Low tax territories

There is a small set of rules aimed at transactions with companies located in low tax territories. These are defined to be states or territories which do not impose tax on the profits earned or distributed by a legal person or where such tax is less than 1/3 of the income tax which an Estonian resident would have to pay in similar circumstances. Therefore, generally, a territory with a corporate income tax rate of 6% or below would be deemed to be a low tax territory.

As an exception to the above rule, where the company located in the low tax territory derives at least 50% of income from real business activities (i.e. it is not a passive company) and/or the territory exchanges tax information with other countries, payments to such company would not be subjected to taxation under the “low tax territory” rules. 

Estonia has an example list of white-listed territories which are never considered tax havens. No EU or tax treaty country is ever considered a tax haven. The list is published on the website of the Estonian tax authorities, available in English.

By law, the following dealings with residents of low tax territories are taxable with 20/80 corporate income tax:

  • acquisition of securities (shares, bonds, etc.) issued by a legal person located in a low tax rate territory, (unless these meet certain requirements provided by the Investment Funds Act);
  • acquisition of a holding i.e. shares in a legal person located in a low tax rate territory – this generally means buying a shareholding in such a company;
  • payment of a fine for delay or a contractual penalty, or extra-judicial compensation for damage, to a legal person located in a low tax rate territory;
    If usually contractual fines are not taxed as non-business related payments, then there is a specific rule if such penalties are paid to a company located in a tax haven.
  • grant of a loan or making of advance payment to a legal person located in a low tax rate territory or acquisition of a right of claim against a legal person located in a low tax rate territory in any other manner.

Remember that the taxable period is one month and non-business related expenses should be declared on tax return „TSD“ Annex 6 by the 10th day of the month following the payment. Taxes are due by the same date. A late payment interest of 0.06% per day applies if you happen to be late with paying tax.

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. Download the full version of the Business Guide

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. 

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