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Personal income tax

Tax Base

Residents pay tax on their worldwide income. Taxable income includes, in particular, income from employment (salaries, wages, bonuses and other remuneration); business income; interest, royalties, rental income; capital gains; pensions and scholarships (except scholarships financed from state budget or paid on the basis of law). Taxable income does not include dividends paid by Estonian or foreign companies when the underlying profits have already been taxed.

Unilateral relief for double taxation in respect of income derived from abroad is available in the form of ordinary tax credit with per country limitation. The credit is limited to the Estonian tax computed on the item of income. Moreover, double taxation of employment income is avoided by way of exemption method if all the following conditions are fulfilled:

a) the person has stayed in the foreign state for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months;
b) the specified income has been the taxable income of the person in the foreign state and if this is certified and the amount of income tax is indicated on the certificate (even if the amount is zero).

Non-residents pay income tax on their income from Estonian sources as listed in the Income Tax Act. Income taxable in Estonia includes income from employment or government services provided in Estonia; income from a business carried on in Estonia; part of interest received from Estonian sources that is above market conditions; royalties arising in Estonia; certain types of capital gains; gains from disposal of assets located in Estonia; directors' fees paid by Estonian enterprises; and income of a sportsman or an artiste from his activities in Estonia, pensions, insurance payments.

Exemptions

The basic exemption for resident individuals is 1728 euros per year (144 euros per month). There is also an increased basic exemption available for raising children (1728 euros starting with the second child), for pensions (2304 euros per year) and for compensation for an accident at work or an occupational disease (768 euros per year). Taxpayers can also deduct their mortgage interest, training expenses and certain charitable gifts and donations (up to 1920 euros per year but not more than 50% of taxable income). Contributions to supplementary funded pension system are deductible as well (up to 6000 euros or 15% of taxable income). Mandatory social security contributions are fully deductible.

The same deductions are available for certain non-resident individuals deriving most of their taxable income in Estonia.

Certain categories of income of resident and non-resident individuals are not subject to tax, such as scholarships paid on the basis of law; fringe benefits (taxable at the level of employer); child allowances and other subsidies and benefits paid from the State, local, or Social Insurance budgets; per diem and accommodation reimbursements for business trips; compensation for the use of private vehicles; insurance proceeds and other payments received under insurance contracts; inheritances and gifts received; gains from the alienation of movables in personal use and from the alienation of taxpayer's main home; lottery winnings; expropriation payments and compensation received for expropriation.

Income of the following persons is not subject to tax in Estonia: foreign diplomatic representatives, consular representatives, special or diplomatic missions, representatives of international or intergovernmental organisations and co-operation programs exercising their official functions in Estonia, plus persons employed with them who are not citizens or permanent inhabitants of Estonia. The above-mentioned persons, with the exception of the members of representations of co-operation programs, must be registered in the Ministry of Foreign Affairs.

Taxable income derived by a self-employed person from the realisation of self-produced, unprocessed agricultural products up to the amount of 2877 euros is not subject to income tax.

Rate Structure


Tax rate for the years 1994-2004 was 26% for 2005 24%, for 2006 23%, for the 2007 22% and as from 2008 it is 21% of the taxable income. The withholding tax rate on royalties, payments to non-residents for services provided in Estonia, and on payments to non-resident artists and sportsmen is 10%. The withholding tax rate for certain pensions is also 10%. The period of taxation is a calendar year.

Employment income is subject to a withholding tax at the general rate of 21%. The withholding agent (enterprise or employer) has the obligation to remit the relevant amounts to the tax authority monthly. A taxpayer does not have to file a tax return when his annual income comprises only income on which the tax has been correctly withheld or when his annual income does not exceed the basic exemption. Otherwise, tax returns are due by March 31 of the year following the period of taxation.

Tax allocation


Amount of personal income tax received by local municipalities does not depend on tax deductions anymore. Introduction of new deductions, increasing basic exemption or reducing tax rate will have an impact only on the state budget tax revenue. The amount of income tax revenue for the municipality where a resident natural person lives is calculated as 11,4 per cent of the taxable income of the person.