Chapter 2: Taxes in Estonia
2.1 Overview of Tax Types for SMEs
Running a company in Estonia comes with a transparent and startup-friendly tax system – especially for foreign entrepreneurs and e-residents. As an SME owner or board member, you should be aware of several key taxes and know which taxes apply to the company, to employees, or to owners:
Corporate Income Tax (CIT) – Company’s tax on profits. Estonia famously has 0% CIT on retained or reinvested profits, and a 22% tax on distributed profits (e.g. dividends) (investinestonia.com). This tax is paid by the company when profits are paid out to owners. (Until 2024 the rate was 20%, and it increased to 22% in 2025.) We’ll explain this unique system in section 2.2.
Value-Added Tax (VAT) – Consumption tax on goods and services. The standard VAT rate is 22% in Estonia (e-resident.gov.ee) (set to rise to 24% from July 2025 (e-resident.gov.ee). Companies add VAT to sales of most goods/services and remit it to the state, while also reclaiming VAT on business purchases. VAT is paid and reported by the company (section 2.3 covers when you need to register for VAT, different rates, and special schemes).
Personal Income Tax (PIT) – Flat tax on individuals’ income. The rate is 20% (increasing to 22% from 2025) on most income. For a company, this matters when you pay salaries or board member fees – the company must withhold 20% (or 22%) from an individual’s gross pay and forward it to the Tax Board (emta.ee). Employees’ salary income is thus taxed at 20/22% in Estonia (unless the employee is tax-resident elsewhere, which we’ll discuss).
Social Tax – Employer-paid social security tax. The company pays 33% social tax on top of an employee’s or board member’s gross salary (emta.ee). This tax funds public health insurance and pensions. For example, if an employee’s gross salary is €1,000, the company contributes an additional €330 as social tax. Only the employer pays this, not the employee. (There is a minimum monthly social tax base: even if someone earns very little in a month, the company must still pay social tax as if they earned a minimum amount. In 2025 the minimum base is €820 per month, so the minimum social tax per worker is €270.60 monthly (emta.ee)
Unemployment Insurance Contributions – Funding for unemployment benefits. These are split between employer and employee. The employer pays 0.8% of gross salaries, and the employee pays 1.6% (withheld from salary). For example, on a €1,000 salary, the company pays €8 and the employee sees €16 deducted for unemployment insurance. (These rates are fixed through at least 2026)
Mandatory Pension Contribution (II pillar) – Employee-funded pension. If the employee is enrolled in Estonia’s II pillar pension scheme (commonly the case for Estonian tax residents who have not opted out), the company withholds 2% of gross salary for the employee’s pension fund. This is in addition to the social tax – which already includes a pension component – and is paid by the employee via withholding. Foreign employees or those who opted out won’t have this deduction.
Fringe Benefit Tax – Company tax on benefits given to individuals. If the company provides a benefit to an employee or board member (for example, covering a personal expense or providing a company car for private use), the company must pay tax on the value of that benefit. Fringe benefits are taxed at the company’s expense as if it were a profit distribution: 22% income tax on the grossed-up value (effectively 22/78 on the net value) plus 33% social tax (investinestonia.com). In short, the company shoulders the tax so that the individual doesn’t pay for receiving the perk.
Who pays what? To summarize:
The company pays corporate income tax on its distributed profits, and it pays employer contributions (33% social tax and 0.8% unemployment) on wages or fees.
The employees pay personal income tax (20/22%) on their salaries and 1.6% unemployment (and 2% pension if applicable) – but these are withheld and remitted by the company.
The owners receive dividends net of the company’s corporate tax; if the owner also works in the company (as a board member or employee), they may draw a salary or fee which then incurs the above payroll taxes. We will delve into each of these taxes in the next sections.
2.2 All About Corporate Income Tax
Estonia’s Corporate Income Tax system is quite different from most countries. Corporate Income Tax (CIT) in Estonia is only paid when profits are distributed, not annually on profits. This means if your company reinvests or retains its earnings, you pay no CIT that year. Profits can be kept in the company tax-free indefinitely. Once you decide to distribute profits (e.g. pay dividends to shareholders), that distribution triggers CIT.
Who must pay CIT?
All Estonian resident companies (such as an OÜ – Private Limited Company) are subject to CIT on their distributed profits. This also applies to permanent establishments of foreign companies in Estonia, if they distribute profits to the head office. In practical terms, if you’re a foreign entrepreneur with an Estonian company, your company will pay CIT when it pays you (or other owners) a dividend or if it covers non-business expenses (which are treated as profit distributions). If no distribution is made in a year, the company owes no CIT and does not file a corporate tax return – there is no annual CIT filing for profit.
CIT Rate and Calculation
The standard CIT rate on distributed profits in Estonia is 22% (as of 2025). This rate is applied on a gross basis.
In practice, this means:
For every €100 of profit your company distributes, €22 goes to the tax authority, and €78 is paid out to the shareholder as a net dividend.
Another way to look at it: the effective tax rate is 22/78 of the net amount distributed (which is about 28.2%), but it’s usually easier just to remember the 22% gross rate.
Example:
If your company wants to distribute €10,000 in net dividends to a shareholder, it will need to pay approximately €2,821 in CIT, for a total cost of €12,821 to the company.
Conversely, if your company has €10,000 of profit to distribute, it will pay €2,200 in tax (22%), leaving about €7,800 net for the shareholder.
Key Point:
Only distributed profits are taxed. If profits are retained and not paid out as dividends, no corporate income tax is due—a major benefit for companies focused on reinvesting and growth.
No double taxation on dividends inside Estonia
The 22% corporate tax is considered a final tax on the profit distribution. If the shareholder is an Estonian tax resident individual, they do not pay personal income tax on the dividend – the company has already paid the 22% and that’s the end of it. The individual would just declare the dividend on their annual return for information, but it isn’t taxed again locally. (In other words, Estonia doesn’t tax dividends twice; there’s only the corporate level tax in most cases.)
