How to calculate income tax in Estonia

Official tax rate for the income tax in Estonia is 22%. But it is not that simple.

Effective tax rate

According to Income Tax Act of Estonia – the tax rate is 22%. But before applying this tax rate, the taxated amount shall be divided with koeff 0.78 and only then 22% rate shall be applied.

So the effective tax rate is: 22 / 78 * 100% = 28.205%.

Calculation of income tax

Lets imagine that Estonian company had a great financial year and now its management wants to distribute a huge amount of 1’000.00 euro as dividends.

Then income tax shall be calculated as follows:

1000 / 0.78 = 1282,05 euro.

1282,05 * 0.22 = 282.05 euro tax.

Meaning, that paying out 1000.00 euro to shareholers, Estonian company shall also declare and pay 282.05 euro as income tax.

In any way, as long as company does not distribute profit directly or indirectly and does not pay salaries, no income tax shall be declared.

Increase by 2%

With recent legislation amendments Estonian government wanted to increase income tax by “2%” till 24%.

Meaning that the actual tax rate would have been: 24/76 = 31.579%.

So by saying “we are going to increase income tax by 2%”, Estonian government actually wanted to say that they were going to increase income tax by ~3.37%.

How to calculate income tax

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