Estonia is one of the most popular jurisdictions for startups. Reasons include the absolute ease of starting and running a business, access to the European market, and a convenient tax regime.
The Estonian taxation system has become so popular that other countries are adopting it. For example, in 2021, Poland introduced the option for companies to choose the tax on distributed profits, known as the “Estoński CIT”.
So, how does this Estonian-style business taxation work?
Corporate Income Tax (CIT) in Estonia
All undistributed corporate profits of Estonian businesses are exempt from taxation. Until dividends are paid to business owners, the company pays no taxes or contributions. Taxation of corporate profit in Estonia is deferred until the profit is distributed as dividends or deemed distributed.
The CIT rate on distributed profit in Estonia is 22 percent. More precisely, the tax is calculated using the 22/78 scheme (meaning 22 percent of the gross distribution or 22/78 of the net amount). This means that 22 percent is withheld from the distributed profit amount.
Example. If a company decides to distribute a profit of €100, it will pay €78 to the owner and €22 as tax. If a shareholder wants to receive a clean €100, the company must pay €28.21 in tax.
The effective Estonian tax rate is approximately 28.21 percent of the net amount received by the shareholder.
This tax is connected to the payment of dividends, but it is a tax on profit rather than on the dividends themselves. If the company owner is a tax resident of another country, the received dividends must be declared, and taxes must be paid according to the laws of the country of residence and the applicable double taxation avoidance treaty.
VAT in Estonia
VAT (Value Added Tax) is a tax applied at each stage of production and sale of goods and services, but the final consumer bears the actual burden.
Estonian VAT does not affect the company’s tax load. In Estonia, Value Added Tax is charged on the supply of goods and services where the place of supply is Estonia, on the import of goods, and on the acquisition of goods within the EU. The standard Estonian VAT rate is 24 percent, with reduced rates of 13 percent, 9 percent, and 0 percent for specific categories of goods and services.
An Estonian company must register for VAT if its annual income exceeds €40000. In some cases, the Estonian VAT registration obligation arises earlier, for example, when selling electronic services to final consumers in the EU. Voluntary VAT registration is permitted.
The Value Added Tax is calculated at every stage of sale. A business can reduce the amount of tax payable by subtracting input VAT paid on business purchases from output VAT charged on sales.
Output VAT on sales of €1000, input VAT on purchases of €700; the company pays only the difference of €300.
If output VAT is lower than input VAT, the government refunds the difference or carries it forward. Voluntary VAT registration is common for this reason. Estonia applies a reverse charge system for certain services between VAT payers within the EU. If a transaction is between parties with valid EU VAT numbers, the supplier does not add VAT to the invoice. The buyer self-assesses VAT and deducts it as input and output VAT simultaneously. For transactions outside the EU, a zero percent rate applies.
Examples
- An Estonian company issues an invoice for software development services to a German company.
The supplier requests the German client’s VAT number and verifies its validity using the official verification resource.If the number is active and belongs to the client, the supplier does not add VAT to the invoice amount. If the client company is not VAT-registered, the supplier adds 24 percent to the invoice amount.
- An Estonian company issues an invoice for software development services to a U.S. company.
In this case, the payment originates from outside the EU, so the supplier does not include VAT in the invoice.
The VAT received by the Estonian company from such transactions is payable after deducting the value-added tax paid by the company itself.
Taxation in Estonia for the employer
Employers are required to withhold personal income tax (PIT) at a flat rate of 22 percent from salaries.
The social security contribution is 33 percent, with 20 percent allocated to state pension insurance and 13 percent used for state health insurance.
In addition to social contributions, employers must also pay and withhold unemployment insurance contributions. The unemployment insurance rates are 1.6 percent for employees and 0.8 percent for employers (employer contributions are calculated based on salaries). These contributions apply mainly to wages and payments for services provided by individuals. Current information as of 2026.
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Frequently asked questions about business taxation in Estonia
- Undistributed profits are not taxed;
- Tax is paid only when profits are distributed (dividends or deemed distributions);
- Rate: 22 percent of the gross distribution (22/78 of the net amount).
CIT is not a tax on dividends, although it is linked to their payment. Suppose a shareholder is a resident of another country. In that case, they must declare the received dividends and pay taxes in accordance with the laws of their country of residence and any applicable double taxation treaty.
Tax laws vary by country, double taxation so to understand the overall tax burden, it is recommended to consult a tax advisor.
- Mandatory registration for all companies with annual revenue exceeding €40,000;
- Voluntary registration is possible, often to claim tax credits;
- Mandatory registration may apply before reaching the threshold, for example, when selling electronic services to final consumers in the EU.
An Estonian business must charge VAT to the client by adding 24 percent to the invoice amount. The company can deduct input Value Added Tax (from purchases) from output VAT (from sales) and pay the difference to the state. If output VAT is less than input VAT, the state refunds the difference.