Dividends to foreign owners
Estonia does not withhold additional tax on dividends paid to non-resident shareholders. This is a significant benefit for foreign entrepreneurs—unlike many countries, Estonia doesn’t levy a dividend withholding tax on outbound dividends, as long as the company has already paid the corporate income tax (CIT) on those profits.
What does this mean?
Your Estonian company can distribute dividends internationally without incurring extra Estonian tax.
However, you may need to declare and pay tax on that dividend in your home country according to your local tax rules.
Important considerations:
The Estonian CIT is a tax on the company, not a withholding tax on individuals.
Because of this, many countries won’t give you credit for the Estonian 22% CIT when you report your dividend income at home.
This can result in double taxation: for example, the company pays 22% CIT in Estonia, and the shareholder may have to pay an additional 15% (or more) tax on the same dividend in their home country, leading to a combined rate of around 37%.
Most tax treaties with Estonia treat CIT as a corporate tax, not a withholding tax, so credits are rarely given.
Tip: Some countries offer a participation exemption or other relief for foreign dividends, but this varies by jurisdiction.
Bottom line: Estonia won’t tax your dividend twice, but you should always check the rules in your own country to avoid unexpected tax bills.
Regular dividend distributions and changes in 2025
In the past, Estonia had a policy to encourage regular profit distributions by offering a reduced CIT rate of 14% on a portion of dividends if you had been paying them out consistently (with an accompanying 7% withholding tax for individuals receiving those dividends). However, as of 2025, this preferential rate is abolished. Now all distributed profits are taxed at the uniform 22% rate, regardless of frequency. In short, there isn’t a lower rate for regular payouts anymore – it simplifies the system.
When and how to report/pay CIT
In Estonia, CIT is linked to profit distribution events—not to annual profits. This means:
Tax is assessed and paid at the time dividends (or other profit distributions) are made, not at the end of the financial year.
Companies declare and pay CIT using the monthly tax declaration (Form TSD). There is no separate annual corporate tax return for profits.
Whenever your company pays out dividends, you must include the distribution in that month’s Form TSD and pay the tax by the due date.
Key details:
The deadline for reporting and paying CIT is typically the 10th day of the month following the distribution.
Example: If a dividend is paid on March 15, it must be declared and the CIT paid by April 10.
Important:
Dividends can only be distributed from retained earnings that have been verified in the annual report. This means you can only pay out profits after the financial year is closed, the annual report is approved, and the proper corporate procedures (such as shareholder approval) are followed.
Other transactions treated as profit distribution
Estonia’s corporate income tax (CIT) isn’t limited just to formal dividends. Any use of company profits for non-business purposes is treated as a taxable distribution and is subject to CIT. This includes:
Fringe benefits (e.g. personal use of a company car, health insurance for employees)
Gifts or donations
Non-business expenses (for example, making a personal purchase through the company)
The tax system is designed to catch profit that leaves the company for private benefit, not legitimate business activities.
How is it taxed?
The company must pay 22% CIT on these non-business distributions (usually calculated as 22/78 of the net value).
If an individual benefits (as with fringe benefits), social tax may also apply.
What isn’t taxed under CIT?
Genuine business expenses—such as salaries, rent, supplies, and other necessary costs—are not subject to CIT.
There is no standard annual profit tax: profits can be reinvested tax-free as long as they remain in the company.
In summary:
No corporate tax on profits kept in the company.
22% CIT applies when profits are taken out—whether as dividends, fringe benefits, or other non-business uses.
Many foreign founders use this flexibility to reinvest earnings and defer taking dividends, sometimes preferring to pay themselves a salary (which is covered separately under payroll taxes) or only taking minimal distributions when needed.
Compliance reminder:
Whenever a profit distribution or a taxable benefit is made, declare it and pay the corresponding tax by the 10th of the following month.
Quick Tip: To avoid issues, make sure all company expenses are genuinely business-related, and handle any withdrawals or personal benefits transparently and in line with the rules.
2.3 All About VAT (Value-Added Tax)
What is VAT
Value-Added Tax is a consumer tax applied at each stage of the supply chain. In Estonia (as in all EU countries), businesses add VAT to the price of most goods and services and the end-consumer ultimately bears the cost. As an entrepreneur, understanding VAT is crucial if you sell products or services, because you might need to charge this tax and remit it to the state. It’s also important for reclaiming VAT on your business purchases.
VAT registration – when is it required
In Estonia, you are obligated to register as a VAT payer once your company’s taxable sales exceed €40,000 in a calendar year. This threshold applies to turnover in Estonia (and generally EU-wide sales that would be taxed in Estonia).
If your sales are below €40k, you don’t have to register – you can issue invoices without VAT. However, you may choose to register voluntarily even earlier, for instance to reclaim VAT on expenses or to appear as a VAT-registered business to partners.
Once the threshold is crossed, you must apply for VAT number promptly (there are penalties if you fail to register on time but keep selling with no VAT).
For non-resident companies (businesses not established in Estonia) making taxable supplies in Estonia, note that the €40k threshold doesn’t apply – a foreign company generally must register for Estonian VAT from its first taxable sale in Estonia.
Example: if your Estonian OÜ hasn’t hit €40k but you start an additional business as a foreign company selling in Estonia, that foreign entity would need VAT registration immediately. Similarly, if you as a non-EU business are using Estonia for certain EU schemes, you might have to register (potentially with a fiscal representative). But in our context, as an SME with an Estonian company, focus on the €40k threshold for your OÜ.
Special case – digital services B2C: If your company provides digital services (like software-as-a-service, downloadable apps, streaming, etc.) to consumers in other EU countries, EU VAT rules require you to charge VAT where the customer is located.
There is a small pan-EU threshold of €10,000 for cross-border B2C digital services (and other cross-border B2C sales). Below that total annual EU sales amount, you can opt to treat those sales the same as domestic and just charge Estonian VAT (or none, if you’re not registered yet).
