FOREWORD. Estonia. Services provided by member firms include:

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1 2016/17

2 FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2016/17 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 30 April 2016, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory; Financial Planning / Wealth Management; Corporate Finance; Management Consultancy; IT Consultancy; Insolvency - Corporate and Personal; Taxation; Forensic Accounting; and, Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at PKF Worldwide Tax Guide 2016/17 1

3 IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited (PKFI) administers a family of legally independent firms. Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. PKF INTERNATIONAL LIMITED JUNE 2016 PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION PKF Worldwide Tax Guide 2016/17 2

4 STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE COMPANY TAX CAPITAL GAINS TAX BRANCH PROFITS TAX VALUE ADDED TAX (VAT) FRINGE BENEFITS TAX LOCAL TAXES B. DETERMINATION OF TAXABLE INCOME C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. RELATED PARTY TRANSACTIONS F. WITHHOLDING TAX G. EXCHANGE CONTROL H. PERSONAL TAX I. TREATY AND NON-TREATY WITHHOLDING TAX RATES PKF Worldwide Tax Guide 2016/17 3

5 MEMBER FIRM For further advice or information please contact: City Name Contact Information Tallinn Rein Ruusalu BASIC FACTS Full name: Republic of Estonia Capital: Tallinn Main languages: Estonian, English, Russian Population: 1.3 million (2013 PRB) Major religion: Christianity Monetary unit: EURO Internet domain:.ee Int. dialling code: +372 KEY TAX POINTS Estonian resident companies do not pay tax on their profits until they are distributed to shareholders. The taxable period is the calendar month. There is no separate capital gains tax. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made. Value added tax applies to most goods and services. Local taxes are imposed by only a few municipalities. Foreign tax is mostly relieved by exemption by virtue of the provisions of the double tax agreements with most overseas jurisdictions. Withholding taxes apply to interest, royalties and dividends paid to non-resident corporate shareholders. However, withholding tax only applies to interest to the extent that it exceeds the open market rate. Income tax applies to individuals at a single, flat rate. A. TAXES PAYABLE COMPANY TAX Estonian resident companies are liable for corporate income tax on their worldwide income. Corporate income tax is not levied when the company makes profits but when those profits are distributed to the company's shareholders. The rate is 20% on the gross profits distributed or 20/80 on the net amount of the dividend distributed to the shareholders. Although the tax applies like a withholding tax on the recipient of the dividend it is, strictly speaking, a tax on the company. The taxable period is the calendar month. CAPITAL GAINS TAX There is no separate capital gains tax in Estonia. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made. BRANCH PROFITS TAX There is no specific branch profits tax in Estonia. Branches of foreign companies are taxed under the same principles as resident companies, i.e. taxed on the distribution of profits. PKF Worldwide Tax Guide 2016/17 4

6 VALUE ADDED TAX (VAT) The supply of most goods and services is subject to VAT. Some goods and services are exempt from VAT. The standard VAT rate is 20%. A lower rate of 9% applies to certain items such as books, medicinal products etc. Exports from Estonia are zero rated. FRINGE BENEFITS TAX Fringe benefits are taxed as income. With effect from 1 January 2008, 20% income tax is levied on the gross value of the benefit plus 33% social security contribution. LOCAL TAXES Local government has the right to impose local taxes but presently only a few municipalities do so. B. DETERMINATION OF TAXABLE INCOME As the income of Estonian-resident companies is exempt from tax, there is no requirement for determining trading income for tax purposes. Tax is levied on the payment of dividends and distributions of profit in other forms such as fringe benefits, gifts and other non-business related payments. C. FOREIGN TAX RELIEF Under Estonia's double tax treaties, foreign tax is mostly relieved by exemption. D. CORPORATE GROUPS Corporations are taxed separately in Estonia. There is no concept of consolidated tax returns. E. RELATED PARTY TRANSACTIONS Related party transactions may be adjusted for tax purposes if the transactions are not at arm's length. F. WITHHOLDING TAX Withholding taxes must be deducted from interest, royalties and dividends paid to non-resident corporate shareholders (see table below). Withholding tax applies to the interest payments only if the interest rate is over the market rate and only to the proportion above the market rate. G. EXCHANGE CONTROL There are no exchange controls in Estonia. H. PERSONAL TAX There is one income tax rate of 20% and it applies to most income over the annual tax-free threshold of EUR 2,040. Employers are obliged to withhold income tax from employees' salaries. In addition, the following social security rates apply: Social security tax of 33% of gross salary; Unemployment insurance: - Employer 0.8% of gross salary; PKF Worldwide Tax Guide 2016/17 5

7 - Employee 1.6% of gross salary. Dividends received from resident companies and interest received from EU credit institutions are tax free. I. TREATY AND NON-TREATY WITHHOLDING TAX RATES There is no withholding tax on dividends in Estonia. Interest 1 Royalties 2 Royalties 3 Non-treaty countries Treaty countries: Albania Armenia Azerbaijan Austria Bahrain Belarus Belgium Bulgaria Canada China Croatia Czech Republic Cyprus Denmark Finland France Georgia Germany Greece Hungary Iceland India Ireland Isle of Man Israel Italy Jersey Kazakhstan Korea PKF Worldwide Tax Guide 2016/17 6

8 Interest 1 Royalties 2 Royalties 3 Latvia Lithuania Luxembourg Macedonia Malta Moldova Netherlands Norway Poland Portugal Romania Serbia Singapore Slovak Republic Slovenia Spain Sweden Switzerland Thailand Turkey Turkmenistan Ukraine United Arab Emirates United Kingdom United Mexican States 4,9 6 / United States Uzbekistan NOTES: 1. Withholding tax applies to the interest payments only if the interest rate is over the market rate and only to the proportion above the market rate. 2. Generally, rate applicable to royalties for equipment rental (but see additional notes below). 3. Royalties other than in note 2 above. 4. Rate applicable to copyright royalties. 5. In effect from 1 January The interest paid to banks and pension funds or pension schemes. PKF Worldwide Tax Guide 2016/17 7

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