Note: In this article, we speak exclusively of salaries, dividends, and their implications (social security, pension, etc) for Estonian tax residents, not e-residents. This means people who decide to settle down in Estonia. To know more about salaries and dividends for e-residents, please visit this link.
Many e-residents end up becoming residents of the Baltic country. As Estonia is part of the EU, if you are European, it is as easy for you as traveling there, renting an apartment, and going to the immigration office to get your physical residence and ID. This ID is different from the e-Residency ID and, indeed, as soon as you become an Estonian resident, they will invalidate your e-Residency ID.
If you are not European, there are many options for you. One of the most interesting ones is the Startup Visa program of Estonia. We have discussed this program previously here, but you can find updated information on their website.
From the moment you become a tax resident in Estonia, you will be liable to pay your taxes in the country. That includes your dividends and salaries obtained from your Estonian company. The good news is, the Estonian fiscal system is as good for individuals as it is for companies, meaning, everything is easy, paperless, and the taxes and fiscal matters are simple and easy to understand for everybody.
Dividends for Estonian Residents
This is where the good news starts for Estonian residents. If you are a tax resident in the Baltic country, you don’t pay personal taxes for the dividends you receive. Your company will pay corporate tax (20% of gross), but you won’t need to pay more taxes afterward.
Let’s see an example. You are an Estonian resident with a company in Estonia. You distribute 10,000€ in dividends, with 8,000€ going to your personal bank account, and 2,000€ paid in taxes. Of these 8,000€ you receive in your personal bank account, you won’t need to pay anything extra, now or in your annual tax report.
Salaries and Income Tax for Estonian Residents
Estonia has also a very good fiscal regime for salaries. Let’s talk about it.
We already talked about taxes and VAT for e-residents, but when you are a tax resident in Estonia, things are different.
As an Estonian tax-resident, you are liable to pay taxes for the whole salary. You will need to pay not just income tax, but also social tax, and make sure the latter covers the minimum requested by the authorities per month (192.72€ as of 2021). Besides, there are some other minor taxes added to the mix.
Also, keep in mind that you will be liable to pay taxes in Estonia, as an individual, for all your income worldwide. That means that if you receive salaries, dividends, or any other revenue from outside of Estonia, you will have to report it too.
A Concrete Example
Let’s see a specific example of a salary. We are interested in two main points: how much will the employer pay for a gross wage, and how much will end up in the hands of the employee.
As of 2021, for a gross salary of 1,000€, these are the numbers.
|Social Tax (paid by the employer)||330.00€|
|Unemployment insurance (paid by the employer)||8.00€|
|Total Cost for the employer (Wage Fund)||1338.00€|
|Funded pension (paid by the employee)||20.00€|
|Unemployment insurance (paid by the employee)||16.00|
So the total cost for the employer (the company) will be 1,338€, and the employee will receive 871,20€ in their account. The employee will not need to pay any extra tax for that income afterward.
The Income Tax
Where do those 92.80€ come from? The income tax in Estonia is 20% flat, but there is a reduction applied to the taxable income if you are a tax resident in Estonia. For a monthly salary of 1000€, the first 500€ are tax-exempt. So from 1000€, -36€ (pension + unemployment benefits) we have 964€, from these, the first 500€ are tax-free, so that leaves us with 464*20%, which is 92.80€ in income tax.
So what are the rules for this tax exemption?
Up to 500€ a month, or a total of 6,000€ a year, are subject to this tax exemption, but the amount decreases depending on your total income. For revenue of more than 25,500€ a year, there’s no exemption at all. Remember that you need to include all your revenue here (including your worldwide income).
- If your total income is up to 14,400€, the exemption is 500€ a month. That’s the example we mentioned earlier, supposing this person’s only income is that 1,000€ salary.
- If your total income is more than 14,400 but less than 25,200€, your annual exemption would be:
6000 – 6000 ÷ 10 800 × (income – 14 400)
So if your annual gross salary was 18,000€ (1,500€ gross salary per month), your exemption would be
6000 – 6000 ÷ 10 800 × (18000 – 14 400) = 4000€ per year
That means that every month you have 333,33€ exempt of taxes, and your income tax will be then:
20% x (1500 – 20 – 16 – 333,33) = 226,13€.
That means from your 1500€ gross salary you will receive 1237,87€. Not bad.
If you want to know more, here is the official source from the Estonian Tax & Customs Board Office.
Salaries or Dividends?
You may be wondering, what’s better for me if I become an Estonian resident, paying myself a salary, distributing dividends, both? Do I need to have a salary in the first place?
First, being an employee of your company and receiving a salary is not currently mandatory.
But is it advisable to pay yourself a monthly wage? Well, it depends on many factors. There are mainly two things to consider, timing and social coverage.
If you need a steady, monthly source of income, you should consider becoming an employee of your company. Dividends are commonly distributed once a year, after the submission of the financial report. If, on the other hand, your company is generating a decent profit, you can consider distributing annual dividends that will cover your needs for the whole year.
Another important consideration is social coverage. Your wage, when you receive one, contributes to your social security (with social taxes), unemployment, and pension funds. That means that if you don’t receive a salary, you will not have access to social security. You will need private health insurance.
Perhaps the most rational solution lies somewhere in-between, i.e: receiving a small salary, enough to cover your social security needs, unemployment, pension, etc, and distributing dividends to supplement this wage. That may also be the best solution, tax-wise, as you may benefit from the tax-exempt reduction on low salaries.
The e-Residency program is attracting many e-residents to Estonia. From merely being interested in the digital nation, some of them become physical residents in the country. There are many reasons why this is a good idea if you have your company in Estonia. Tallinn is a beautiful and modern European capital with a blossoming startup scene and a well-developed entrepreneurial ecosystem.
In this article, we explained the implications of becoming a tax resident in Estonia in terms of individual taxation, i.e: how your salaries, dividends, and other income, would be taxed if you become a resident of the baltic country.
Can We Help You?
If you decide to become an Estonian physical resident, and eventually pay your taxes there, we can help you do your individual reports and fulfill your tax obligations. Contact us to know more.