Although corporate income tax rates in Estonia are 0%, it’s essential to know specific details about doing accounting there. Most people doing business in this country consider Estonian accounting policies and taxes to be simple. However, there are many details for people to be wary of in regards to taxes. While corporate income tax rates are nothing, some costs cannot be eligible as a business expense.
A company operating in Estonia needs to make sure all costs are full-proof involving its enterprise. For example, using a corporate banking card to pay for business expenses needs invoices to ensure those expenses are subject to corporate income tax rules. This process means a business is required to have receipts and invoices related to any purchase they make, or other costly tax rules apply.
Basic Accounting Requirements for company in Estonia
In Estonia, businesses follow The Accounting Act (TAA), which is what regulates the essential accounting functions for all business entities there. However, other laws and acts govern taxes in Estonia. The essence of TAA complies with IAS. There are also two ways to prepare consolidated and annual accounts in Estonia. Companies can choose between following IFRS or Estonian accounting standards. It’s also useful to know that the Estonian Accounting Standards Board writes up The Estonian GAAP.
The Fiscal Year
The length of a financial year for businesses is twelve months. At the end of the fiscal year, it’s up to the business to make an annual report consisting of yearly accounts, as well as a management report. The company also needs to include an auditor’s report to the annual report if required. All annual reports must be filed to the register, even if no transactions occurred in the financial year. If the annual report is not on file within six months of the close to the fiscal year, a penalty can occur. There could be additional penalties for being late. If the delay is short, there is generally no penalty.
Owner Equity and Share Capital of a Company in Estonia
If owner equity drops below 2,500 EUR or is less than 50% of registered share capital, owners can face the possibility of having to dissolve their company. Any owner facing this issue must restore the company equity back to government standards if they want to save the company from being dissolved, which is costly to do. To prevent this, covering the share capital before filing the annual report is correct to do. It’s a common practice in Estonia to have salary employees and to pay them at the beginning of the next month they’ve started work. This policy leaves enough time for the company to account for taxes.
Company in Estonia and VAT ID Requirements
If a company has no VAT ID, then they are not eligible for VAT refunds. No VAT ID means that anything bought could lose 20% of the purchase price the business could have gotten a refund for. Companies that do have VAT IDs have to prepare VAT and payroll-related tax returns, which they must file even if there have been no transactions. VAT returns must be on file on the 20th day of the month they were submitted last. Businesses can expect returns by the 20th of the next month that they submitted their latest returns too. Be aware that a company can have their VAT ID revoked. If no transactions related to VAT returns for several months, a written caution is sent to the company by the government as a warning. If the company has paid VAT amounts in excess, a refund for the money takes place within a month after filing for a relevant application. However, be prepared for a thorough check of the company’s paperwork by authorities.
Tax Returns and Payroll Taxes
If a company decides not to pay any employee salary under the Estonian employment rules, that company doesn’t need to file monthly tax returns. Payroll taxes are not payable in Estonia. Thus, the company can instead prepare an annual report only once per year instead of once per month. This policy keeps accounting costs low for filing the annual report, and could end up saving the company money. In general, companies must prepare payroll returns with taxes paid by the 10th of the next month they filed them.