Why is Estonia consistently number one?
Estonia’s impressive top score is driven by four key positive features of its tax system.
- Corporate tax — Estonia has a 20 per cent corporate tax rate that is only applied to distributed profits.
- Income tax —it also has a flat 20 per cent tax on individual income that does not apply to personal dividend income.
- Property tax — Estonia’s property taxes only apply to the value of land, rather than to the value of real property or capital.
- Territorial tax system — the country’s territorial tax system exempts 100 per cent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
What Is a Territorial Tax System?
A territorial corporate tax system is one that excludes profits multinational companies earn in foreign countries from their domestic tax base. Singapore and Hong Kong are well known for their territorial corporate tax systems. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation.
The strengths of the Estonian tax system
- Estonia’s corporate income tax system only taxes distributed earnings, allowing companies to reinvest their profits tax-free.
- VAT applies to a broad base and has a low compliance burden.
- Property taxes only apply to the value of land.
- Foreign dividends are not taxed (with few restrictions)
While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories.
Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor income.
New Zealand has a relatively flat, low-rate individual income tax that also largely exempts capital gains, a well-structured property tax, and a broad-based value-added tax.
Switzerland has relatively low corporate tax rates, a low, broad-based consumption tax, and an individual income tax that partially exempts capital gains from taxation.
Luxembourg has a broad-based consumption tax and a competitive international tax system.
A truly global measure
The Tax Foundation’s International Tax Competitiveness Index (ITCI) not only showcases which countries provide the best tax environment for investment, but also details which ones offer the best tax environment for workers and businesses.
In doing so, the ITCI considers more than 40 variables across the following five core categories:
- Corporate Taxes
- Individual Taxes
- Consumption Taxes
- Property Taxes;
- and International Tax Rules
Other benefits of Estonia
When assessing locations to set up a business, entrepreneurs, investors, and freelancers should also consider non-tax benefits. Estonia’s infrastructure and reliable legal system, good business climate, simple tax system, advanced digital society as well as well-trained labour, e-Residency program, highly developed business services and fast and simple digital company registration procedures are among the “intangibles” that companies consider beyond the tax savings.
As Estonia is a member state of the European Union, companies registered there enjoy all the benefits of doing business in the European region. Creating a company in Estonia is quick and easy.
Take your first step with InCorpora
If you’re looking to establish a company in Estonia, InCorpora is ready and waiting to help.
Setting up an Estonian entity couldn’t be more straightforward, thanks to our dedicated team. Our tailored package covers all aspects of company establishment in Estonia, including:
- Setting up an IBAN for borderless banking
- Boosting substance with payroll, leased office, etc
- Giving you limited liability
- VAT registration, if required
- Producing a tax residence certificate within 2 days
- Setting up payment gateways.
Company registration takes as little as one week.
If you’re interested in starting your Estonian company, take the first step and get in touch with us today to book your free 15-minute consultation.
For more information, please contact us on info@incorpora.eu or WhatsApp (+372 5605 2020).
