Estonia has a so called black list of low tax territories. The tax authority in Estonia will check the business in cases where another party of business transaction is located in one of these countries. It is recommended to give a price list beforehand to the tax authorities.

When one conducts business possibly connected to these territories on the black list the taxpayer must prove that the other party is not located in one of these countries. Good evidence for tax authorities is a certificate issued by local tax authority regarding the size and burden of taxes.  

A legal person (company) is not seen to be located in a low tax rate territory if more than 50 per cent of its annual income is derived from actual economic activity or if the state or territory of location of the legal person provides the Estonian tax authority with information concerning the income of a person controlled by Estonian residents. 

Income tax is charged on the income of a legal person located in a low tax rate territory (and controlled by Estonian residents). It is irrespective of whether the legal person has distributed any profits to taxpayers or not.

Income tax is charged on business income derived by a non-resident in Estonia. If the non-resident is a legal person located in a low tax rate territory of the black list, income tax is charged on all income derived by the non-resident from the provision of services to Estonian residents, irrespective of where the services were provided or used. Income tax is withheld from payments to a legal person located in a low tax rate territory for services provided to an Estonian resident. 

Resident companies must pay income tax on payments which are not related to business, unless in situations where income tax has been withheld on such payments pursuant to § 41 (e.g. salaries, royalties etc.) or paid pursuant to §§ 48–51 (e.g. fringe, donations benefits, gifts, expenses not related to business and dividends) of the Income Tax Act.

If you want to find out more about taxation in Latvia or in the Baltics, please contact our lawyers at info@gencs.eu.