Taxation of corporations
9.3 Taxable income
Net operating losses
As noted above, Estonia levies a corporate income tax only on profits that are distributed as dividends, share buy-backs, capital reductions, liquidation proceeds or deemed profit distributions.
There is no use for the losses carried forward, as distributable profits are determined by financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS and there is no adjustment of accounting profits for tax purposes (tax loss carry-forward or carry-back).
Distributed profits are generally subject to a 21% corporate income tax (21/79 on the net amount of profit distribution). For example, a company that has profits of 100 available for distribution can distribute dividends of 79, on which it has to pay corporate income tax of 21. From the Estonian perspective, this tax is regarded as a corporate income tax and not a withholding tax, so the tax rate is not affected by double tax treaties. Certain domestic and foreign taxes can be credited against the corporate income tax charge under domestic law or double tax treaties. Certain distributions are exempt from such tax (“participation exemption”). Dividends paid to non-resident legal entities (including “tax haven” entities) are not subject to additional withholding tax under domestic law. Distributable profits are determined by financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS and there is no adjustment of accounting profits for tax purposes (e.g. there is no separate tax depreciation, or tax loss carry forward or carry-back).
9.4 Deductibility of expenses Depreciation and depletion Distributable profits are determined by financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS, and there is no adjustment of accounting profits for tax purposes. Corporate entities are not subject to tax depreciation rules.
Payments to foreign affiliates Payments to foreign affiliates are “deductible”, i.e. not subject to 21/79 corporate income tax, as they are deemed profit distributions, provided that the payment serves a business purpose and provides a benefit to the payer, is at arm’s length, and is substantiated by sufficient documentation (see also section 10.5). Payments to foreign affiliates may also be subject to various withholding taxes. Certain payments to affiliates located in “tax havens” are always subject to 21/79 corporate income tax or 21% withholding tax. Taxes All taxes paid are “deductible” for income tax purposes. In certain circumstances domestic or foreign taxes may be creditable against the 21/79 corporate income tax charge under domestic law or an applicable tax treaty. Fringe benefits Employers operating in Estonia (including foreign companies that have a permanent establishment or employees in Estonia) are liable to Estonian taxation on any fringe benefits granted to their employees (including directors). Fringe benefits are subject to special tax treatment in Estonia, as it is only the employer who has the obligation to pay taxes on the fringe benefits furnished to the employee. Taxable fringe benefits received by a resident employee are in general not included in the taxable income of the employee for Estonian tax purposes.
PwC
Guide to doing business and investing in Estonia
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