General

Accounting rules and taxation

‘Most foreign businesspeople operating an Estonian company consider Estonian accounting rules and taxation system simple and straightforward. Accounting and bureaucracy related costs are generally rather low in Estonia.

Estonian accounting rules are not much different from those applied in other EU countries; however, there are a number of details that are important to be aware of.

Although the corporate income tax rate charged on corporate profits is 0% (22% tax is applied when profits are distributed) certain costs are not eligible as business expenses. All costs of the company need to be substantiated (at least at some level) as being related to the company’s enterprise. If the corporate bank card is used to pay for any expenses, and no invoice is presented to prove that the expense is business related, such expense is subject the corporate income tax. All costs need to be backed up by source documents (invoices, etc).

Accounting requirements

The Accounting Act (valid from 1 January 2003) regulates basic accounting functions in all business entities registered in Estonia. It does not regulate accounting for taxes, which are regulated by other laws and acts. The essence of the law is framed in compliance with International Accounting Standards (IAS).

Almost all Estonian companies can choose whether to prepare their consolidated and annual accounts in accordance with International Financial Reporting Standards (IFRS) or in accordance with the Estonian accounting standards ("Estonian GAAP"). Listed companies and financial institutions are required to prepare their accounts in accordance with IFRS. The Estonian GAAP is written by the Estonian Accounting Standards Board.

The length of a financial year is 12 months. At the end of each financial year, an accounting entity is required to prepare an annual report that consists of the annual accounts and the management report. The auditor's report and, in the case of a company, the profit distribution proposal for the financial year should be annexed to the annual report. The auditor's report need not be annexed to the annual report if auditing is not compulsory.

Annual reports must be filed to the register even if the company has had no transactions in the financial year.

Annual reports must be filed within 6 months following the close of the financial year. A penalty can be charged if an annual report is filed late. However, generally no penalty is charged if the delay is short.

If the owners’ equity drops under 2500 EUR or is less than 50% of the registered share capital the owners must either restore the equity capital or dissolve the company. To avoid unnecessary waste of time, it is advisable to ensure that your company’s share capital is covered enough before filing the annual report.

For practical reasons, if the company has salaried employees it is better to pay the salary at the beginning of the months following the month when the salary was earned, which is a common practice in Estonia. Otherwise too little time is left for tax accounting (payroll taxes are due at the latest on the 10th day of the month following the month when the salary was paid).

If the company has no VAT ID

It is important to understand that without a VAT ID the company is not eligible for VAT refunds. In practice this means that whenever you buy something, you will lose VAT equalling 22% of the price.

If the company pays no salary under the Estonian employment rules, no payroll taxes are payable in Estonia and the company need not file monthly tax returns. This means that the company can prepare the accounts once a year, i.e. for the purpose of filing the annual report, and keep accounting costs low.

If the company has a VAT ID

The company has to file VAT and payroll related tax returns even if there have been no payments or transactions. Payroll returns must be filed and payroll taxes paid by the 10th day of the next month, while VAT returns must be submitted and VAT paid by the 20th day of the month following the month that the return applies to.

If for some months the company has had no sales subject to VAT, the company’s VAT ID could be revoked. However, before that the company is always sent a written caution.

If a company has paid excess VAT, such excess amount is generally refunded within 30 days after the relevant application is filed. However, in most cases the tax authorities check the company’s paperwork thoroughly.