which the economic activity of a amount exceeding fair market interest.non-resident is permanently carried out in Estonia For resident private individuals, interest paid from loans, securities, The economic activity is carried out within certain geographical leases or other debt obligations, including the amounts calculated on boundaries or such activity is mobile in nature the basis of debt obligations by which the initial debt obligations are

increased, is subject to the standard income tax rate of 21%. Interest A representative of a non-resident operates in Estonia and is paid by credit institutions in relation to a deposit account is tax authorized to carry out, and repeatedly carries out, transactions exempt.in the name of the non-resident

No thin capitalization or interest cap or debt-to-equity rules are Taxation principles for a permanent establishment are the same as applicable in Estonia.for a resident legal person in Estonia.

RoyaltiesDividends

Royalties paid to non-residents are subject to 10% tax at source. Companies distributing dividends must pay corporate income tax at No tax is withheld if royalties are paid to a related party from the rate of 21% on the gross amount of dividends paid. This income another EU Member State or Switzerland (either directly or via its tax is treated as a payment of income tax by the distributing permanent establishment), and at least one of the following company and not as a tax withheld from the payment to the requirements is met:recipient of dividends.

The company receiving payments owns and has owned 25% of If an Estonian company is paying the received dividends forward the share capital of the company paying the fee for at least two (except for dividends from companies located in a low-tax yearsjurisdiction), the dividends distributed are exempt from corporate

income tax if these were received from a taxable subsidiary resident The company paying royalties owns and has owned 25% of the in the EEA or Switzerland, or where the following conditions are share capital of the company receiving payments for at least two satisfied: years

Foreign tax has been paid or withheld from the profit from which The company situated in the EU or Switzerland owns and has the dividends were paid owned 25% of the share capital of both companies

The Estonian company paying dividends owned at least 10% of A standard withholding tax rate of 21% applies to the royalties paid the shares or votes of the foreign company when the dividends to resident private individuals.were received

Sale of real estateThe following payments are also taxable as deemed dividends: the

The gain from the sale of real property by a non-resident in Estonia decrease of share capital, the redemption of shares and the payment is subject to 21% income tax.of liquidation proceeds in the amount which exceeds monetary and

non-monetary payments made to equity.Furthermore, the gain from the sale of shares in a real estate

company is subject to 21% income tax. A non-resident must hold at

least 10% of the shares and at least 50% of the assets must consist

of Estonian real estate (not necessarily at the time of the sale but at

any point during the two preceding years) for the company to

qualify as a real estate company. The same applies for contractual

investment funds and other pool of assets.

18



Value added tax

Non-established business

A “non-established business” is a business that has no fixed

establishment in the territory of Estonia. A non-established business

must register for VAT if it makes taxable supplies of goods or

services regardless of the amount of supply. A registered branch,

fixed establishment of a foreign company or a resident legal person

must be registered for VAT purposes if making taxable supplies in

Estonia of more than EUR16,000 per calendar year.

A foreign taxable person can make transactions that do not relate to

its Estonian fixed establishment. In this case, the rules for a

non-established business apply.

VAT base

The following activities are subject to VAT:

The supply of goods or services made in Estonia by a taxable

person

The supply of services for which the place of supply is not in

Estonia (that is, services that are provided through a seat or fixed

establishment located in Estonia to a person who is registered as

a taxable person or taxable person with limited liability in the EU

or who is a non-EU country person engaged in business)

Reverse-charge services received by a taxable person in Estonia

(that is, services for which the recipient is liable to pay VAT)

The intra-Community acquisition of goods

The importation of goods into Estonia (except VAT-exempt

import), regardless of the status of the importer

19



VAT payers The supply of certain financial and insurance services, sale of real

estate (except a new building), and leasing or letting of immovable If an Estonian entity (including the fixed establishment of a foreign property or parts thereof are generally exempt from VAT. However, entity) makes taxable supplies in Estonia over the current VAT VAT payers have the possibility to opt for the application of VAT on registration threshold of EUR16,000, the entity is required to the above transactions if the tax authorities are informed in advance. register and account for the Estonian VAT. The registration Taxable persons who have opted to charge VAT on the lease of real obligation does not arise if an entity is engaged in supplies, which are estate or some financial services should charge VAT on all the taxed with 0% VAT rate, unless the supplies are treated as intra- respective transactions for at least two years.Community supplies of goods or if services are provided to a taxable

person of another Member State. As from 1 January 2011, the domestic reverse charge applies on

the supply of immovables and waste metal by the recipient if both When a foreign entity without any fixed establishment in Estonia transaction parties are taxable persons and the transaction is makes taxable supply in Estonia that is not subject to the Estonian considered a taxable supply.reverse charge, the foreign entity must register for VAT purposes

from the date when the taxable supply was made. In this case, no Returns and paymentregistration threshold applies (see below). Different rules apply in