Once you exceed €10k in B2C services to EU consumers, you need to apply the VAT of each customer’s country. This is where the One Stop Shop (OSS) comes in (more on that shortly).
Example: if an Estonian software company sells €15,000 worth of app subscriptions directly to consumers across various EU countries, it must charge each customer their local VAT rate – an Italian customer pays Italian VAT, a French customer pays French VAT, etc. Rather than register separately in IT, FR, and so on, the company can use the OSS scheme via Estonia to report all those foreign VAT amounts in one consolidated filing.
VAT rates in Estonia
Estonia currently has three main VAT rates, and it’s essential for businesses to apply the correct rate to every transaction and keep up with changing rules. The best way to ensure full compliance—from adding the right VAT rate on invoices to filing VAT returns—is to use Enty, which automates and handles the entire VAT process for you.
Current VAT Rates in Estonia:
Standard rate: 22%
Applies to most goods and services (consulting, restaurant meals, electronics, software, etc.).
The standard rate increased from 20% to 22% on January 1, 2024.
Note: Another rise to 24% is planned for July 1, 2025, as a temporary measure. Always double-check the current rate.
Reduced rate: 9%
Applies to certain goods and services, including:
Books, textbooks, periodicals (newspapers, journals)
Many pharmaceuticals and medical devices (if listed officially)
Some accommodation-related services (until end of 2024)
Most SME offerings, such as software, consulting, and typical retail goods, do not qualify for this reduced rate.
Intermediate rate: 13%
Introduced from January 1, 2025, for accommodation services (e.g., hotel stays).
Until the end of 2024, accommodation is taxed at 9%, but from 2025 onward, it increases to 13%.
Zero rate (0%)
Applies to:
Exports (goods sold outside the EU, with proper documentation)
Intra-EU supplies to VAT-registered businesses in other EU countries (B2B transactions)
Certain international services (e.g., transport, services related to export goods, etc.)
Some industries—like insurance, healthcare, education, and financial services—are VAT exempt (they do not charge VAT and generally cannot reclaim input VAT).
Why Use Enty for VAT?
Enty ensures you apply the correct VAT rate on every invoice—automatically.
The platform handles all aspects of VAT compliance: from proper invoicing to preparing and submitting your VAT returns on time.
This minimizes your risk of errors, missed deadlines, or costly penalties, letting you focus on running your business.
In summary: Staying compliant with Estonia’s VAT system can be complex, especially as rates change and exceptions apply. With Enty, you can trust that your VAT is always managed correctly and efficiently.
When do you charge Estonian VAT vs no VAT? This depends on who your customer is and where they are
Domestic sales (Estonia)
If you sell to anyone in Estonia and you’re VAT-registered, you charge Estonian VAT (22% or appropriate rate) on the sale, unless a specific exemption applies.
The customer, if also a business, can usually reclaim it on their VAT return, so B2B inside Estonia the VAT is neutral (but you must still charge it). If you are below the €40k threshold and not registered, you don’t add VAT on your Estonian sales at all (until you register).
B2B sales to other EU countries
If you sell goods or services to a VAT-registered business in another EU member state, in most cases no Estonian VAT is charged. Instead, the reverse charge mechanism applies: you put the buyer’s valid VAT number on the invoice and state “VAT reverse-charged” (in essence, you are doing a 0% intra-Community supply for goods or “VAT not charged under Article 44 of VAT Directive” for services).
The buyer will self-account for VAT in their country (they’ll both charge themselves and deduct it, which for them typically nets out to zero owed). For example, your Estonian tech company provides a €5,000 software consulting service to a German company (with a VAT number). You do not add Estonian 22% VAT.
The invoice lists the German client’s VAT ID and a note that the service is subject to reverse charge. The German company will handle German VAT on their end. Important: You must verify the client’s VAT number (e.g. via the VIES system) and keep record, and you’ll need to report such sales in the monthly VAT statement and the EU sales listing (VIES report) by the 20th of the next month. This reporting is how tax authorities ensure VAT isn’t lost. If your EU customer is not VAT-registered (e.g. a small business or individual), then this is treated as B2C – see next point.
B2C sales to other EU countries (goods)
If you sell goods online to consumers in other EU countries (distance selling, like e-commerce retail), you generally must charge VAT where the consumer is once you exceed the €10,000 cross-border threshold (shared with electronic services).
Below that, you could opt to charge Estonian VAT on all EU consumer sales. But above it, you need to apply each country’s VAT. To simplify, an Estonian company can use the OSS (One Stop Shop) Union scheme.
This means you register for OSS in Estonia (if you’re already VAT-registered, it’s an add-on), and then you file a special quarterly OSS return where you declare, for example, €2,000 of sales to France (charging 20% French VAT), €3,000 to Germany (19% VAT), etc., and you pay all those VAT amounts to the Estonian Tax Board, which then forwards the money to the respective countries.
This way, you didn’t have to register for VAT in each country where your customers are. OSS covers all intra-EU B2C services and distance sales of goods now. If you do a lot of cross-border B2C, OSS is a lifesaver administratively. If you’re below €10k, you can decide to use OSS voluntarily or just keep it simple with Estonian VAT – but once you cross that threshold in pan-EU sales, you must switch to destination VAT.
Digital services B2C (telecom, broadcasting, e-services)
This is a subset of B2C services (like mobile apps, streaming subscriptions, downloadable software for consumers). By EU law, these digital services always had the rule to tax where the consumer is. The same €10k threshold and OSS mechanism described above apply to them as well (since 2019, micro businesses got that threshold; prior to that it was from €1). So effectively, treat them the same as goods for OSS purposes.
Sales to non-EU customers
If you sell goods to a customer outside the European Union, that’s an export – you don’t charge Estonian VAT (rate 0%). If you provide services to a client outside the EU, the VAT treatment depends on the type of service, but many services provided to a non-EU client will fall under “place of supply outside EU” and thus no Estonian VAT (effectively outside scope or 0%).
