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.
Income tax
Usually, a company is liable to pay income tax outside Estonia in two cases:
- if you provide a service or sell goods, the income from which is taxed in the country where these transactions were made;
- if you receive dividends, interest, royalties, rental or lease income from abroad;
- your company's business activity is such that there is a permanent establishment abroad. A permanent establishment is a place of business through which all or part of your permanent economic activity is carried out.
Consult the tax laws of specific countries to determine for which services and products and in which cases income tax is payable abroad. Estonia has entered into treaties with many other countries for the avoidance of double taxation and prevention of tax evasion.
Accordingly, business income is generally subject to taxation only if you have a permanent establishment in a country where the service is rendered There is a limit to the amount of income tax withheld from interest, royalties or dividends abroad.
To obtain a tax exemption or tax subsidy, an Estonian enterprise abroad must certify that it is a resident of Estonia – in other words, an enterprise taxable in Estonia. The certificate of residency can be issued by the Tax and Customs Board for a period of up to three years. However, there are countries that have established special regulations for obtaining a tax exemption and a proof of residency is not sufficient.
Employee’s income tax payable in the case of cross-border operations
The payment of income tax when working abroad depends on the tax laws of the foreign country, the tax residency of the employee and whether or not you come to have a permanent establishment abroad. If an employee is based in another country for more than 183 days within a consecutive 12-month period, the employee must generally pay income tax to the country of the location of the work, regardless of whether or not the employer has a permanent establishment abroad.
Social tax
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 tax
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.