The taxable period is one calendar month. Monthly VAT returns must the case of distance sales and e-commerce.be submitted and VAT shall be paid to the tax authorities by the

If a business is not registered for VAT purposes in Estonia but sells 20th day of the month following the taxable period.

and delivers goods from another EU Member State to customers in VAT refundEstonia who are not VAT registered (distance sales), and where the

value of those sales exceeds a threshold of EUR35,000, the business Estonia refunds VAT incurred by a business activity that is neither is required to register and account for VAT in Estonia.established in Estonia nor registered for VAT in Estonia. VAT is

refunded if the taxable person is required to pay VAT in the country If the taxable value of intra-Community acquisitions acquired by a of residence and does not have a fixed establishment through which non-taxable person exceeds EUR10,000 from the beginning of the the economic activity is carried out in Estonia. VAT is refundable to calendar year, the obligation to register as a taxable person with another state's taxable persons on the condition that the Estonian limited liability arises from the date when the threshold was taxable person may deduct VAT under the same circumstances on exceeded.the import of goods and on the acquisition of goods or receipt of

A company does not have to register for VAT purposes in Estonia if services.

all supplies go through the free zone or a customs warehouse in For EU taxable persons, the refund request must be at least EUR50 Estonia.for a year or EUR400 for a period longer than three months but

VAT rates shorter than the calendar year.

The standard rate of VAT is 20%. On some goods and services, such For a non-EU taxable person, the refund request must be at least

as books, periodicals, accommodation services and medicinal EUR320 for a year.

products, the rate of VAT is 9%. VAT at the rate of 0% is applied on VAT group registrationgoods under export procedure and non-Community goods placed in

the free zone, a VAT warehouse, excise warehouse or a customs A parent company and its subsidiaries may apply to register as a warehouse. VAT at the rate of 0% is also applied to international VAT group. One VAT registration number is provided to all members transport services, as well as some other services where the place of of the VAT group. The effect of grouping is that no VAT is charged supply is not Estonia.on supplies between group members if the person who acquired the

goods or services as a result of the transaction uses them entirely The supply of certain goods and services of a social nature (e.g., for the purposes of that person's taxable supplies. Group members health and welfare services, education, postal services and stamps) are jointly and severally liable for all VAT liabilities.is exempt from VAT. In addition, some other goods and services are

exempt from VAT; for example, securities, investment gold and

gambling, including lotteries and lottery tickets.

20



Social security payments

Social tax

Social tax is imposed on employers to fund pension insurance and

health insurance. Social tax is applied on wages and other

remuneration paid to employees, public servants and members of

boards, business income of sole proprietors, remuneration paid to

natural persons on the basis of contracts for services and fringe

benefits. The flat tax rate is 33% (in certain instances, 13%). The

minimum monthly tax base for salaries on which social tax is

calculated is not less than EUR278.02 in 2011, i.e., the minimum

social tax to be paid monthly is EUR91.78 in 2011. However, there

are exceptions and special advantageous rules when the employee

has been unemployed previously for six months or if the employee

has two or more employers at the same time. No ceiling applies to

the amount of salary subject to social tax.

Self-employed persons must pay social tax at the rate of 33% on

their net business income, restricted to a maximum tax base of 15

times the sum of the minimum monthly wages for the taxable period

(EUR50,042.82 in 2011). In addition, self-employed persons are

required to pay social tax for the current quarter during the taxable

period as advance payments to the bank account of the Tax and

Customs Board by the 15th day of the 3rd month of each quarter in

the amount of EUR275.24 (EUR1,101.33 in a calendar year)in

2012.

21



Unemployment insurance payments Tax filing and payment procedures

Unemployment insurance payment is an obligatory payment withheld An employer is obliged to declare the social security contributions

from the insured person's (employee's) income and paid by an withheld and the social tax payable by submitting a monthly tax

employer from the gross income. The rate of payment can be return by the 10th day following the month of payment. Any taxes

changed annually within the established range: 0.5%—2.8% (for payable shall also be transferred to the tax authority's bank account

employee) and 0.25%—1.4% (for employer). In 2012, the rates are by the same date.