For example, if your Estonian company is designing a website for a client in the USA, you would typically not add Estonian VAT because the service is consumed outside the EU. (There are exceptions for certain services related to real estate, events, or passenger transport – those have special place-of-supply rules. Most B2B services to non-EU are no VAT from Estonia’s perspective.)
Purchases of services from abroad (import of services)
If your Estonian company is VAT-registered and buys services from a foreign provider (say a software license from a US company, or consulting from a UK freelancer), you may need to apply reverse charge on your side as the buyer. In Estonia, importing a service from abroad requires you to self-assess Estonian VAT on that service (at 22% as if you were both the supplier and recipient) and at the same time you can deduct it as input VAT (if it’s a business expense), so it often washes out to zero payable.
This is more a compliance step – you declare the purchase under both output and input on your VAT return. If you are not VAT-registered and buy services from abroad, be careful: exceeding certain ceilings can force you to register. For instance, if a non-VAT-registered company buys substantial services from foreign firms, it might trigger an obligation to register for VAT in Estonia because you’re effectively the one owing the VAT (this is a complex area – but as a rule, if your non-registered company starts dealing internationally, it’s usually time to register voluntarily).
Imports of goods
If your company imports goods from outside the EU (e.g. bringing in equipment from the USA or China to Estonia), you will pay import VAT (and any customs duties) at the border. As a VAT-registered entity, you can usually reclaim the import VAT on your next return (so it’s refundable).
Estonia’s customs and tax system is efficient; you might also be able to use deferred accounting for VAT. If not VAT-registered, the import VAT is a cost (though you could later get registered and reclaim if it was for business use).
OSS and IOSS schemes
We discussed OSS for intra-EU sales. There’s also IOSS (Import One Stop Shop), which is a special scheme for selling goods to EU consumers when the goods are shipped from outside the EU, with a value under €150 per parcel. If you run, say, a dropshipping e-commerce where products ship from a non-EU warehouse directly to consumers in various EU countries, IOSS allows you to collect the VAT from the customer at the point of sale and remit it through a single IOSS return, so that the goods can clear customs in the EU without each customer having to pay import VAT on delivery.
IOSS is optional but can vastly improve customer experience if relevant to your business. An Estonian company can register for IOSS in Estonia (it will get an IOSS number to put on packages). If you’re not doing physical goods from outside EU, you likely don’t need IOSS. But it’s good to know it exists as part of the EU’s modern e-commerce VAT package.
VAT compliance and reporting
Once registered, your company must charge the appropriate VAT on sales, issue invoices with proper VAT details, file returns, and pay the tax on time:
Invoice requirements
Estonian VAT law requires certain details on invoices, such as your company’s name, address, VAT number, the customer’s details, description of goods/services, date, the VAT amount and rate applied, etc. If you’re using reverse charge, the invoice must state the applicable article or “reverse charge – VAT not charged”. Good invoicing practices and documentation are important, especially for cross-border sales (you may need proof of transport for 0% intra-EU goods, etc.).
VAT return frequency
In Estonia, the default reporting period is monthly. You must submit a VAT return for each calendar month by the 20th of the following month. For example, January’s VAT return is due by February 20. This return includes total sales, total purchases, output VAT collected, and input VAT to credit. Payment of any VAT due is also due by the 20th.
The system is all electronic via the e-MTA (e-Tax) portal. In some cases, very small businesses might be allowed quarterly returns (Estonia historically allowed quarterly filing if your annual taxable turnover is below a certain limit and you apply for it), but as a new entrepreneur it’s safest to plan for monthly filings unless you have confirmation of a quarterly schedule. Most SMEs file monthly because if you have even one EU cross-border transaction, you’ll need monthly filing for the EU sales report anyway.
EU Sales List (VIES report)
When you have B2B sales to other EU countries at 0% (intra-Community supply of goods or certain services), you must file a report of those transactions. In Estonia this is often an annex or a separate report (sometimes called Form KMD INF). It’s also due by the 20th of the next month. You list each customer’s VAT number and the total amount sold to them in that month. This report is how Estonia communicates to other countries to ensure the buyer reported corresponding acquisition. It’s mandatory if you had any EU 0% B2B sales.
Reverse charge on purchases
For services or goods where you as the buyer must reverse charge, you will include those in your VAT return (both as output and input). The tax software or your accountant will help with this. It’s essentially a line where you declare “services received from abroad, €X, output VAT €Y, input VAT €Y”.
VAT refunds
If your input VAT (the VAT you paid on business purchases like equipment, software, etc.) exceeds your output VAT (the VAT you collected from sales) in a given period, you’ll have a VAT credit. Estonia allows offsetting it against other tax liabilities or refunding it. VAT refunds are typically processed quickly (within a month or so) if everything is in order. New companies often have refunds in early stages (buying lots of setup materials, but sales are small). The Tax Board may audit or ask for documents if you consistently claim large refunds, but the system is quite straightforward if your documentation is sound.
Record-keeping: You need to keep all invoices and documents related to VAT for at least 7 years in Estonia.. This is in case of audit. Digital records are acceptable (fitting with Estonia’s e-governance style).
Intrastat: If your company’s physical trade in goods with other EU countries exceeds certain thresholds (e.g., shipping goods in or out over ~€200,000/year), you have to file Intrastat reports – statistical declarations of goods volumes. This is not a tax, but a stats requirement. Many service companies or small traders won’t hit the threshold, but be aware if you do a lot of importing/exporting goods within the EU.
VAT for Estonian SMEs: Key Takeaways
Monitor your sales: Track your turnover to know when you must register for VAT (the threshold is €40,000 per year).
Register on time: Once required, register promptly as a VAT payer with the Tax Board.
Apply the correct VAT rate: Always charge the right VAT rate, which depends on what you’re selling, who your customer is, and where they’re located.
