JAGRAN LAKECITY BUSINESS SCHOOL
JAGRAN LAKECITY UNIVERSITY
2021 – 2023
CORPORATE TAX PLANNING AND
MANAGEMENT
ASSIGNMENT - II
SEMESTER – IV
MARCH 2023
SUBMITTED BY: SUBMITTED TO:
MAYANK RATHI DR. IFTEKHAR KHAN
JLU06078
2021MBA019
Contents
Introduction ....................................................................................................... 3
International Tax Competitiveness Index ........................................................... 3
Sources of Revenue in Estonia ........................................................................... 5
Corporate Taxation in Estonia............................................................................ 5
Exceptions ...................................................................................................... 6
Loss carried forward ....................................................................................... 6
Personal taxation In Estonia ............................................................................... 7
VAT Rate .......................................................................................................... 7
Real Estate Tax And Land Tax .......................................................................... 7
Investment Incentives ........................................................................................ 7
Tax Treaties ....................................................................................................... 8
Impact of Taxation System on Economy of Estonia ........................................... 8
Conclusion and Comments ................................................................................ 9
REFERENCES ................................................................................................ 10
ESTONIA TAXATION SYSTEM AND IMPACT ON
THEIR ECONOMY
Introduction
Estonia, formally the Republic of Estonia, is a country by the Baltic Sea in
Northern Europe. It is bordered to the north by the Gulf of Finland across from
Finland, to the west by the sea across from Sweden, to the south by Latvia, and
to the east by Lake Peipus and Russia. Currency of the country is Euro.
The estimate for Estonia GDP (nominal) is $41.55 billion and Per capita is
$31,207 for the year 2023.
International Tax Competitiveness Index
The Tax Foundation’ s International Tax Competitiveness Index (ITCI) measures
the degree to which the 38 OECD countries’ tax systems promote
competitiveness through low tax burdens on business investment and neutrality
through a well-structured tax code. The ITCI considers more than 40 variables
across five categories: Corporate Taxes, Individual Taxes, Consumption Taxes,
Property Taxes, and International Tax Rules.
The ITCI attempts to display not only which countries provide the best tax
environment for investment but also the best tax environment for workers and
businesses.
Sources of Revenue in Estonia
Countries raise tax revenue through a mix of individual income taxes, corporate
income taxes, social insurance taxes, taxes on goods and services, and property
taxes. The mix of tax policies can influence how distortionary or neutral a tax
system is. Taxes on income can create more economic harm than taxes on
consumption and property. However, the extent to which an individual country
relies on any of these taxes can differ substantially.
Corporate Taxation in Estonia
In Estonia, corporate income tax is not levied when profit is earned but when it is
distributed. In 2021, the standard tax rate is 20% (calculated as 20/80 of the net
distribution).
Under the regulation in force from 1 January 2018, a profit distribution that is
smaller than, or equal to, the past three years’ average profit distribution which
has been taxed in Estonia will be subject to income tax of 14% (calculated as
14/86 of the net distribution).
Companies which distribute profit and pay 14% Corporate Income Tax (CIT) on
it are additionally obliged to withhold income tax of 7% from dividends paid to
resident and non-resident natural persons. Tax treaties may provide lower
withholding tax rates.
Exceptions
Under certain conditions, redistribution of dividends is not subject to taxation.
Income tax is not charged on dividends, which are passed on after being received
from a company domiciled in an EEA Member State or Switzerland, if at least
10% of the shares or votes in that company is held by the Estonian company. The
exemption applies to dividends received from a company domiciled in another
country as well, if the Estonian company holds at least 10% of the shares or votes
in this company, and income tax has been withheld or paid upon the profits on
the account of which the dividend has been paid. Also, in some cases the
exemption is applied to the dividends paid out of the profit attributed to a resident
company’s permanent establishment. However, the exemption does not apply if
dividends are received from companies in low tax jurisdictions.
Loss carried forward
Losses incurred by a company do not affect corporate taxation.
Estonia Corporate tax rates can be observed by the above graph which depicts the
tax rates from 1980-2020. Corporate Tax rate is nearly half than what it was in
1980.