2.8% for the insured and 1.4% for the employer, but these are Non-resident employersplanned to be decreased in the future.

If a non-resident entity has employees performing their activity in Pension systemEstonia, it is required to register itself in the regional tax center of

The pension system in Estonia is divided into three pillars — state the Tax and Customs Board within 10 days of the date on which the

pension, mandatory funded pension and supplementary funded tax liability arises. Registering is necessary in order to declare and

pension. The state pension insurance provides income in the case of pay taxes applied on the payments made to the employees. In order

old age, disability or loss of provider. In Estonia, there are two types to register as a non-resident employer in Estonia, an application and

of state pensions: pensions depending on the labor input (old-age other documents stipulated by Estonian legislation must be

pension, disability pension and survivor's pension) and the minimum submitted to the regional tax and customs center of the Estonian

national pension. Funded pension is based on prepaid finance — Tax and Customs Board.

employees pay 2% from their gross income to a pension fund, and If a non-resident entity receives payments in Estonia that are subject the state adds 4% from the employee's salary. to income or social tax, unemployment insurance premiums or

Subscription to the funded pension is mandatory for persons born in funded pension payments, the payer of such income is required to

1983 or later. Prior to October 2010, for those born in 1942—1983 submit an application to the regional tax and customs center in order

the funded pension was not mandatory, yet the voluntary to receive a specific identification number for the non-resident entity.

subscription is no longer possible.Totalization agreements

Voluntary schemesThe Estonian social security legislation follows the rules provided by

The third pillar of the Estonian pension system covers a voluntary the European Council Regulation No. 883/2004. To provide relief

supplementary pension scheme; contributions to this scheme are tax from double social security taxes and to maintain relevant benefit

deductible for the employee. Starting from 2012, the employer can coverage, Estonia has concluded several totalization agreements.

make contributions exempt from income tax to the voluntary private These kinds of agreements have been concluded with Canada,

pension system on behalf of the employee (still having the obligation Ukraine and Moldova. Certain agreements regarding pensions have

to pay social tax). The tax-exempt limit is 15% of the taxable income also been made with Russia.

of employee but not over EUR6,000 per year, and it applies

collectively to the contributions made by the employee and

employer.

The Health Insurance Fund also offers voluntary insurance. Voluntary

registration with the Health Insurance Fund is possible for those who

have no other insurance coverage. The insurance premium for one

calendar month in 2012 is EUR103, the quarterly payment is

EUR309 and the annual payment is EUR1,236.

22



Other taxes

Gambling tax

Gambling tax in Estonia is levied on the organizer of the gambling,

i.e., a person who organizes betting, lotteries, totalizators, games of

skill or games of chance. Gambling tax is imposed on:

Gambling tables and gambling machines used for organizing

games of chance (EUR1,278.23 per gambling table and

EUR447.38 per gambling machine) and gambling machines used

for games of skill (EUR31.96 per machine)

Amounts received from the sale of lottery tickets when lotteries

are organized (18%)

The winning fund of the commercial lottery when lotteries are

organized and the winning fund is more than EUR10,000 (18%)

Amounts received as the stakes made when totalizators are

organized, from which the winning amounts have been deducted

(5%)

Amounts received as the stakes made when games of chance or

games of skill are organized as distance gambling, from which the

winning amounts have been deducted (5%)

Participation stakes received when organizing a gambling

tournament (5%)

Excises

The products that are subject to excise tax are fuel, electricity,

packaging (bottles, cases etc.), tobacco and alcohol.

Land tax

Land tax is applied on the assessed value of land. The annual rate of

land tax varies between 0.1% and 2.5% of the taxable value of land.

The tax is paid by the owners of real estate, building leaseholders or

beneficial owners.

Heavy goods vehicle tax

Trucks and road trains are subject to tax based on the maximum

authorized weight, the number of axles, the type of suspension of

the driving axle of truck and the maximum authorized weight or

gross laden weight of a road train.

Local taxes

Local taxes are imposed by a rural municipality or city council

regulation in compliance with the conditions provided by the Local

Taxes Act. Those taxes allowed are: advertisement tax, road and

street closure tax, motor vehicle tax, animal tax, entertainment tax

and parking charge. The Local Taxes Amendment Act of 2012

abolished the local municipalities' right to establish sales and boat

taxes in their administrative area. The amendment has been made in

order to avoid indirect price increases in other regions of Estonia,

which is triggered by the tax obligation in one local municipality, thus

adversely affecting the overall business environment in the state.