Keep proper invoices: Maintain clear, accurate invoicing—this is essential for compliance and VAT deductions.
File and pay on time: VAT returns are generally due by the 20th of each month.
If you’re running a cross-border digital or e-commerce business, use the OSS (One-Stop Shop) scheme to streamline your VAT obligations across multiple EU countries.
While VAT rules can seem daunting at first, Estonia’s online tax system and harmonized EU rules make ongoing compliance much more straightforward. There’s also plenty of official help: the Estonian Tax Board offers English-language guides and customer support for new businesses.
Why use Enty?
Enty makes VAT easy and stress-free. The platform automates everything from selecting the right VAT rate for each invoice to preparing and submitting your monthly VAT returns. You get:
Automatic compliance with changing VAT rates and rules
Hassle-free, accurate invoicing
On-time VAT filings—no missed deadlines or late fees
Friendly support that actually helps
With Enty, you can focus on growing your business, knowing all your VAT obligations are handled by experts. It’s the smart, modern solution for busy entrepreneurs who want to get VAT right the first time—every time.
2.4 All About Payroll Taxes
If your Estonian company has people working for it – whether that’s you as the founder, or other employees – you need to understand payroll taxation. Estonia’s system is simple in that taxes are mostly flat-rate, but you must withhold and contribute the correct amounts and file reports diligently. This section covers salaries, board member remuneration, and how different payroll components work.
When paying any individual through the company, there are four main types of charges to consider:
Personal Income Tax - 20%
Social Tax – 33%
Unemployment Insurance (UI) – 0.8% employer and 1.6% employee
Mandatory Funded Pension – 2% employee (if applicable)
Personal Income Tax (PIT) in Estonia: The Basics
Flat rate: The standard PIT rate for residents is 20% (rising to 22% from 2025).
How it works: Employers withhold PIT from employees’ gross salaries and transfer it to the Tax Board each pay period.
Basic tax allowance:
All residents are entitled to a universal tax-free allowance of €8,400 per year (€700 per month), which reduces their taxable income.
Typically, an employee tells one employer to apply this allowance. The employer then deducts the allowance from monthly earnings before calculating PIT.
Example: If an employee earns €1,500/month and uses the €700 allowance, only €800 is taxed, so PIT is €160 at 20%.
The allowance system switched to a universal flat amount in 2024, simplifying calculations for everyone.
Non-residents: Non-resident employees generally do not receive the allowance. Their PIT is calculated on their entire gross salary at 20% (or 22% from 2025).
Employer’s responsibility: The company is responsible for calculating, withholding, and remitting the PIT to the Tax Board on behalf of employees.
Social Tax – 33% (employer’s obligation)
Rate and Who Pays: Social tax is set at 33% and is paid by the employer, on top of the employee’s gross salary. It is not deducted from the employee’s pay—this is a direct company expense.
Purpose: This tax funds the state pension and public health insurance for employees.
Example: For a gross monthly salary of €1,500, the employer pays an additional €495 in social tax (33%).
Minimum Requirement:
There is a minimum base for social tax each month per employee or board member.
Even if someone works part-time and earns less than the minimum, the company must pay at least 33% of the set base.
2024: Minimum base is €725 → minimum social tax per month is €239.25
2025: Minimum base is €820 → minimum social tax per month is €270.60
This ensures every registered worker has health coverage.
Multiple Employers: If an employee has several employers, together they must cover at least the minimum social tax. With proper reporting, the obligation can be split, but often each employer simply pays the minimum.
Board Members: Directors are also subject to the minimum social tax if they receive any remuneration that month.
No Maximum Cap: There is no upper limit: social tax at 33% applies to the entire gross salary, no matter how high it is.
In summary, social tax is a significant cost for employers in Estonia, ensuring employees’ access to health and pension benefits, with mandatory minimums regardless of part-time status.
Unemployment Insurance (UI) – 0.8% employer and 1.6% employee
This is mandated by the Estonian Unemployment Insurance Fund. The employer contributes 0.8% of gross and the employee contributes 1.6%, making a total of 2.4% going into the unemployment fund The employee’s share is withheld from salary.
For instance, for €1,500 salary, employer pays €12 and employee gets €24 deducted for UI. These rates are uniform and will remain through 2026. Some individuals (like board members or certain contract types) might not be subject to unemployment insurance – it generally applies to employees under employment contracts. We’ll clarify that soon.
Mandatory Funded Pension – 2% employee (if applicable)
This is also known as II pillar pension. Estonian residents born 1983 or later were automatically enrolled until recently (and others opted in), but since 2021 it’s voluntary – people can choose to stay or leave the II pillar.
If an employee is participating, the employer must withhold 2% from their gross pay for the pension fund. The state (via social tax) contributes an additional 4% on their behalf (it doesn’t cost the employer extra; 4% of the 33% social tax is allocated to that person’s pension, the remaining 29% goes to health/pension budget).
So, if your employee hasn’t opted out of the funded pension, you’ll deduct 2%. If they have opted out (or never had to join), you simply don’t deduct it. Foreign employees who are not Estonian residents typically are not in this system at all, so usually no 2% for them. It’s good to check each employee’s status – the default for a local hire under 60 years old is likely they have it, unless they took the steps to opt out.
Employer vs. employee obligations
The beauty of the system is that the company handles almost everything through payroll. The employee doesn’t have to separately pay anything; you withhold their taxes (PIT, 1.6% UI, 2% pension) from their paycheck and you directly pay the employer taxes (33% social, 0.8% UI).
The company then remits all these amounts to the state. From the employee’s perspective, they receive their net salary after those withholdings. As an employer, it’s important to budget the “gross-to-total” costs. For example, if you agree on a €1,000 gross monthly salary with an employee, the breakdown (assuming they use the basic exemption fully) would roughly be:
Gross €1,000.
