Generally, individuals are taxed based on two principles – based on their residency and based on the source of income. The residency principle gives a country unlimited taxation rights on the worldwide income of that individual. Source taxation is limited to certain sources of income originating from a particular state.
Most of the countries in the world consider an individual as their tax resident if the person has a permanent home in their country or the person spends a sufficient amount of time in that country. The same goes for Estonia.
A private individual is considered an Estonian tax resident:
- if their place of residence is in Estonia; or
- if they stay in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months.
Since the conditions of tax residency are very similar in most countries in the world, it can happen that a private individual is simultaneously considered a tax resident by two (or even more) countries at the same time. This is not a desirable situation as can easily result in double taxation. To resolve this (and several other types of double taxation situations), countries have concluded “Conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income” (in short often referred to as tax treaties), that among other rules, resolve tax residency questions between states.
Currently, Estonia has concluded tax treaties with 63 countries in the world. All treaties are available in Estonian and English language on the website of the Estonian Ministry of Finance.
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In tax treaties, a certain test is normally included for resolving dual residency – a case where two countries claim the same individual to be its tax resident:
- Firstly, the individual is a resident in a country where he/she has a permanent home available;
- If he/she has a permanent home in both countries, the residency country would be the one where his/her personal and economic relations are closer. This means the country where his family, friends, work etc. are located.
- In case his/her vital interests cannot be determined, the residency country is the one where he/she habitually lives;
- If he/she lives in both countries, the residency country would be the one where (s)he is national in;
- In case his/her nationality is with none of the countries, the competent authorities must come to a mutual agreement about the residency.
In general, a tax residency country is one where an individual has closer economic and personal interests, where he has a home, lives, works, raises children and hosts barbecues.
Any change in tax residency must be notified to the Tax and Customs Board by submitting a specific notice - Form R.
More information is available on the Estonian Tax Authority’s web page.
The country where you are a tax resident usually has the unlimited right to tax your worldwide income and is the one which should avoid double taxation with source countries by applying relevant domestic rules or tax treaty rules.
Articles in the Knowledge Base are intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.