23



Customs

Estonia has directly applied the EU Community’s customs

legislation, common customs tariffs and customs

preferences on the basis of free trade agreements

concluded by the EU or granted unilaterally. Hence, national

legislation assists in the application of the EU Community

customs legislation.

24



Customs procedures

The EU Community customs legislation provides the chance to

suspend or ease the customs payment obligation if certain conditions

are met. The suspensions or reductions in customs procedures are

as follows:

Inward processing with suspension or drawback

Customs warehousing

Transit procedure

Temporary importation

Processing under customs control

Outward processing

These procedures are subject to the approval of the customs

authority and a customs guarantee is generally needed.

Upon notifying the tax authority in writing in advance, a taxable

person may declare VAT calculated on the import of goods in the

VAT return, provided that the following conditions are met:

The applicant must have been registered for VAT in Estonia for at

least one year.

The applicant must have filed its Estonian VAT returns

electronically for the last year.

At least 50% of the supplies made by the applicant must be zero-

rated.

The applicant must have a good tax compliance history.

Authorized Economic Operator (AEO) status

Entities requesting access to simplified customs procedures have to

verify their activities are compliant with customs laws by achieving

Authorized Economic Operator (AEO) status.

As from 1 January 2008, entities wishing to obtain AEO status must

have met the following criteria during the previous three years:

Appropriate record of compliance with customs requirements

Satisfactory system of managing commercial and transport

records, allowing appropriate customs controls

Proven financial solvency and fulfillment of customs and tax

payment liabilities

Once AEO status is obtained, it is provided until withdrawal.

25


3. Personaltaxes

26

3. Personal taxes


Income tax

Definition of a resident

In Estonia, a natural person shall be regarded as a resident if their

place of residence is in Estonia or if they stay in Estonia for at least

183 days over the course of 12 consecutive calendar months.

However, if there is an applicable double tax treaty, the provisions of

the treaty shall prevail. Natural persons are obliged to inform the tax

authorities about the formation or change of their Estonian residency

via a special form.

A person shall be deemed to be a resident as of the date of their

arrival in Estonia if they stay in Estonia at least 183 days during 12

consecutive calendar months. It is not limited to a calendar year,

consequently, the number of days spent in Estonia during any 12

consecutive calendar months is decisive in determining tax residence.

Residents of Estonia are subject to income tax on their worldwide income regardless of the

source of income. Non-residents are taxable on the income from Estonian sources only.

However, tax treaty provisions override the domestic legislation.

� Income subject to taxIncome for tax purposes is the income derived from all

sources, including salaries, wages, pensions, scholarships,

grants, gambling prizes, directors' fees, insurance indemnities,

payments from pension funds, rent payments, royalties,

interest accrued from loans, securities, leases or other debt

obligations, and other payments made for services rendered

under the contracts governed by the Law of Obligations Act.

Individuals acting independently in their own name and at

their own risk are also subject to income tax on the income

derived from self-employment or entrepreneurial activities.

Any revenue received by an individual should be classified on

the basis of the relationship between the provider and the

recipient, third parties of the provider and the recipient and

the actual circumstances of receiving the income.

27

3. Personal taxes

� Taxation of resident persons

Resident persons are taxable on their worldwide income. In general,

the following items are excluded from the taxable income of

residents (within limits if applicable):

InheritancesGiftsInsurance proceedsIndemnification payments

Dividends that have been subject to corporate income tax or

foreign withholding taxIncome from the exchange of a holding in the course of a

merger, division, or transformation of companies or non-profit

associations

Income from the increase or acquisition of a holding in a

company through a non-monetary contribution

Income from the exchange of units of an EU investment fund

Interest received from credit institutions (EEA), with exceptions

of deposit and settlement account interests

Income from transfers of movable property used for personal

purposes

Gains from transfers of domicile

Gains from transfers of summer cottages or garden houses

Per diem allowances and accommodation costs of business trips,

and compensation for business use of a private car according to

limits

Childbirth allowances

In-service training and retraining of employees

Payments for the treatment of damage caused to the health of

an employee

Lottery winnings

State pensions and scholarships

Also, any compensation for certified expenses incurred for the

benefit of another person or any compensation for direct property

damage is not deemed to be taxable income of a resident (if

received other than as a result of entrepreneurial activities).