Employee pays: 20% PIT on (1000-700) = €60 (if basic exemption applied; if no exemption, €200), plus 1.6% UI (€16), plus 2% pension (€20) if applicable.
Net pay to employee: around €904 (if using full exemption; otherwise ~€764 without exemption and with pension).
Employer pays on top: 33% social (€330) and 0.8% UI (€8) = €338.
Total cost for employer: €1,338 in this scenario, to give employee ~€904 net.
The company needs to file these in the monthly TSD declaration and pay by the 10th of the following month emta.ee.
Board member remuneration vs. employee salary
In Estonia, company directors (board members) are not automatically employees. They can be compensated via a board member fee (sometimes called director’s fee or management remuneration) which is not an “employment contract” but is still considered taxable income. It’s crucial for foreign founders to grasp the difference:
Employee Salary:
Employment contract is required.
Full taxes apply: 20% personal income tax (PIT), 33% social tax, 0.8%–1.6% unemployment insurance, and 2% pension contribution.
Employees must be paid at least the Estonian minimum wage (€725/month in 2024, likely higher in 2025).
Employees are entitled to benefits like paid vacation and sick leave.
Work location matters:
- If the employee works in Estonia, Estonia taxes the salary.
- If the work is performed abroad (e.g., Spain), taxes usually apply in the country of residence — the company might need to register as a foreign employer.
Board Member Remuneration:
No employment contract needed — board members are compensated for management duties.
Taxes: 20% personal income tax + 33% social tax, unless an exemption applies.
No unemployment insurance or II pillar pension contributions apply.
EU/EEA/Swiss residents with an A1 certificate (confirming social security in their home country) are exempt from paying Estonian social tax — only 20% PIT is withheld.
Non-EU residents or board members without an A1 must pay the full 33% social tax in Estonia.
Common among e-resident entrepreneurs and foreign founders.
Which to Choose?:
Living in Estonia:
Founders often use a board fee instead of a full employment contract for flexibility but must still pay social tax. Authorities expect some regular remuneration if the company is active — otherwise, dividends might be reclassified as salary.Living abroad (EU/EEA):
Paying a board fee with an A1 certificate is highly tax-efficient — only 20% PIT applies in Estonia without social tax.Living abroad (non-EU):
Board fees are allowed, but social tax must be paid. Some non-EU founders avoid paying salaries or fees and take only dividends, but this carries risks if the work resembles full-time management
Special Situations: Split Compensation
Some founders split their income between:
Salary for technical work performed abroad (taxed in the country of residence),
Board fee for management work linked to Estonia (taxed in Estonia).
Example: A founder living in France might have a French salary and a small Estonian board fee.
Such splits require careful planning to avoid tax conflicts and should be well-documented.
Practical Takeaways for owners/founders:
If living in Estonia: A small board fee (or board fee + salary) is common and expected if managing the company actively.
If living abroad (EU/EEA): Use an A1 certificate to reduce tax costs — board fees become very efficient.
If living abroad (non-EU): Be cautious — board fees will trigger social tax unless structured carefully. Dividends alone can work but carry audit risks if unpaid management work is suspected.
Always pay yourself reasonably if the company is operational — even a small board fee helps demonstrate compliance.
Not sure how to pay yourself as a business owner, or considering how best to hire and pay your first employee? Our team is always ready to provide tailored consultations—helping you choose the most tax-efficient and compliant way to handle owner compensation, payroll, or hiring decisions.
With Enty, you get proactive support and smart advice, so you can focus on growing your business while we handle the details. Reach out anytime—our experts are here to help you make the right financial moves for your company.
Other payroll considerations for SMEs:
Annual reports and salary decisions: If you’re the sole owner, you don’t need a formal employment contract to pay yourself, but you should have a board decision about your remuneration. Keep corporate resolutions or at least document in meeting minutes what salary or fee is approved for board members. This is a good governance practice.
Payroll process: Each month calculate gross, apply deductions (PIT, UI, pension) and contributions. Pay net to employee by agreed payday. By the 10th of next month, pay all taxes to “Maksu- ja Tolliamet” (Tax Board) and file the TSD. Late payment of these taxes can incur interest, and failing to declare can result in penalties, so it’s wise to set reminders or automate via accounting software or a payroll service.
Benefits and reimbursements: Some costs, like business travel expenses, can be reimbursed to an employee without tax (with proper receipts and within reasonable limits). But be cautious: if you start reimbursing lots of things or giving perks (like use of a company car for personal trips, or paying a daily allowance without travel), those could be deemed taxable benefits. For example, a company car used personally would require the company to pay fringe benefit tax (which is the 22%+33% on the value of that benefit, as mentioned in 2.1).
Contractors vs employees: If you hire people as independent contractors (not on payroll), you generally don’t withhold taxes – they handle their own. However, you must be sure they are legitimately contractors (have their own company or are registered as self-employed abroad). If they’re essentially working like an employee under your direction, they might legally be considered an employee. Misclassification can lead to liabilities. Estonia is quite straightforward on this, but if your contractor is in another country, that country might claim you should register as an employer there. Always clarify the status for each person working for your company.
To sum up payroll in Estonia: flat income tax, fixed social rates, and the employer does the heavy lifting of withholding and contributing. The system is electronic and efficient, with most filings done online with pre-filled data after you input the salary details.
As an SME founder, decide whether to be an employee, board member, or both, and plan your taxes accordingly. Make use of EU provisions (like A1 certificates) if you qualify, to avoid double paying social taxes.
And remember the obligation to pay at least a minimum social tax each month for active personnel – you don’t want to accidentally skip that and fall out of compliance emta.ee. When in doubt, consult a local payroll accountant, especially if you have cross-border situations.
2.5 FAQ – Estonian Taxes
Q1: Does e-Residency make me an Estonian tax resident?
