Taxing in a smart way
Individual taxation is one of the most important metrics in the International Tax Competitiveness Index (ITCI). It measures income tax rates and thresholds, how complex the income tax is, and the tax rates levied on income from capital gains and dividends. The latest issue of ITCI was published in November 2022.
The resulting score is a useful guide for individuals and investors who wish to invest or relocate to the country. Estonia, which provides both e-residency for business and digital nomad visas, is now a proven leader in effective taxation. What’s behind that?
Estonia levies a top marginal income tax rate of 20% on wage income, the second lowest rate in the OECD. Estonia applies the top rate at 0.33 times the average national income, making it a relatively flat income tax. In contrast, the top earners in France are paying 55.4% on wage income. Neighbouring Nordic countries, such as Finland, Sweden or Denmark, are also in the same category.
In Estonia, however, you can raise your income much more effectively. The policy also benefits employees as their wages grow faster. In 2021, average monthly gross wages and salaries in Estonia rose by 6.9%, while in 2022, a 10.1% increase was recorded.
Estonia’s labour tax payments are largely automated, resulting in one of the easiest income tax systems to comply with in the OECD, reports Tax Foundation. Estonian policymakers prioritize simplicity which is consistently evident throughout the tax code. The latest development — entrepreneurs’ accounts also let anyone earn additional income with a flat 20% income rate and automated tax reporting.
As Estonia differs vastly from other countries, it also affects its revenue structure. Famous for its strict fiscal policy and low debt levels, Estonia collects around 16,5% of the budget revenues from individual taxes compared to the 24% OECD average.
The state gains the rest of the money through indirect taxation (value-added tax, environmental taxes, etc.), social security contributions, and corporate income taxes. This allows the government to offer a more favourable environment for businesses and investors.
Also, due to Estonia’s cash-flow tax on business profits, there is no separate levy on dividend income, setting the dividends tax rate to zero per cent. All of this put the country in first place in individual tax competitiveness from the 3rd place a year ago.
The previous leader, the Czech Republic, dropped to 5th place in the ranking. In a somewhat surprising development, Colombia swiftly rose to 2nd place, outperforming a lot of European economies. This shows the increased importance of international competitiveness, as more and more countries are attracting talent and investments from all around the world.
Estonia’s simple and effective tax system is one of the main reasons the country has been so successful in recent decades. The corporate tax rate is 20% and the country has a territorial tax system, which means that only Estonian-source income is taxed. This makes the country an attractive destination for foreign investors. Most importantly, the country has 0% taxation on reinvested profits, which speeds up the growth of companies.
Wish to invest in Estonia or do business in the country that has the world’s best tax system? Read more about taxation in Estonia and send us a request for e-Consulting to find out more from one of our advisors.