� � � �

�

�

�

�

�

�

�

�

�

�

�

�

�

�

� Employment income

Taxable gross employment income includes all compensation, such

as salary, vacation payments or advance payments. In general, fringe benefits, including a company car, housing, lunch

vouchers and similar items, are not treated as taxable income.

Instead, the company pays income tax on fringe benefits. However,

foreign employees working in Estonia, who are paid solely by a

foreign company and do not have an employer in Estonia, must pay

income tax on fringe benefits received from the foreign company.

Income from foreign employment is generally taxed in the same way

as income from Estonian employment (any income tax paid abroad

is creditable against the Estonian income tax obligation). Income for

the work performed or services provided abroad is not subject to

income tax in Estonia if the period of stay in the foreign state

exceeds 183 days during a 12-month period and the income was

considered taxable abroad. It is not relevant whether any actual tax

was paid, the fact that income was included in the individual’s

taxable income is sufficient.


3. Personal taxes


�

�

�

Income from self-employment

Directors' fees

Other income

All income attributable to self-employment or entrepreneurship is

subject to income tax. The individual receiving income from self-

employment or entrepreneurship is entitled to deduct verified costs,

which were necessary for their business and are recognized by

personal income tax law.

Losses from entrepreneurship, except for the losses incurred on the

sale of securities and receivables, may be offset against the income

derived from other sources. Losses may generally be carried forward

for seven years.

Directors' fees are regarded as employment income and are subject to tax in the same way.

Gifts received from non-resident entities are taxed at the rate of 21%

if income tax is not paid in a foreign country or if the gifts have not

been taxed as fringe benefits by the employer.

� Taxation of non-resident persons

Generally, foreign individuals are taxed on wages, salaries, bonuses,

allowances and other remuneration for the work or services

performed in Estonia. Income tax is charged on the income derived

by a non-resident natural person from work under an employment

contract if the person has stayed in Estonia for the purpose of

employment for at least 183 days over the course of a period of 12

consecutive calendar months, or the payment is made by an

Estonian employer.

Non-resident individuals are taxed on the following types of income

derived from Estonian sources:

Salary, wages and other employment income for the work

performed in Estonia if there are more than 183 days spent in this

country or if paid by a resident or non-resident registered in Estonia

Income from the transfer or lease of assets registered in Estonia

Interest received from the state of Estonia, the residents of

Estonia and non-residents with a permanent establishment registered

in Estonia, to the extent that the interest received significantly

exceeds the amount of interest payable on a similar debt obligation

under the market conditions

Royalties and income from the sales or licenses of patents,

copyrights, trademarks, software, know-how and other information

received from an Estonian person

Liquidation distributions and payments related to a company’s

reduction of its share capital to the extent that the amount received

exceeds the acquisition cost of the shares, except for the portion of

the received payment that has been taxed at the level of the

company making the payments

�

�

�

�

�

29

3. Personal taxes

� Investment income

The dividends received by residents from resident companies are

exempt from tax. Residents are taxed on all dividends and other

profit distributions received from foreign companies unless income

tax was paid on the profit out of which the dividends were paid or

unless income tax on the dividends was withheld in a foreign

country. Effective from 1 January 2009, the dividends paid to non-

resident shareholders are not subject to withholding tax.

Starting from 1 January 2011, there is a special private investment

tax exemption regime applicable in the form of an investment

account. Capital gains transferred to the investment account for

reinvestment shall not be taxed until taken out of the investment

account.

The interest received by individuals from resident credit institutions,

EEA resident credit institutions and branches of non-resident credit

institutions located in the EEA is exempt from tax. This tax

exemption does not apply to interest deposits where the rate of

return is dependant on the value of underlying asset and interest

from an investment account.

Rental payments and royalties received by resident individuals are

subject to withholding tax at the rate of 21%.

� Capital gain

Generally, capital gains derived from the sale of property or

securities are taxable under income tax rules. There are, however,

some exemptions; for example, the capital gains derived by resident

individuals from the sale of their home are not subject to income tax

(applies only to one transaction within a two-year period).

Losses incurred on the sale of securities in previous periods may be

offset against the gain received from the sale of securities. The

losses incurred may be carried forward indefinitely.