A: No – e-Residency is a digital ID and access to services, not a tax residency. Your Estonian company is a tax resident of Estonia (because it’s established under Estonian law), but you personally remain a tax resident of your home country unless you actually relocate to Estonia. Simply managing an Estonian OÜ from abroad does not shift your personal tax residency to Estonia, and you won’t file a personal tax return in Estonia just for being an e-resident. However, if you move to Estonia and spend >183 days a year there or make it your main home, you’d become a tax resident personally and then would declare worldwide income to Estonia (using that €8,400 allowance, etc.). For purely digital e-residents abroad, you pay yourself in the ways discussed (salary/board fees/dividends) and handle personal taxes in your country. Always separate the company’s tax obligations in Estonia from your own tax obligations at homelearn.e-resident.gov.ee.
Q2: If my company is Estonian, can my home country tax the company’s profits too? (Permanent Establishment concerns)
A: This is an important consideration. By default, an Estonian company is only subject to Estonian tax on its profits (and distributions). But if you run the company’s operations entirely from another country, that country might argue your Estonian company has a permanent establishment (PE) or even effective management there. For example, if you live in Country X and do all work from X, meeting clients there, etc., the tax authority in X could say: “hey, even though this company is Estonian, the real business is carried out here, so the profits should be taxed here.” Many countries have treaties that define when a PE is created – often a fixed place of business, or if the company is effectively managed from there. Estonia itself does not impose a “management & control” test for corporate residency (so the company remains Estonian resident regardless), but other countries might still tax the local activities. In practice, this means you could face corporate income tax abroad on your Estonian company’s earnings, then exempt or credit it in Estonia. The Estonian Tax Board even gives an example: An e-resident’s Estonian company managed from abroad will probably have a PE abroad, and the foreign country will tax that profit; Estonia would then not tax the dividends on those profits to avoid double taxation emta.ee. To manage this, consult a tax advisor in your country. Some entrepreneurs mitigate PE risk by having some business substance in Estonia (e.g., a part-time employee or using Estonian business service providers) or at least by not signing all contracts in their home country. Each case varies. Key point: e-Residency isn’t a loophole to avoid your home country’s tax if your business activities are essentially carried out at home. It’s meant to simplify administration. So ensure compliance with both jurisdictions – you may need to file tax returns in your country for the PE of the Estonian company while still enjoying Estonia’s deferred-profit system (usually you’d get relief so you don’t pay double).
Q3: How are dividends taxed for me personally?
A: If you’re an Estonian tax resident individual, dividends from an Estonian company are exempt from additional income tax (since the company paid the CIT). You would list the dividend on your annual return, but then apply an exemption so it’s not taxed again. If you’re a non-resident individual, Estonia does not tax your dividend at all at the personal level – you receive the net amount after the company’s CIT. However, you must check your own country’s rules: most likely, you need to declare that dividend as foreign income. Many countries will tax it at their dividend tax rate. As mentioned, since Estonia doesn’t impose a withholding tax (WHT) on the dividend, you might not have a direct tax credit for the Estonian CIT the company paid. For instance, if you’re a tax resident of the UK and you get €10,000 in dividends from your Estonian OÜ (which paid €2,821 Estonian CIT on it), the UK will ask you to report €10k dividend income. The UK won’t credit the €2,821 because that was paid by the company, not you, and Estonia didn’t withhold anything from your payment. You’d then pay UK dividend tax on the €10k (which might be, say, 7.5% or 32.5% depending on your bracket). There are some exceptions: a country might have a territorial system or participation exemption that lets you exclude it. But generally, expect some personal tax in your country on those dividends. Double taxation? Yes, it can happen: effectively ~22% in Estonia at corporate level and then ~15% (for example) at personal level abroad = ~37%. This is why some owners favor taking some salary to use allowances or avoid high personal tax, or even consider moving tax residency to Estonia if it makes sense (where only the 22% would apply). If you move to Estonia, local dividends would be just 22% at company and 0% personal as noted. One more note: if your country has a tax treaty with Estonia, often the treaty article on dividends allows Estonia to levy up to a certain WHT (usually 5% or 15%) and then your country would credit that. But Estonia levies 0% WHT, so that treaty provision doesn’t get utilized. Essentially Estonia shifted the tax to the company level. Only in the case of the old 14% reduced rate + 7% WHT (now abolished) did treaties matter – that 7% was creditable for foreigners. Now with 22% at company and 0% WHT, treaties don’t provide relief for the corporate tax.
Q4: Do I have to pay myself a salary or board fee as an owner?
A: Legally, no – there’s no requirement that a shareholder or board member must draw remuneration. You could technically not pay any wages or fees and only take dividends when you want. However, there are practical and tax risk considerations: If you do a lot of work for the company and never take a salary/fee, the Tax Board might say those dividends you took are actually concealed wages (because you performed work to generate that profit). In that case, they could demand that social tax be paid on dividends retroactively. To be safe, it’s recommended to pay yourself at least some reasonable amount if the company is active. It doesn’t have to be huge – just defensible. Many starting entrepreneurs keep it low to conserve cash (e.g., a token board fee of a few hundred euros monthly) and then take more as dividends since they’re taxed lower (no social tax). Estonian authorities have hinted that a company with only dividends and no salaries, especially with a single active owner, raises red flags. So while not mandated, paying yourself a salary/fee is a good practice to show that you differentiate between labor income and return on investment. Another angle: paying yourself a salary makes you eligible for local social benefits (health insurance via Tervisekassa, accumulating state pension credits, etc.). If you plan to live in Estonia or spend time there, having health coverage is a big plus, which you only get by contributing social tax (or by paying voluntary health insurance contributions if you’re not employed). For e-residents abroad with health coverage back home, this is less of an incentive, but for those physically in Estonia, it’s key. So bottom line: you don’t have to per law, but it’s wise to. If you truly are just a passive owner (say you invested in an Estonian business but don’t work in it), then taking only dividends is fine since you’re not performing services.
Q5: What is the tax treatment of expenses I incur personally for the company?
