As the 2023 edition of the Tax Competitiveness Index got published, Estonia celebrated an unusual achievement — the country has been at the top for 10 years straight, beating other contenders in the OECD at the simplicity and business friendliness of its tax system.
What does it take to stay a champion for a full decade? According to Tax Foundation, Estonia’s top score in 2023 is driven mainly by four positive features of its tax code:
- It has no corporate income tax on reinvested and retained profits (and a 14-20 per cent corporate income tax rate on distributed profits; to be changed to unified 22 per cent from January 1, 2025). This means that Estonia’s corporate income tax system allows companies to reinvest their profits tax-free, and grow their business much faster without additional burdens.
- It has a flat 20 per cent tax (22 per cent from January 1, 2025) on individual income. The tax is not applied in the case of distributed dividends that have already been taxed with a corporate income tax (see above).
- Its property tax applies only to the value of land, rather than to the value of real property or capital.
- It has a territorial tax system that exempts 100 per cent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
simplEST tax system, once again
A clear advantage of Estonia’s tax system is that companies spend less time on tax compliance than they would in any other country in the OECD. For example, in an average OECD country, 42 hours per year are used by companies to comply with just corporate income taxes. In Estonia, the figure is five hours. The report also stresses that other taxes, such as the value added tax (VAT), also have a low compliance burden.
The same goes for individuals. Yearly declarations are filed in minutes, and the country is leading 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 part is that Estonian tax system do not punish those who take risks. In 2023, only the Estonian and Latvian systems allow, by design, unlimited carry backs of losses, which helps businesses to deduct current year losses against past profits. In the unicorn haven, as Estonia is usually titled, the initiative to try new things is welcomed.
No excessive taxation
According to Tax Foundation, the structure of a country’s tax code 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 is one that 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.
As business activity becomes more and more global, Estonia is pushing strong to be a 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.
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.