Non-resident individuals are taxed on the gains derived from the sale

of property located in Estonia, excluding securities issued by

companies registered in Estonia. However, this exclusion does not

apply if the transferred holding is a holding in a company, a

contractual investment fund or other pool of assets, and if both of

the following circumstances apply:

At the time of the transfer or during the two-year period before

the transfer, more than 50% of the property of the company, fund or

pool of assets was directly or indirectly made up of the immovables

or the buildings that are movables located in Estonia

At the time of transfer, the non-resident had a holding of at

least 10% in the company, fund or pool of assets.

�

�


3. Personal taxes


Employer-provided stock options Deductions

As from 1 January 2011, employer-provided stock options are taxed When determining taxable income, certain tax deductions and

as fringe benefits at the moment of exercising the options, not at the exemptions can be taken into account by resident or non-resident

moment of granting them. The taxable value of a fringe benefit is persons who are EEA residents with at least 75% of their worldwide

the difference between the fair market value of the securities and taxable income received in Estonia. If the person has not been a tax

the purchase price. However, stock options with at least a three-year resident in Estonia during the whole tax period, the deductions and

period between the grant and exercise of the option are considered exemptions can be taken into account in proportion to the period of

exempted from fringe benefit taxes. Estonian residence. Tax deductions can be received by submitting an

Estonian resident tax return by 31 March following the end of the No tax obligations are imposed on employees with respect to the taxable period (calendar year end 31 December).receipt of non-monetary benefits from Estonian employers. However,

employees are subject to tax on the capital gains derived from the For self-employment income, expenses related to the actual

disposal of shares. A taxable capital gain represents the sales price performance of business are also deductible if supported by proper

reduced by the acquisition price and by the taxable value of the documentation.

fringe benefit.The basic tax exemption is EUR1,728 per calendar year. There are

also additional basic exemptions for parents with two or more

children, for retirement allowances and for work accident or

occupational illness compensation.

Additional deductions are available (within applicable limits)for the

following items: housing loan interest paid to an EEA credit

institution, educational expenses, gifts to registered non-profit

organizations and similar institutions of the EEA, obligatory social

security payments paid in Estonia or abroad (if paid from the income

taxable in Estonia), and payments to voluntary pension funds.

Business deductionsOnly documented expenses directly related to entrepreneurial or self-

employment activities, including expenses for work-related advanced

training and retraining of employees, and losses incurred on the

disposal of assets (except for losses incurred on the sale of

securities), are deductible (with some limits applicable). If certain

expenses are only partly related to the entrepreneurial or self-

employment activities, only the part directly related to those

activities is deductible.

31

3. Personal taxes

Rates For a non-resident

Estonian and foreign individuals are, as a rule, subject to personal A non-resident person must file an income tax return if they derive

income tax at a flat rate of 21%. income or capital gains subject to taxation in Estonia from which

income tax has not been withheld or would like to claim deductions Income tax at the rate of 10% is applied on certain payments made available to non-residents with at least 75% of their worldwide by an insurer to a policyholder, on the payments made from a income received in Estonia. The tax return must be submitted by voluntary pension fund and also on certain payments paid to non- 31 March following the year of taxation. Exceptionally, in the case of residents (payments for services rendered in Estonia, payments to the transfer of an immovable, the income tax return shall be athletes and artists). submitted during one month after receiving the gain; also, a non-

resident who derives business income that is subject to taxation in Tax filing and payment procedures Estonia is required to submit an income tax return (concerning

business income derived during the period of taxation) within six The period of taxation is a calendar year.

months following the period of taxation. If the business is terminated

before the end of the period of taxation, the income tax return shall Estonian employers must withhold the proper amount of income tax

be submitted within two months following the termination of from employees' salaries. Individual tax liability is determined by

activities. Any additional amount of tax due shall be paid into the deducting the taxes withheld and creditable amounts of foreign taxes

bank account of the Tax and Customs Board within three months paid from the computed amount of income tax.

after the due date for submitting the income tax return.

