Taxes payable in the case of cross-border operations
If you are engaged in business across national boundaries – i.e. in more than one country – you will also have to pay some of the taxes related to transactions and employees to foreign countries. Tax laws are different in each country, as a result of which you should familiarize yourself with the local legislation before expanding to new foreign countries.
In general, companies incur income tax obligations outside Estonia in two cases:
- If you render a service or sell goods and must pay the income received from the transactions to the country in which you conducted the transactions;
- Your company’s business activity is such that you have a permanent establishment in a foreign country. A permanent establishment is the location in which the entirety or a part of your permanent economic activity takes place.
As to the types of services and products on which income tax must be paid, you should consult the tax legislation of a specific country.
Estonia has entered into treaties with many other countries for the avoidance of double taxation and prevention of tax evasion. Business income is generally subject to taxation only if you have a permanent establishment in a country where the service is rendered.
To obtain a tax exemption or tax subsidy, an Estonian enterprise must certify that it is a resident of the contracting state – in other words, an Estonian enterprise. The Estonian Tax and Customs Board can issue a certificate of residency for three years. There are countries that have established special regulations for obtaining a tax exemption; in this case, it may not be sufficient to prove residency.
Employee’s income tax payable in the case of cross-border operations
Paying income tax when an employee is working in a foreign country depends on the employment contract, the particularities of the company’s activity and whether, as you do business, you come to have a permanent establishment abroad or not. If an employee is based in another country for more than 183 days within a consecutive 12-month period, the employee must pay income tax to the country of the location of the work.
In general, social tax is paid based on the principle that the country where the work is performed is also responsible for health care and pension insurance. If your employee is working continuously in a foreign country, social tax is to be paid to that foreign country.
If you send an employee on a business trip, social tax must be paid in Estonia and the employee must have a relevant certificate regarding this fact. If you fail to obtain a certificate of social insurance for an employee, you may be liable for social tax in accordance with the legislation of the country of location.
If your employee is not on a business trip, but is working simultaneously in more than one country, the employee shall be subject to the social tax legislation of the country in which he or she lives and works.
Value-added taxation takes place in the country that is the place of supply of service or goods. As a rule, services are taxed in the recipient’s country of location if the recipient of the service is a taxpayer in another country or a business entity from a non-Community country. Thus the recipient of the service pays VAT in his or her own country – i.e. reverse charge of VAT is applied. Only in a few exceptional cases, such as services related to the location of real estate, is the place of supply determined according to the physical location.
VAT rates in the European Union vary from country to country.