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

Residents earning income in Estonia are liable to pay income tax at a flat rate of 22% in 2007. No local income taxes are imposed. Taxable income is generally an aggregate of ordinary income, business income and income from disposal of property less deductions and personal allowances.

Deductions

Residents are entitled to the following deductions from their taxable income:

• An annual personal allowance of EEK24,000 (€1,534), for 2007, is also deductible. Starting from the second child, a parent is given an additional personal allowance of the same amount for every child under 18 years old.
• 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 Tax

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 22%. The amount withheld is credited against income tax due.

Capital Gains

Capital gains are not taxed separately but aggregated with ordinary income and business income and the same 22% flat rate of income tax is imposed on them. 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.

Estonia - more data and information

• Lawyers (attorneys) with property law practices in Estonia

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