Investment Income and Capital Gains Taxation in Estonia

There isn’t a distinct category for capital gains taxation; rather, capital gains are integrated into the general taxable income and subjected to the standard tax rate.

Are investment income and capital gains taxed in Estonia?

Any profits obtained from selling or exchanging transferable monetary assets, including real estate, securities, partnerships’ shares, investment fund units, claims, or other proprietary rights, are taxed at a fixed rate of 20%.

Certain exceptions apply for non-residents:  

● Generally, capital gains from selling shares in Estonian companies aren’t taxed. However, if the sold shares belong to a company primarily consisting of Estonian immovable properties (more than 50% of assets) and the seller holds at least 10% stake, those gains are assessable for taxation.  

● Proceeds from disposing Estonian immovable property, along with rights tied to such property, are subject to income tax assessed by the authorities. Similarly, sales of movable property registered in Estonia before disposal fall under the same taxation rule.

Some types of gains enjoy tax exemptions:  

● Sales of vacation homes or garden houses, provided they’ve been owned for over two years and the land area doesn’t exceed 0.25 hectares.

● Revenues related to expropriation compensation schemes and privatization initiatives.

● Disposal of personally used items.

● Share exchanges occurring during mergers, splits, or other reorganization processes.

Also sale proceeds from one’s primary residence used continuously until the moment of sale (restricted to one sale every two years).

Dividends

In Estonia, corporate income tax isn’t levied when earnings accrue but when they’re distributed. Standard income tax on dividends is 20% (computed by adding 20/80 to the distributed sum). Regularly distributed dividends attract a lower rate of 14% (calculated as 14/86 of the distribution), assuming the distributed amount doesn’t exceed the company’s historical averages. Excessive portions of dividends are taxed at the standard rate.

Additionally, companies distributing profits and paying 14% corporate income tax are mandated to withhold an additional 7% income tax from dividends paid to residents and non-residents alike. Double taxation treaties may offer reduced rates.

Exceptionally, redistributed dividends aren’t taxed if the beneficiary owns at least 10% of a company domiciled in an EEA Member State or Switzerland.

An exemption from taxation applies to dividends received from a company domiciled in another country, provided the Estonian company holds at least 10% of the voting shares or capital in that firm, and income tax has been withheld or paid. Similar rules extend to dividends sourced from a permanent establishment belonging to a resident company.

However, the exemption ceases to apply if dividends originate from low-tax jurisdictions.  

Interest Income Taxation

Almost all domestic interest incomes (excluding deposit rates) are taxed as investment income at a flat rate of 20%. Expenses related to these revenues are not deductible from the taxable base.

There is a notable exception: interest income derived by non-residents from investments in collective investment funds or similar asset pools is excluded from taxation if more than 50% of the fund’s assets consist of Estonian immovable property and the non-resident holds at least 10% stake.  

Rental Income Taxation

Persons receiving rental income from commercial or residential leasing must declare beforehand whether such income qualifies as business income or not. If classified as business income, individuals must register as self-employed, and only net income after deducting expenses enters the taxable base. However, this same amount is also subject to social security contributions.

On the contrary, if rental income is treated as investment income, the entire gross income is included in the taxable base, but no social security contributions are levied.

All commercial or residential rental income is taxed at a flat rate of 20%. Since 1 January 2016, individuals have been able to deduct 1/5 of the taxable amount to cover rental-related expenditures.  

Gifts

There is no gift tax in Estonia.