The corporate tax rate is 0% on undistributed profits, and 20% on distributed profits. According to the corporate income tax system applied in Estonia, undistributed profits are not subject to tax. Instead, the corporate income tax is levied at a rate of 20/80 of the net amount (20% of the gross amount) of distributed profits. Thus a company not distributing profit is not obliged to pay corporate income tax. Taxable expenses are subject to 20/80 corporate income tax as well.
Estonia offers e-residency and 0% taxation to foreign companies with no actual presence in the country. E-residency is not a legal way to avoid paying tax in the actual country of residence, but may wrongfully be used for that purpose.
Estonian transfer pricing rules are stipulated in the Income Tax Act and in Regulation No. 53 issued by the Estonian Ministry of Finance on 10 November 2006. Estonian taxpayers are required to be able to demonstrate that both domestic as well as cross-border transactions with related parties were conducted at arm’s length. Transfer pricing rules are applicable to all types of transactions.