For a residentElectronic declaration

A resident person must file an income tax return if their annual Tax returns may be submitted electronically. This service is available

income exceeds EUR1,728 (for 2012), and if they would be on the Tax and Customs Board's website www.emta.ee, and also in

required to pay additional income tax based on the income tax Russian and English.

return or would like to claim available deductions. Individual income

tax returns must be filed by 31 March of the year following the tax In order to submit tax returns electronically, a taxpayer must make

year. Individuals must pay income tax due by 1 July of the year an authentication and an e-services agreement with the Tax and

following the tax year. Resident individuals who declare business Customs Board, via local internet-bank or via the internet by using

income or gains from the transfer of property are required to pay an ID card or mobile ID. To do this, a valid identification document

any additional amount of tax by 1 October of the year following the must be presented by the person. Representatives of legal persons

tax year. Spouses may file a joint income tax return and are then must present a power of attorney to the Tax and Customs Board.

taxed jointly. Most of the tax returns are submitted electronically.


Visa-free entry

3. Personal taxes


Visas, work and residence permits

According to the Estonian Aliens Act, permits are required

for non-EU foreign nationals in order to enter, stay or work

in Estonia.

�

�

Nationals of the Member States of EU and EEA —

Schengen States —

Austria, Belgium, Bulgaria, Cyprus, Czech Republic,

Denmark, Germany, Greece, Finland, France, Hungary,

Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania,

Luxembourg, Malta, the Netherlands, Norway, Poland,

Portugal, Romania, Slovakia, Slovenia, Spain, Sweden,

Switzerland and the United Kingdom. The basis for their

stay in Estonia is regulated by the Citizen of European

Union Act.

Austria, Belgium, Czech Republic,

Denmark, Finland, France, Germany, Greece, Hungary,

Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, the

Netherlands, Norway, Portugal, Poland, Slovakia, Slovenia,

Spain, Sweden and Switzerland.

Estonian National Opera

33

Visa-free entry Categories of visas

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The holders of passports of the following countries

do not need any visa to enter Estonia for stays of no

more than three months within a six-month period:

Albania (for biometrical passport holders only), Andorra,

Antigua and Barbuda, Argentina, Australia, Bahamas,

Barbados, Bosnia and Herzegovina (for biometrical

passport holders only), Brazil, Brunei, Canada, Chile, Costa

Rica, Croatia, El Salvador, Guatemala, Holy See, Honduras,

Hong Kong Special Administrative Region, Israel, Japan,

Macao Special Administrative Region, Macedonia (for

biometrical passport holders only), Malaysia, Mauritius,

Mexico, Monaco, Montenegro (for biometrical passport

holders only), New Zealand, Nicaragua, Panama,

Paraguay, San Marino, Serbia (for biometrical passport

holders only), Seychelles, Singapore, South Korea, St

Kitts-Nevis, Taiwan (passports issued by Taiwan that

include an identity card number), the United States of

America, Uruguay, Vatican City and Venezuela.

A family member of an EU/EEA/EFTA national who,

in addition to the valid passport of the country of their

nationality, presents a residence card, which has been

issued pursuant to the Directive 2004/38/EC bearing the

text "Residence Card of a Family Member of an EEA

National," may enter Estonia without a visa if the family

member is traveling together with the EU/EEA/EFTA

national or traveling to see the EU/EEA/EFTA national.

This Directive shall apply to EU/EEA/EFTA nationals, who

move to or reside in a Member State other than that of

which they are a national.

The holders of diplomatic passports of Albania,

Armenia, Azerbaijan, Bosnia and Herzegovina, Georgia,

Kazakhstan, Montenegro, Russia and Serbia may stay visa-

free in Estonia for up to 90 days within 6 months.

The holders of diplomatic and service passports of

Bolivia, Macedonia, Morocco, Peru, Philippines and Ukraine

may stay visa-free in Estonia for up to 90 days within 6

months.

The holders of diplomatic, service and special

passports of Turkey may stay visa-free in Estonia for up to

90 days within a 6-month period.

The holders of Laissez-Passer issued by the United

Nations may stay visa-free in Estonia for up to 90 days

within a 6-month period.

The holders of the diplomatic and official passports

of Moldova may stay visa-free in Estonia for up to 90 days

within a six month period.

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Airport transit visa (A-type)

Short-stay visa (C-type)

Long-stay visa (D-type)

authorizes entry and

stay in the international zone of an airport until departure

of the flight headed for the required destination.

authorizes single or multiple

entries within 6 months and a maximum stay of 90 days.

authorizes multiple entries

and stay between 90 days and 1 year for the purpose

specified within.


