EVER SINCE IT WAS established in 1994, the current Estonian tax system has been a combination of low tax rates and a wide tax base. The fact that more than 88 percent of inhabitants with a duty to declare tax in 2007 declared via the Internet, proves that the system is simple.
THE TOTAL TAX PRESSURE in Estonia (the relation between public sector taxes and GNP, the so called tax quota) is estimated to reach 32.3 percent of GNP in 2008.
The state level
On a state level, a number of different taxes are applied. The most important are:
- Income and corporate tax 21 %
- VAT 18, 5 or 0 %
- Social taxes 33 %
- Unemployment insurance 0,3 % from the employer and 0,6 % from the employee (on gross salary)
- Real estate tax 0,1 - 2,5 %
- Gambling tax Fixed fee or 18% on lottery ticket price
REGARDING TAX CONTRIBUTION to the national budget, the social tax is the largest source of income followed by VAT and income tax.
INCOME TAX IS currently 21 percent and the coalition government objective is to decrease the tax rate by one percentage point per year by 2011. In the end of 2007 and the beginning of 2008, there was a major financial deceleration in Estonia. VAT and excise tax income decreased to such levels that the government had to revise the budget. As a result, there was a discussion between the coalition parties (especially between the Social Democrats and the Reform party) whether tax decreases should continue as planned.
INCOME INCLUDES SALARY, bonuses, benefits, return on capital, pension, alimony etc. There is no progressiveness in the income tax system, but the fixed basic allowance, EEK 27 000 per year in 2008 (to be increased by EEK 3000 per year up until 2011), results in a lower income tax for low income earners. The current average income is app EEK 12 500 per month before taxes (EEK 1 ˜ SEK 0.6). Estonia has a rather skew income distribution which gives the fixed basic allowance some effect. In addition, there is a higher fixed basic allowance for senior citizens and for families with more than one child.
DEDUCTION POSSIBILITIES beyond the fixed basic allowance are strictly limited to interest rates, costs for education and private retirement savings. The maximum limit for deductions is EEK 50 000 per year. Certain income is tax-exempt, for example per diem, lottery prizes, inheritance, gifts and state grants.
EVER SINCE YEAR 2000, the corporate tax has a somewhat unusual form in Estonia. The basic principle is that reinvested profit is tax-exempt while dividends have the same tax rate as income tax (ie 21% in 2008). The objective is to decrease this tax rate to 18 percent by 2011.
THE CURRENT CORPORATE tax system is not consistent with certain parts of the EU Parent/Subsidiary directives and Estonia has been allowed postponement until December 31, 2008 to adjust the system accordingly.
ON MARCH 26, a number of technical corporate tax law adjustments were established. They will take effect on January 1, 2009. According to the Estonian interpretation, these adjustments will make the new system compatible with EU directives and Estonia is supported by certain cases in the European Court. Rather than implementing a more conventional corporate tax system with low tax rates, Estonia chose to keep the basic principles in the old system. According to some analysts, some question marks remain regarding the compatibility and a review of the new Estonian corporate tax system in the European Court cannot be excluded.
IN ESTONIA there are 227 municipalities (33 cities and 194 provincial municipalities). Estonian municipalities get app. 45 percent of their income from a 12 percent of each citizen’s total income (before deductions) return from the government to the municipalities, ie a little more than 50 percent of the citizen’s income tax. There is no local income tax in Estonia.
Source: Henrik Garmer,
First secretary of the
Swedish Embassy in Tallinn