MAJOR DEVELOPMENTS
No major changes in the tax system have occurred, but a number of amendments have been introduced, most notably to the
laws on VAT, income tax, and the general tax code. A new excise tax on packages of alcoholic drinks has been introduced.
INCOME TAXES ON CORPORATIONS
1. Rates
Estonian enterprises are taxed on a worldwide basis. Since January 1, 1994, the rate of corporate income tax has been 26%.
Insurance companies generally are taxed at 4% of the gross amount of premiums accrued during the period of taxation. Exceptions from this rule are made to life, pension, and health insurance, re-insurance, and traffic insurance. The tax rate is 1% of the amount of premiums in case of life, pension, or health insurance activities. Traffic insurance premiums are exempt from taxation, and re-insurance premiums may be
deducted from the amount of premiums subject to premium taxation.
2. Local Income Taxes
Local authorities may levy a local income tax on enterprises under the Law on Local Taxes. The rate may not exceed 2% of the amount of taxable income computed under the Income Tax Law, less national income tax. For insurance companies, the local income tax may not exceed 0.4% of the gross amount of the premiums. No local authority has applied the local income tax.
3. Capital Gains Taxes
Capital gains are added to taxable income and taxed at the ordinary income tax rate.
4. Branch Profits Taxes
A branch of a foreign corporation is taxed on its branch profits as though it were a resident enterprise. Detailed legislation on determining the tax liability of branches is lacking.
5. Foreign Tax Reliefs
Relief for foreign taxes incurred outside Estonia is granted in
accordance with double taxation treaties, which generally provide for the ordinary credit method and an indirect credit for corporations owning at least 10% of the voting power of the distributing corporation. In the case of nontreaty countries, a unilateral tax credit is allowed for withholding taxes; there is no indirect credit.
7. Payment of Taxes
Enterprises are resident in Estonia if they are incorporated there. All enterprises are taxed as separate taxable entities, except for general partnerships with not more than 10 partners if the partners are all resident individuals and income is computed as the income of the partnership, allocated to the partners, and then taxed in their hands.
All nonprofit societies and associations are exempt from income tax on their entrance or membership fees. Nonprofit entities approved by the government and cultural, sport, educational, health, and social security institutions belonging to the state or local authorities are exempt also on the donations received. For the purpose of maintaining and restoring cultural or environmental assets, the business income of nonprofit societies and associations generally is taxable, but they are entitled to deduct up to 10% of their income after deducting allowable expenses and depreciation. Effective March 23, 1997, nonprofit entities are exempt from income tax on interest received for depositing entrance and membership fees and donations in resident credit institutions.
In addition, any income derived from Estonia by intergovernmental organizations and foundations that are established by foreign governments or under intergovernmental agreements is tax-exempt. To qualify for this exemption, these entities must satisfy the government that they meet specified requirements. Legal entities of public law (e.g., statutory bodies) are tax-exempt in respect of assignments received from state or local budgets.
From 1997, the enterprise is to pay monthly income tax installments of an amount equal to 1/12 of the income tax calculated in the tax return submitted for the previous tax period.
New enterprises are not required to make advance payments during their initial tax period. An enterprise that has no taxable income during the current tax period, taking into account the carryforward of losses, is not required to pay advance payments. The tax board may allow reduced advance payments, if the enterprise estimates income to be less than the income derived during previous tax period.
From the tax year 1996, enterprises are required to submit only an annual tax return, which is due by the date the annual report is due, i.e., six months from the end of the financial year.
INCOME TAXES ON INDIVIDUALS
9. Rates
Effective January 1, 1994, the flat rate of individual income tax is 26%--the same as for enterprises. Taxable income of an individual includes, in particular, income from employment (salaries, wages, pensions), business income, and investment income (interest, royalties, rents).
Individuals are resident in Estonia if they have a permanent place of reside
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