With the 2024 edition of the Tax Competitiveness Index published, Estonia is marking an extraordinary achievement—the country has been at the top of the index for 11 years straight, beating other contenders in the OECD with the simplicity and business-friendliness of its tax system.
What does it take to stay a champion for over a decade? According to the Tax Foundation, Estonia’s top score in 2024 is driven mainly by four positive features of its tax code:
- Estonia has a 20 percent corporate income tax rate that applies only to distributed profits. This means that Estonia’s corporate income tax system allows companies to reinvest their profits tax-free and grow their businesses much faster without additional burdens.
- The country has a flat 20 percent tax on individual income that does not apply to personal dividend income. This simple approach creates a transparent and efficient system for individual taxpayers.
- Estonia’s property tax applies only to the value of land, rather than to the value of real property or capital. This unique approach ensures that property improvements and business investments aren’t penalised with additional taxation. Estonian property tax is considered the best in the OECD and doesn’t feature property transfer taxes.
- It has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
The simplEST tax system, once again
A clear advantage of Estonia’s tax system is that companies spend less time on tax compliance than in any other country in the OECD. For example, in an average OECD country, businesses spend significant time complying with corporate income taxes. Estonia’s compliance burden is minimal due to its straightforward distributed profits taxation system.
The same goes for individuals. Yearly declarations are filed in minutes, and the country leads in individual tax competitiveness with a combination of reasonable rates and flat tax policy. Estonia is also among the few countries in the OECD that do not have any property transfer taxes, meaning taxes on the transfer of real property (real estate, land improvements, machinery) from one person or firm to another.
Another important aspect is that Estonia’s tax system does not punish those who take risks. Estonia’s tax system, by design, allows unlimited carrybacks of losses, which helps businesses deduct current-year losses against past profits. This is a unique feature replicated similarly only in neighbouring Latvia. It’s evident from this that Estonia, known as a hotbed for unicorn startups, rewards those with ambition.
No excessive taxation
According to the Tax Foundation, a country’s tax code structure is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities. A competitive tax code keeps marginal tax rates low.
If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance. According to research from the OECD, corporate taxes are most harmful to economic growth. Above all, simplicity and clever structure are more important than rates themselves.
As business activity becomes increasingly global, Estonia continues to push strongly to be the number one location for internationally oriented entrepreneurs and grow local talent. Combining Europe’s best education system with the world’s most competitive taxation, the country is well-positioned for future growth.
Do you wish to invest in Estonia or do business in the country with 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.
