Taxation

It is said that there is nothing of more certainty than taxes and death. That is why you should know how taxes influence your income derived from financial transactions.

We will review the following investment-related taxation subjects:

Investment funds
Dividends and interest
Securities transactions
Agreements on avoiding double taxation

Taxes related to investment activity

  • The income tax rate in Estonia is 22% of taxable income (up to December 31, 2005, tax rate was 24%).
  • The tax-free income of the resident physical person during the taxation period in 2006 is 24 000 EEK (20 400 EEK in 2005).
Income is taxed differently in Estonia for resident and non-resident persons:

Taxpayer

Interest

Dividends

Capital gain tax
Physical persons resident in Estonia
  1. Not taxable if the interest payer is a credit institution of the European Union or an Estonian subsidiary of a foreign bank.
  2. If the interest payer is any other person, 22% income tax is withheld.
  1. Not taxable if the dividend payer is an Estonian enterpreneur.
  2. 22% from dividends and profit appropriations must be paid if no tax has been withheld from dividend payment made by foreign company.
  1. 22%
 
Legal persons resident in Estonia
  1. Not taxable
  1. Not taxable
  1. Not taxable
 
Non-resident physical persons
  1. Not taxable if the interest payer is a credit institution of the European Union or an Estonian subsidiary of a foreign bank
  2. If the interest payer is any other person, interest payments are not taxable in general, except if the interest rate is essentially higher than the average market interest rate.
  1. Not taxable
  1. Not taxable*
 
Non-resident legal persons
  1. Not taxable in general, except if the interest rate is essentially higher than the average market interest rate.
  1. 22% (withheld by the dividend payer)
  2. If the person owns at least 20% of the share capital of the enterprise making the dividend payment, no tax is withheld. This does not apply for entrepreneurs from low tax territories.
  1. Not taxable*

*Income tax is charged on gains derived by a non-resident from a transfer of property only if the transferred holding is a holding of at least 10 per cent in a company of whose property, according to the balance sheet as of the last day of the preceding financial year, more than 75 per cent is made up of immovables or structures as movables, which are located in Estonia.


Investment funds

The return of investment funds is generally expressed to the owner in the growth of the share value (an exception here is, for instance, Swedbank Money Market Fund, where interest income is monthly paid to the share holder or he is given additional shares for the income, whereas the value of the share does not change).

Income tax is payable by resident physical persons at the sale of a share on the difference of the purchase and sale prices. In case of the Swedbank Money Market Fund the income tax is deducted from the interest payments at the source.

Non-residents and resident companies do not pay the income tax, except in the case of the Swedbank Money Market Fund, where payout is interest income and will be taxed at the source..


Dividends

Resident physical persons pay income tax only on dividends received from non-residents in case income tax has not been withheld from dividend payment in a foreign country or in case income tax was not paid in foreign country on distributed profit.

If a resident company pays dividends, it has to pay income tax at a rate 22/78 and withhold income tax of 22% from dividend payments to non-resident shareholders. A resident enterprise does not have income tax obligation if another enterprise has paid income tax on the share of profit on the basis of which the dividend is being paid, or if income tax has been withheld on it, and if the divident receiver owned at least 20% of the shares, stocks or votes of the enterprise that paid the dividends at the time of paying out the dividends.

Example:
A company pays EEK 1 000 000 in dividends. From this amount the company has to pay income tax at a rate 22/78 (28,2051%), which makes EEK 282 051. I.e. actually the company pays out dividends in the amount of EEK 1,000,000 to shareholders and income tax in the amount of EEK 282 051 to the Tax Board.

Resident physical person

No tax is withheld

Non-resident physical person

No tax is withheld

Resident legal person

No tax is withheld

Non-resident legal person 22% withholding tax is withheld by the company (except if the person owns at least 20% of the enterprise making the payment and is not located in the territory with low tax rate)

Interest

The interest payer withholds income tax on taxable interest paid to resident physical persons.

Interest paid to physical persons by a resident credit institution of the European Union member state, or an Estonian subsidiary of the non-resident credit institution is not taxed with income tax.

Interest paid to non-residents is not taxable in general in Estonia. Income tax is withheld only if the interest rate is essentially higher than the average market interest rate.  

Interest paid to resident legal persons is not taxable.


Capital gain tax, including derivatives

Resident physical persons pay income tax in Estonia on income earned. Income is calculated as the difference of the acquisition price of the securities (including commission and transaction fees) and the selling price (deducting commission and transaction fees).

If the loss from selling securities exceeds the profit received from selling, the loss cannot be deducted from other taxable income. Loss from selling securities during a taxation period can be deducted from profit from selling securities received during the same period. However, if the loss of the taxation period exceeds the profit of the same period, it can be transferred without limitations to following taxation periods and then deducted from profit received from selling securities.