Personal taxation In Estonia
In Estonia, a flat tax rate of 20% is imposed on personal income. Taxable income
Natural persons are subject to general income tax of 20% on income derived from
• employment (monetary payments);
• business (self-employed income);
• property/investment (rental income, royalties, interest, capital gains on disposal
of business, movable and immovable property);
• other sources (certain pensions, scholarships, grants, awards, lottery prizes,
insurance indemnities and payments from pension funds).
In certain cases, the income tax rate is 10%. Fringe benefits (i.e. remuneration
received in the form of benefits-in-kind) are taxed at the employer’s level.
VAT Rate
The standard VAT rate is 20% and the reduced rate is 9%. There are some
transactions which attracts 0% VAT also.
Real Estate Tax And Land Tax
The only property tax imposed in Estonia is the land tax. As a rule, the annual tax
rate is between 0.1% and 2.5% of the taxable value of the land. The owner (or, in
certain cases, the user) of the land has to pay the tax. However, the land under a
taxpayer’s home is exempt from tax.
Investment Incentives
Only one investment incentive is available under the Estonian tax system: no tax
is levied on retained or reinvested profits. However, profit distributions are
subject to taxation. For more information please kindly refer to the corporate
income tax section above.
Tax Treaties
Estonia has Double taxation treaties with 65 nations all over the globe including
India. Following are the nations:
Impact of Taxation System on Economy of Estonia
Estonia's flat tax system has had a significant impact on the country's economy
since its implementation in 1994. Here are some ways in which the Estonian
taxation system has affected the economy:
Attraction of foreign investment: The simplicity and predictability of the
Estonian tax system has made the country an attractive destination for
foreign investors. The flat tax rate of 20% applies to both corporate and
individual income, making it easy for businesses to plan and invest in the
country.
Encouragement of entrepreneurship: The low administrative costs and
flat tax rate have made it easier for entrepreneurs to start and grow
businesses in Estonia. This has led to a thriving startup scene, with
companies like Skype and TransferWise launching from Estonia.
Increased tax compliance: The simplicity of the Estonian tax system has
led to high levels of tax compliance, with fewer opportunities for tax
evasion or avoidance. This has helped to increase government revenue and
ensure that all businesses and individuals are contributing their fair share.
Boost to the economy: The Estonian economy has experienced steady
growth since the introduction of the flat tax system. The World Bank has
praised Estonia for its economic performance and competitiveness, citing
the tax system as one of the key factors behind its success.
Overall, the Estonian taxation system has had a positive impact on the economy
by attracting foreign investment, encouraging entrepreneurship, increasing tax
compliance, and boosting economic growth.
Conclusion and Comments
Estonia has a unique taxation system known as the Estonian "flat tax" system,
which has been in place since 1994. The system is characterized by its simplicity
and low administrative costs. Here are some key features of the Estonian taxation
system:
Flat income tax: All income, whether earned through employment, self-
employment, or investment, is subject to a flat income tax rate of 20%.
There are no tax brackets, and everyone pays the same rate.
Corporate income tax: The corporate income tax rate is also 20%, and it
applies to all profits earned by resident companies.
Value-added tax (VAT): The standard VAT rate is 20%, but there is also
a reduced rate of 9% for certain goods and services, such as books,
pharmaceuticals, and hotel accommodation.
Social security contributions: Both employees and employers must pay
social security contributions, which are capped at a certain amount per
month. The employee's contribution is 20% of their gross salary, and the
employer's contribution is 33% of the employee's gross salary.
Taxation of dividends: Dividends paid to resident companies or
individuals are tax-exempt, but a 20% withholding tax applies to dividends
paid to non-residents.
Overall, the Estonian taxation system is designed to be simple, efficient, and
business-friendly. The flat tax system, in particular, has been credited with
attracting foreign investment and spurring economic growth.
REFERENCES
KPMG. (2021). Tax card 2021. Estonia.
Tax Foundation. (n.d.). Retrieved from Taxes in Estonia:
https://taxfoundation.org/country/estonia
