Taxation of permanent establishments of non-residents in Estonia
A resident of one country carrying on business in another other country generally will be subject to that country’s income tax if it has a permanent establishment there and income attributable to a permanent establishment. Income tax treaties typically include standard language defining the term permanent establishment.
For the purposes of a Convention between the Republic of Estonia and the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital the permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
An enterprise of one country generally will have a permanent establishment in the other country if it has
- a fixed place of business (a place of management, a branch, a workshop, factory, an oil or gas well, a quarry or any other place of extraction of natural resources, etc.);
- a dependent agent who has the authority to conclude contracts binding the enterprise and the agent habitually exercises that authority in the other country.
A building site, a construction, assembly or installation project or a supervisory or consultancy activity connected therewith constitutes a permanent establishment only if such site, project or activity lasts for a period of more than six months.
Permanent establishment does not depend on registration of a permanent establishment and begins from economic activity of a non-resident company in Estonia; however, the registration is still compulsory. For registration PE non-resident shall issue an application to Estonian Tax and Customs Board. If the non-resident has not fulfilled the registration obligation the Estonian Tax and Customs Board may register the PE retroactively from the date when the registration obligation actually begins.
VAT payer registration in Estonia
Is it not necessary to register as a VAT payer in Estonia from the beginning of the service. The legal person is obligated to register as a VAT payer if the taxable annual turnover of the company exceeds 16 000 euros.
Estonia provides corporate income taxation system as resident companies and permanent establishments of non-resident companies do not pay income tax on retained or reinvested earnings. The corporate income tax (CIT) obligation is deferred to the moment of distributing profits. Therefore, to the extent that profits are not distributed, there is no CIT obligation for resident companies. CIT is levied at the gross rate of 21% on profit distributions, (dividends, gifts, fringe benefits, and other no business expenditure and excessive capital reductions) made by companies.
The moment of taxation is carried forward until the moment of distribution of profits or the moment of taking the profits out of the permanent establishment. Only the cost of property taken out of the permanent establishment exceeding the cost of property brought in was subject to taxation.
A non-resident legal person with a permanent establishment in Estonia is required to submit a tax return concerning the amount and the recipients of payments made during the period of taxation. The tax return shall also be submitted concerning the received income which distribution is exempted from income tax in Estonia.
Personal taxes in Estonia
If a non-resident legal person with a permanent establishment in Estonia wants to use their own employees (posted workers EU citizens) in Estonia the company in certain cases must pay taxes (social tax, unemployment insurance premiums, Income tax from employee salary) .
For the purposes of the Estonian Income Tax Act, a natural person is a resident of Estonia if he or she has a permanent place of residence in Estonia or stays in Estonia for 183 days or longer during a period of twelve consecutive calendar months. Resident natural persons must pay income tax on
their worldwide income. If a double taxation treaty applies, income tax paid abroad may in most cases be deducted from income tax payable in Estonia. A funded pension payment , unemployment insurance tax of 2% and personal income tax is 21%, which is deducted from the employee’s salary by the employer.
The employees, working in the facility in Estonia are to be paid at least a minimum salary as determined by the Estonian government, 320 euro per month.
Social tax is paid by employers at a rate of 33% on all payments made to employees for salaried work performed. Social tax is not part of the salary number; it is calculated on the basis of the agreed salary.
According to EU Parlament regulation no 883/2004 about the coordination of social security systems, person who pursues an activity as an employed person in a Member State on behalf of an employer which normally carries out its activities there and who is posted by that employer to another Member State to perform work on that employer's behalf shall continue to be subject to the legislation of the first Member State, provided that the anticipated duration of such work does not exceed twenty-four months and that he is not sent to replace another person.
It means, that the person, who was posted to Estonia to perform work on employer's behalf is subject to the legislations and tax systems of the employer’s country and have not any social tax liability in Estonia if such work does not exceed 24 months.