Growth of the value of the securities as compared to the acquisition price is not regarded as income until the securities are sold. Both the purchase and sale costs of the securities must be documented (usually they are shown on the account statement, a securities transaction order or a confirmation). Acquisition costs are costs made to acquire the securities, including the purchase price, paid commission fees, charges, broker fees, bank fees and other costs related to the securities transaction. Costs not directly related to the acquisition of securities such as broker's success fee, account maintenance fee, costs related to change of account manager, etc. cannot be regarded as costs. Securities account opening fee can be taken into account with the first securities transaction. Acquisition costs related to the sold securities only can be regarded as acquisition costs. If the amount of acquired securities was larger than is currently being sold, proportion must be found. If the investor has bought the securities sold at different times with different prices and securities of the same issuer also remain in his ownership, the weighted average acquisition price method or the FIFO (first in, first out) method can be used. Chosen method must be applied consistently.

Generally the profit from the sale of securities is not taxable for non-residents.

Example

Income from selling the shares of an Estonian enterprise

Resident physical persons pay 22% income tax on the purchase and sale price difference deducting the costs related to acquisition and selling. Resident companies and non-residents do not pay income tax.

 

Agreements on avoiding double taxation

If an agreement to avoid double taxation has been concluded between Estonia and a foreign country, tax rates pursuant to that agreement shall be applied to the residents of that country and Estonia. According to most of those agreements, Estonia can withhold 15% income tax on dividends and 10% income tax on interest paid to non-residents. The same principle is valid when Estonian resident earns income in the corresponding foreign country, i.e. income tax on dividends can be withheld in general up to 15% and on interest in general up to 10%.

As the precondition for applying reduced rates the competent tax withholder has always to be informed of the residency of the payment receiver (informing is generally done by residency certificate.)

Review of effective agreements on avoiding double taxation of income and capital tax and preventing tax avoidance and some tax rates in these agreements:

Country Tax rate on dividends Tax rate on interest
Armenia 15% 10%
Austria 15% 10%
Belgium 15% 10%
Byelorussia 10% 10%
Canada 15% 10%
China 10% 10%
Croatia 15% 10%
Czezh Republic 15% 10%
Denmark 15% 10%
Finland 15% 10%
France 15% 10%
Germany 15% 10%
Great Britain 15% 10%
Holland 15% 10%
Hungary 15% 10%
Iceland 15% 10%
Ireland 15% 10%
Italy 15% 10%
Kazakhstan 15% 10%
Latvia 15% 10%
Lithuania 15% 0%
Malta 15% 10%
Moldova 10% 10%
Norway 15% 10%
Poland 15% 10%
Portugal 10% 10%
Romania 10% 10%
Spain 15% 10%
Sweden 15% 10%
Switzerland 15% 10%
Turkey 10% 10%
Ukraine 15% 10%
USA 15% 10%

There are exceptions in all agreements on avoiding double taxation with income and capital tax and preventing tax avoidance in which cases the tax rate is different from what is shown in this table. It must also be considered that generally the interest income of of non-residents is not taxed in Estonia. The effective agreements on avoiding double taxation can be accessed at the home page of the Tax Board.


Other provisions

In case the Tax Board can prove that the permanent operating location of a non-resident is in Estonia, they must pay taxes and submit reports equally with residents. Permanent location property to be transferred out of Estonia or payments are charged with income tax if they exceed the respective property brought into Estonia or no other property is received or service provided in return.

Income of a legal person under the control of Estonian residents located at a low tax rate territory is charged with income tax (independent of whether the legal person has distributed profit or not). A low tax rate territory is a foreign country or a territory with independent tax legislation within a foreign country, in which there is no income tax for legal persons or in which legal persons' income tax is under 2/3 of the income tax that an Estonian resident physical person pays on business income of the same size, not including allowed deductions. Legal person, which earns over 50% of its annual income from manufacturing of goods, trade in goods, and provision of transport, communications, accommodation and tourism services in the home country of the legal person, or provision of insurance services by a legal person holding an insurance activities licence or from freighting ships owned by it and registered in the legal person’s country of residence, is not considered located at a low tax rate territory.

The following countries are not included among low tax rate territories:

Armenia
Austria
Belgium
Byelorussia
Canada
China, except Hong Kong, Aomen (Macao)
Croatia
Cyprus
Czech Republic
Denmark
Finland
France
Germany
Greece
Holland, except Aruba, Holland Antilles
Hungary
Iceland
Ireland
Italy
Japan
Kazakhstan
Latvia
Lithuania
Luxembourg
Malta
Moldova
Norway
Poland
Portugal, except Madeira
Slovakia
Slovenia
Spain
Sweden
Swiss Confederation
Ukraine
United Kingdom of Great Britain and Northern Ireland, except Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, the Canal Islands (Jersey, Guernsey), the Isle of Man, Montserrat, Turks and Caicos
United States of America, except the Virgin Islands and Marshall Republic

This selective overview is informative and Swedbank shall not be held responsible for damages or losses which may arise if the information presented here does not coincide with the views of the State Tax Board or other state bodies at interpreting tax legislation. Potential investors should consult their tax advisors on Estonian laws.