Corporate Income Tax (CIT) or Corporate Profit Tax stands as one of the most crucial indicators determining the attractiveness of a jurisdiction for foreign businesses and the allure of external investments.
Estonia, a small Northern European country, has caught the attention of numerous international companies and investors in recent years, thanks to its innovative and entrepreneurial environment. However, a key factor in its business appeal is its fiscal system. Let’s explore why the Estonian tax climate is considered one of the best in Europe.
How a Small Country Became a Leader in Economic Development and Innovation
This European nation doesn’t just follow digitalization trends – it sets them. A testament to this is the implementation of the concept of e-Residency, enabling people worldwide to conduct business in the European Union using local digital services. This, in turn, has drawn attention to other aspects of the country’s business environment, particularly its fiscal system.
Open Tax Policy – The Key to Your Business Success!
Studies by the World Bank and other international organizations have shown that countries with a simpler and more understandable tax system experience faster economic development and attract more foreign investment than those with more complex and convoluted fiscal systems.
The local business climate is notable for its simplicity and innovative approach. On one hand, the straightforwardness and predictability of tax rates make financial planning more transparent and comprehensible for entrepreneurs. On the other hand, unique tax solutions, such as the exemption of dividends from personal income tax and the territorial tax system, offer real economic advantages for both international and local businesses.
Transforming the Economy Through Progressive Financial Reforms
It’s important to note that Estonia’s success in creating a favorable tax climate is no accident. It’s the result of a deliberate government strategy focused on attracting investments and stimulating economic growth. This example demonstrates how innovation and progressive reforms can transform an economy and create an environment conducive to business and investment.
Such an approach has made the country not only a leading player in the Baltic region but also a model for the world. Thanks to its policies, the country attracts the attention of international companies looking for a stable yet flexible place to grow their business. This example proves that even small countries can play a key role in the global economy by offering innovative and effective solutions.
ESTONIA’S TAX SYSTEM
#1 in the International Tax Competitiveness Index
Estonia stands as one of the most comfortable and effective jurisdictions in Europe for company formation and business development, as its fiscal system is characterized by simplicity and transparency.
The Most Attractive Tax System in the World!
For the past 10 years, Estonia has topped the OECD’s International Tax Competitiveness Index (International Tax Competitiveness Index), primarily due to its application of a 20% CIT rate that only applies to distributed profits.
Advantages of the Estonian Business Climate
Additionally, the country has a fixed 20% income tax on individual earnings, not applicable to personal income in the form of dividends. Moreover, property tax exists only as a land tax, calculated based on the cadastral value of the land, rather than the real property value. Finally, the country employs a territorial tax system that fully exempts profits earned by enterprises in foreign jurisdictions from local taxation.
CORPORATE TAX IN ESTONIA – 0%
Complete Absence of Corporate Income Tax on Undistributed Profits
In Estonia, there is no CIT on undistributed or reinvested profits. Profits generated from business activities, not distributed as dividends among the founders, are exempt from CIT.
The main advantage of the business environment and fiscal policy in Estonia is the applied rate of 0% corporate tax on undistributed profits.
This means that all revenues a company accumulates in its accounts as reserves or reinvests in various forms (equipment purchases, software development, investments in securities or other financial instruments, etc.)
DIVIDEND TAXATION
CIT on Payments to Founders
The obligation to pay corporate tax arises only at the moment of dividend payments or other non-commercial payouts to founders or third parties.
Dividend Tax
When distributing a company’s profits among its founders, a 20% rate applies (20/80 of the gross payout). For regular dividend payments, a 14% income tax rate may be applied (14/86 of the gross payout).
CONTACT US
If you wish to register a company in Estonia or have any questions about corporate income tax or the taxation of profits of Estonian enterprises – feel free to reach out to our consultants and accountants.
Our experts have over 10 years of experience in tax accounting and corporate law. Together, we will find an effective solution for building an optimal corporate structure to minimize the tax burden on your enterprise.