A: If you as an owner pay something from your own pocket for the company (like you paid a software license with your personal card), you should file an expense report and the company can reimburse you. Such reimbursement is not considered income (so no tax) as long as it’s a legitimate business expense with receipts. It’s best to keep business and personal finances separate to avoid confusion. If the company reimburses something that isn’t clearly business-related, that could be seen as a hidden dividend or benefit. Always document the business purpose. Conversely, if the company pays for something personal of yours, that’s a taxable fringe benefit (company pays tax on it as mentioned). A common example question: “Can my Estonian company cover my travel costs to a business conference and are those deductible?” Yes – travel, accommodation, daily allowances (within limits) for business travel are allowed and not taxable for you, provided you have supporting documents and the trip was work-related. The company can even pay you a daily allowance (per diem) for international business travel, up to certain rates, without tax. These need to be reported on the TSD (but marked as non-taxable). If you exceed the limits, the excess becomes taxable. Keep an accountant’s guidance handy for such cases.
Q6: Are there any tax incentives or special regimes for small businesses?
A: Estonia doesn’t have a lot of complicated incentives – the biggest “incentive” is the system itself (no tax until distribution). There’s no reduced small business corporate tax rate (since profit isn’t taxed annually anyway). There used to be a startup incentive where certain young companies could get some relief on the social tax minimum if the founder was the only worker, but that was discontinued. However, starting 2025, the EU is introducing a new SME VAT exemption scheme: if you are a small business from another EU country doing a bit of business in Estonia, you might not need to register here until EU-wide turnover exceeds €100k globalvatcompliance.com. But for an Estonian company itself, the domestic €40k VAT threshold is the main relief for small turnover firms. There are also some state support programs (grants, etc.) but those are outside the tax code. One tax benefit to mention: if you reinvest profits into research & development or certain assets, you still don’t pay CIT (because no distribution) – effectively Estonia encourages reinvestment by not taxing profits that are plowed back into the business. Also, Estonia has no annual capital tax or net worth tax. No property tax on business assets except land value tax on real estate land. And no local taxes like payroll tax in cities – it’s all central. That simplicity is a perk for SMEs. Lastly, if you eventually sell the company or its shares: Estonia does not tax capital gains of non-residents on selling Estonian company shares (except if most of the company’s assets are Estonian real estate). So a foreign owner can sell their company and not owe tax in Estonia on the gain – you’d handle that in your home country. This isn’t day-to-day, but it’s good to know for exit planning.
Q7: How does Estonia tax the digital economy (cryptocurrency, streaming, etc.)?
A: For corporate entities, crypto or digital assets are treated as normal property: if your company trades crypto, profits are not taxed until you take them out as dividends. If your company accepts crypto as payment, you should convert it to EUR for accounting or at least record the EUR value and that will count as revenue subject to normal VAT rules if applicable. Estonia has been quite straightforward: there are clear guidelines that crypto trading gains realized by a company become part of its profits (again, only taxed at distribution) and VAT does not apply to cryptocurrency exchanges (crypto is treated akin to currency or financial instrument for VAT – usually exempt). If you’re an e-resident doing NFT business or similar, the key is determining if what you sell is a service (likely yes, digital service, so maybe subject to VAT like digital services). The “digital economy” concerns are thus not about special taxes, but about applying existing VAT and income tax rules to new tech. On things like streaming or software-as-service to global users, we already covered VAT OSS for B2C. For income tax, it’s business as usual – your profit sits untaxed until you pay it out. There isn’t a digital services tax or anything in Estonia (some countries have those, Estonia does not).
Q8: Are there any local taxes like municipal or state taxes apart from those discussed?
A: For most SMEs, no. The taxes we covered (CIT, VAT, social, etc.) are national. There is a land tax if you own real estate (land) in Estonia – the rates are low and set by local authorities per land value. If your SME buys property, it will get a land tax bill annually (often a few tenths of a percent of land value). There’s no separate business tax, no payroll tax by city (some countries have that; Estonia doesn’t). There are excise taxes if you deal in alcohol, tobacco, fuel or electricity, etc., but that’s specific. Also, if you own a car in the company and use it privately, instead of a car tax, Estonia uses the fringe benefit tax method for private use. There’s talk in the EU about potential future digital service taxes or minimum corporate taxes, but currently Estonia’s regime stands as described.
Q9:“Should I register for VAT even if I haven’t hit €40k yet?”
A: Many e-resident entrepreneurs do register early, especially if they deal with other EU businesses (who might prefer you have a VAT number for reverse charge) or if they have startup costs with VAT they want to reclaim. Voluntary registration is allowed. Just note once registered, you must comply with filing even if you have zero sales in a month.
Q10: “What if I sell only to foreign businesses and not in Estonia at all?”
A: If all your sales are B2B outside Estonia, technically you might not reach the threshold of taxable Estonian turnover because those sales are zero-rated. However, if you purchase services from abroad or want to reclaim input VAT, you may end up registering anyway. Also, the law could consider certain cross-border activities as triggering registration. It’s wise to register if you have any notable business activity, even if domestic sales are low, to stay on the safe side and be able to fully comply (for instance, to properly account for reverse charge on your expense invoices).
Q11: “How does VAT work with e-Residency and being abroad?”
A: If your company is Estonian, VAT is about the company’s transactions, regardless of where you (the owner) live. You will use the Estonian e-Tax portal to submit returns online. It’s very digital-friendly – you can do it from anywhere. Just remember the rules of what VAT to charge depend on the location and status of your customers, not your personal location.
Q12: “What about VAT on things like Google/Facebook Ads or other services I buy?”
A: If Google (Ireland) charges your company for advertising and your company provided a VAT number, they typically won’t charge you Irish VAT – instead you must reverse charge it in Estonia (output and input). If you didn’t provide a VAT number (say you’re not registered yet), Google will charge you VAT which becomes a cost (and might hint you should have been registered). So once you start incurring such costs, it’s usually time to get a VAT number.
