Part II

Developments in the Member States

the distribution of profits. Hence, the tax rate on retained earnings is zero, and distributed profits in gross terms are
taxed at the same rate as personal income, i.e. at 21 % since 2008. This tax rate is applied also to gifts, donations,
non-enterprise expenses and fringe benefits. The system is applied to Estonian resident companies and permanent
establishments of non-resident companies. The 21 % withholding tax applied on the dividends paid to nonresidents was removed as of 1 January 2009. A withholding tax may still apply to other payments to non-residents,
if they do not have a permanent establishment in Estonia or unless the tax treaties provide otherwise. The measures
to reduce fraud and tax evasion include CFC rules and regulations for minimising the use of transfer-pricing
schemes, as well as a withholding tax of 21 % on the payments to off-shore companies for services.

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VAT and excise duties

The VAT regime has been brought in line with the sixth Directive. The standard rate is 20 % since July 2009. A
9 % reduced rate applies to a limited list of goods (books, periodicals, medicine, accommodation).
Excise duties on alcoholic beverages were increased by 10 % in 2010 and that on tobacco by 10 % in 2010 and
additionally 10 % in 2012. The excise duties on unleaded petrol and diesel were increased both in 2009 and 2010
and now exceed by far the EU minimum tax rates. Taxes on coke and coal, natural gas and electricity were
introduced as part of the green tax reform, and their rates were also increased as part of fiscal consolidation
measures in 2009 and 2010.
Social contributions
Social security is financed largely through a social tax, which is paid by the employer, generally at a rate of 33 %
of gross salary for each employed person. The self-employed also pay the social tax. A 13 % quota from the tax is
transferred to the state health insurance system and the remaining 20 % to the state pension insurance system.
Employees who have joined the second pension pillar (obligatory for those born after 1983) pay an additional 2 %
of their salary to the personal pension account. In this case, the 20 % for the pension insurance system is divided as
16 % to the state pension insurance system (the first pillar) and 4 % to the mandatory funded pension system (the
second pillar).
The social tax, comparable to the employers' social security contributions in other countries, is a fiscally important tax
in Estonia. In 2010 these contributions represented 35.6 % of total taxation, which is by far the highest proportion in
the EU. Employees' social contributions, in contrast, represented only 2.4 % of tax revenues.

Taxation trends in the European Union

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