3. Personal taxes

Residence permits The following persons do not require a work permit in order to work

in Estonia:Citizens of the EU, EEA or Switzerland have the right to stay in Foreign nationals with long-term residence permits Estonia on the basis of a valid travel document or identity document. Foreign nationals who have residence permits for employment As a result, these individuals are not subject to the rules regarding Foreign nationals who have residence permits for business (only residence permits. for executing directing functions in the company specified in the

residence permit) Residence permits are either temporary residence permits issued for Foreign nationals who have applied for a residence permit a period of up to five years, or long-term residence permits. As of before 12 July 1995 and who have obtained such a permit 1 June 2006, foreign nationals holding a permanent residence Imprisoned persons during their stay in prison permit shall automatically be deemed as holding the long-term Members of locomotive crews residence permit and they are not required to submit an application Staff serving on locomotives and trains for a long-term residence permit or pass the language proficiency Drivers for taking passengers or cargo over state borders examination. Foreign nationals who hold a residence permit for settling with a

close relative who is residing permanently in Estonia:A temporary residence permit shall be extended following an - Foreign nationals who hold a residence permit for settling with application for such an extension if the basis for the issue of the a spouseresidence permit has not ceased to exist, there is no reason to - Foreign nationals who hold a residence permit issued on the refuse to extend the permit and if it is justified. The temporary basis of an international agreement residence permit may be issued to a foreign national: - Foreign nationals who hold a residence permit issued on the

basis of substantial public interest For employment - Foreign nationals who hold a residence permit that is based on For business an international agreementFor studies in an educational institution based on the application

of the educational institution A work permit shall not be issued to a foreign national to whom a In order to settle with a close relative who is permanently residence permit has been issued on the condition that their legal

residing in Estonia income ensures their subsistence in Estonia.Whose permanent legal income ensures their subsistence in

Estonia The application for a work permit may be submitted personally to In case of substantial public interest the Service Office of the Citizenship and Migration Board of the Whose application for a residence permit is based on an Prefecture or by post.

international agreement A foreign national who has been issued a residence permit for study Who is married to a person with permanent residence in Estoniamay take employment in Estonia without a work permit in order to

As an additional condition for the extension of residence permits and participate in practical training pursuant to the curriculum. issue of long-term residence permits, foreign nationals are required Otherwise, they may take employment in Estonia only on the basis to enter their residence in Estonia in the population register. of a work permit and only outside of school hours, on condition that

such an employment does not interfere with their studies.Work permits

A work permit can be extended if a person holds a valid residence In order to work in Estonia, foreign nationals must hold a work permit, or if the residence permit is extended and the person has an permit. A citizen of the EU is not subject to the rules regarding work employer at the time of extension of the work permit.permits. Activities as a sole proprietor, employment with an

employment contract or any other contract, or any activity that may If a person holds a valid residence permit, the Citizenship and result in gaining profit or any other benefit irrespective of the type or Migration Board shall make a decision as to whether to issue a work form of the contract, or the location or place of residence of the permit during a period of one month from the date of registration other party to the contract shall be deemed to be employment, and starting processing of the application.unless an international agreement stipulates otherwise.

If a person applies for a work permit concurrently with a The period of validity of a work permit cannot exceed the period of residence permit, the Citizenship and Migration Board shall make a validity of a residence permit. decision as to whether to issue a work permit at the same time as

making the decision as to whether to issue a residence permit.

If a person wishes to extend the work permit, they have to

submit an application for the extension of the work permit at the

latest two months before the valid work permit expires. The term for

the extension of a temporary residence permit shall not be restored

if the residence permit has expired.

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35Doing business in Estonia

3. Personal taxes

Contacts

For further information please contact:

Ivar Kiigemägi

Partner

Assurance Services

Ernst & Young Baltic AS

[email protected]

Lili Kirikal

Senior Manager

Transaction Advisory Services


[email protected]

Ranno Tingas

Partner

Tax Services


[email protected]

Siim Aben

Senior Manager

Advisory Services


[email protected]


Rävala 4

10143 Tallinn

Estonia

+372 6 114 610

[email protected]


_

Estonia is a land with manyopportunities for yourbusiness. Ernst & Youngwould be delightedto help you realize them.

Ernst & Young

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© 2012 EYGM Limited.

All Rights Reserved.

EYG no. DL0630

ED None

This publication contains information in summary form and is

therefore intended for general guidance only. It is not intended

to be a substitute for detailed research or the exercise of

professional judgment. Neither EYGM Limited nor any other

member of the global Ernst & Young organization can accept

any responsibility for loss occasioned to any person acting

or refraining from action as a result of any material in this

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the appropriate advisor.

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