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Estonia: Living There - Tax Issues

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Living There

INDIVIDUAL TAXATION

Residents of Estonia are taxed on their worldwide income. One becomes a resident of Estonia if: 1) one has a place of residence there; or 2) one stays in Estonia for 183 days or more during any given 12-month period. Married couples are taxed separately, but filing joint tax returns are allowed. Children are taxed separately.

INCOME TAX

Taxable income is generally an aggregate of ordinary income, business income and income from disposal of property less deductions and personal allowances. Income is taxed at a flat rate of 21% in 2008.

An annual basic exemption is also deductible. Starting from the second child, a parent is given an additional allowance (of the same amount as the basic exemption) for every child under 18 years old. The annual basic exemption for 2008 is EEK27,000 (€1,726).

For the succeeding years, the applicable tax rate and the annual basic exemption amount are as follows:

Resident individuals are also entitled to the following deductions:

• Alimony payments
• Interest paid to credit institutions and financial institutions resident in any EEA country and to EEA registered non-resident credit institutions on a loan for acquiring or reconstructing his own dwelling. This is limited to one dwelling per tax year.
• Educational expenses and interest on student loans under certain conditions
• Documented gifts and donations to government approved non-profit organizations and to scientific, sports, cultural, educational, health or social security institutions belonging to the state or local authorities, to nature reserves and to public universities. This deduction may not exceed 5% of the taxpayer’s income after the deduction of other allowable expenses.
• Admission and membership fees paid to a trade union are deductible, as well as unemployment insurance contributions. A 2% limit applies to this deduction.
• Premiums for certain voluntary annuity pension schemes and the cost of acquiring investment certificates of qualifying EEA pension funds are deductible from taxable income. This is limited to 15% of income.
• Premiums for compulsory annuity pension schemes are deductible in full. Certain social security contributions paid abroad may be deducted if their payment was compulsory under foreign law.
• Deductions related to mortgage interests, educational expenses, gifts, donations and trade union fees are limited to the lower between EEK50,000 (€3,196) and 50% of the taxable income.
• Pensions received under the law of an EEA country or under a social security arrangement are deductible from the taxable income, up to EEK36,000 (€2,301).

RENTAL INCOME
Taxable rental income is simply computed as rental income less related expenses and maintenance costs. This is then subject to withholding tax at a flat rate of 21% in 2008. The amount withheld is credited against income tax due.

CAPITAL GAINS
Capital gains are aggregated with other income and taxed at the standard income tax rate (21% for 2008). Capital gains are usually computed by deducting acquisition costs and transaction costs from selling price. Some gains are exempt from taxation, such as:

• Gains from the sale of a taxpayer’s primary residence;
• Gains from the transfer of a summer cottage or garden house that the taxpayer has owned for more than 2 years.

PROPERTY TAX

Land Tax

Land owners in Estonia are liable to pay an annual land tax, levied on the market value of the land. The rate is established by the municipal council and varies between 0.1% and 2.5%.

Estonia - more data and information

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