Generally, residents are taxed on their worldwide income in their state of residence. This means that the country where you submit your annual personal income tax returns usually wants to tax income you have earned from everywhere in the world. If you are unsure of where you are a tax resident, read Individual tax residency article first.
NB: Always seek advice from a local professional if you are unsure of tax rules applicable to your situation. The information provided here is only of general nature and should not be relied upon.
Normally there are also both domestic as well as bilateral measures in place to avoid or mitigate double taxation if this income has already been subject to tax in the country where you received it from, i.e. the source state.
For that reason, you should have proof of taxes paid or taxes that have been withheld in Estonia readily available to be presented to your local tax authorities. Local tax treatment could be different for each type of income (dividend, salary, directors' fee) and it might also be affected by what has been agreed in the tax treaty your country has concluded with Estonia.
The most common method for alleviating double taxation is the credit method. This means that your state of residence might allow you to credit your domestic tax liability with the taxes that have been paid in Estonia.
If your country of residence exempts foreign income on condition that tax has been paid or withheld in the source state, then having some tax paid or withheld in Estonia could even be good news. If your country of residence uses the exemption method for foreign dividend income, then the 7% Estonian WHT might end up being the final tax on this item of income. Note that the corporate income tax paid by your Estonian company is not taken into account for your personal tax calculation purposes.
It is not uncommon for directors’ fees, which have already been subject to tax elsewhere, to also be exempted from local income tax, but this should be confirmed with local tax experts.
Please note that the information presented in these guidelines is a generalization of a complex set of rules depending entirely on laws applicable in your state of residence and the treaty it has concluded with Estonia and is therefore only for illustrative purposes.
If your state of residence has a treaty with Estonia allowing for a lower WHT rate than 7%, then you would need to obtain a Certificate of Residence from your local tax authorities or other competent authority to claim treaty benefits. Alternatively, you can fill in Estonian form TM3 and have your local authorities seal it. Countries with treaties allowing lower WHT rates are currently: 5% with Bulgaria, Israel and Macedonia; 0% with Mexico, Georgia, Cyprus, Jersey, Island of Man and the United Arab Emirates. All treaties are available at the website of the Estonian Tax and Customs Board.
Relief from double taxation - examples
Ukraine has no domestic rules in place which would help you offset foreign taxes against your domestic tax liabilities. This means that for avoiding double taxation by way of credit or exemption method, the Estonia-Ukraine tax treaty should be applied. Documentation requirements are set by responsible Ukrainian authorities. The credit is limited to the amount of tax that would be due in Ukraine on the same type of income.
Foreign income of a German resident individual is largely taxed in the same manner as domestic income. While generally credit is given on account of foreign taxes paid, then the tax treaty might require Germany to exempt certain income earned from abroad. The foreign income is usually considered when calculating your overall tax liability for German sourced income.
Although it is not possible to summarise French tax rules applicable to foreign income of French resident individuals, then on a high level, a resident is subject to tax on his/her worldwide income comparably to all domestic income.
It can be expected that employment income from Estonia is exempt from French tax although it will likely be taken into account for calculating your domestic progressive tax rate. Other types of income such as dividends, interest and directors’ fees are taxed on their gross amount in France, but credit is usually given to the extent of tax paid in Estonia.
To avoid double taxation, the requirements for treaty application should be carefully examined and followed.
(You should also be wary of your Estonian company being captured by French Controlled Foreign Company (CFC) rules that aim to attribute income earned from a foreign company to your current tax base as an individual. These rules are complex and it is advised to consult a specialist on the matter.)
This article is part of a Business Guide
This article is a part of larger set of guidelines that e-Residency project team has requested for you and that has been compiled in cooperation with AS PwC. The full version of the Business Guide will be available for download shortly.
Articles in the Knowledge Base and the Business Guide 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.