The Estonian tax system is one of the simplest and most understandable among European countries. This is due to the fact that it is based on the principle of a single tax on the income of legal entities and individuals. Nevertheless, there are certain nuances that must be taken into account when calculating taxes on personal income.
This article will cover the key aspects of income taxation in Estonia, as well as the specifics of applying various benefits and deductions.
Basic principles of personal income taxation in Estonia
Income tax in Estonia is levied on income earned by individuals residing in the country, as well as on income of non-residents, if they are received from sources in Estonia.
Income subject to income tax:
- salary;
- profit from business activities;
- dividends;
- interest on deposits and loans;
- rent for real estate;
- other income, such as lottery winnings, property sales, etc.
The tax rate is 20%, but there are a number of exceptions and benefits that can significantly reduce the tax burden.
Tax deductions in Estonia
Consider the main tax deductions:
- Standard tax deduction. Every taxpayer is entitled to a standard tax deduction of 600 euros per year. If the annual income exceeds 14,400 euros, the amount of the deduction is reduced proportionally.
- Deduction for children. Parents are entitled to a tax deduction for every child under the age of 18. The deduction is 1,848 euros per year for the first child, 3,480 euros for the second and 5,040 euros for the third and subsequent children.
- Social contributions. Social security and health insurance contributions reduce the tax base.
- Expenses for education. The taxpayer’s own or his family’s tuition expenses can be counted as a tax deduction.
In addition, expenses for the purchase or construction of housing, as well as mortgage interest, can be counted as a tax deduction.
Withholding tax at the source of payment
In some cases, the tax may be withheld directly by the source of income payment. For example, employers are required to withhold income tax from their employees’ salaries. Similarly, banks withhold tax on interest on deposits and dividends.
Declaration of income and payment of taxes
Individuals are required to file an income declaration annually by March 31 of the following year. The declaration contains all information about income, expenses, benefits and deductions. Based on these data, the amount of tax to be paid or refunded is calculated.
Summarizing
The personal income tax system in Estonia is simple and transparent. Despite this, it is important to closely monitor changes in legislation and file tax returns on time. The use of electronic services (e-MTA) greatly simplifies interaction with tax authorities and helps to avoid mistakes.