INDIVIDUAL TAXES
SIGNIFICANT DEVELOPMENTS
From July 1,1998 the interest paid to resident or nonresident by a resident credit institution or Hüvitusfongd (Compensation Fund) is exempt from income tax. Certain charitable contributions, as well as premiums to pension schemes and shares of the pension funds, may be deducted from
taxable income in accordance with limitations and conditions prescribed by law.
TERRITORIALITY AND RESIDENCE
An individual who is a resident of Estonia is liable to tax on worldwide income, irrespective of the origin of the income. Nonresidents are taxed on their Estonian-source income. Individuals are considered residents of Estonia if they have a permanent place of residence, their stay exceeds 183 days or they are Estonian public servants who are sent abroad on
assignment.
GROSS INCOME
Employee gross income/Taxable income includes employment and private business income and income from other sources. Income from other sources not exempt from taxation includes nonstate pensions and scholarships; alimony received; interest; royalties; and gains from the alienation of assets, securities and rights.
Certain nonstate scholarships; gains from the sale of a resident taxpayer's own residential dwelling and the first sale of land acquired in the process of property reform; and the winnings from certain lotteries, among other items, are excluded from gross income.
Capital gains and investment income/Capital gains are generally taxed as ordinary income.
Dividends are not taxed in the hands of the resident recipient if they have been received from a company registered in Estonia. Interest from resident credit institutions and the Compensation Fund is exempt from income tax from July 1,1998. Interest from other institutions is taxed at 26%.
DEDUCTIONS
Business deductions/Business-related expenses for persons engaged in entrepreneurship are deductible. In general, a person engaged in entrepreneurship is taxed as a company.
Nonbusiness deductions/Alimony paid during the tax period can be deducted from taxable income. Interest on loans and/or capital rent for the purpose of acquiring a residential building or apartment are deductible if paid to resident credit and financing institutions during the taxation period.
Residents have the right to deduct interest on student loans and the costs of their own or their dependent's training in certified educational institution from their taxable income.
Residents may deduct from taxable income charitable contributions made to nonprofit associations and foundations listed by the government, as well as to cultural, sports, educational, health, or social security institutions belonging to the state or local authorities. The total deduction may not exceed 5 percent of the individual's income for the tax
period after the deduction of other allowable expenses.
Premiums to certain annuity pension schemes and the expenses made to buy the shares of the resident pension funds qualifying under the law, may be deducted from taxable income. Such deduction is limited to 15% of income derived during the tax year.
General deduction/Annual income of up to EEK6,000 is not taxable.
TAX CREDITS
For Estonian residents, national taxes paid abroad as final tax on income during their period of residence are allowed as a credit against tax payable in Estonia. The tax credit is limited to 26% of the foreign income.
OTHER TAXES
Social security taxes/Employers must pay social security contributions for their employees at a rate of 33%.
Local taxes on income/There are no local taxes on income.
TAX ADMINISTRATION
Returns/Annual tax returns must be filed before March 31. Resident husbands and wives are treated as individual taxpayers unless they apply to have their incomes combined.
A nonresident is obliged to file an income tax return on gains from alienation of securities by March 31 following the year of taxation. Gains from the alienation of movable property, buildings or apartments must be declared within one month of the transfer.
Payment of tax/Income from employment is subject to withholding tax. It is the employer's responsibility to withhold taxes and to transfer them to the local tax authorities without delay. The calculation of tax withholding is based on the rates established for taxation of annual income. The amount withheld is credited against the employee's annual tax liability.
TAX RATE
Employee income is taxed at a flat rate of 26%.
INDIVIDUAL TAX CACULATION
Calendar year ending December 31,1998
Assumptions
This calculation concerns a resident who has tax-exempt income of EEK6,000 per year (together, a married couple would have EEK12,000 of tax-exempt income).
Tax computation
Salary, premium and other payments…………………………EEK1,100,00
Other income……………
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