A tax return need not be filed if income tax has been withheld on taxable income and there is no desire to claim deductions to reduce the tax obligation.
What should you bear in mind when claiming deductions?
Income included under the basic exemption
Up to 6000 euros a year can be claimed as tax-exempt under the basic exemption. If the taxpayer’s annual income is less than 14,400 euros, the entire basic exemption can be claimed. For income more than 14,400 euros, the exemption becomes progressively less, and if more than 25,200 euros of income was earned in a year, the exemption falls to 0.
If the basic exemption is claimed continuously in payroll accounting, the following should be borne in mind:
- If a person’s total income is less than 6000 euros (per year) and the basic exemption was claimed continuously and used up, there is no advantage in filing an income tax return, since there would be no paid income tax that could be refunded
- If a person earns other income in addition to salary and wages, it may be that too much exemption was claimed and that the person in fact owes additional income tax
- If for some reason, the tax exemption was not taken into account on a monthly basis, the entirety of the tax exemption can be claimed upon filing the tax return and a refund of overpaid income tax requested.
Additional exemption for parents
There is an additional tax exemption for parents with at least two minor (under 18 years of age) children. One parent at a time can claim this deduction. To do this, declare your child’s data in field 9.7 of the income tax return. The additional exemption per child is 1848 euros; and starting from the third child, it is 3048 euros.
It is a better idea for the parent who has more than 1848 or 3048 euros of taxable income to claim the additional exemption.
Interest on housing loans
2021 will probably be the last time that 300 euros in housing loan interest can be deducted from taxable income: The information on housing loan interest is not pre-filled on the return, so it must be entered on to the tax return through the internet bank.
It should be borne in mind that housing loan interest can be taken into consideration if the person uses the acquired real estate as their place of residence. If the dwelling has been leased out or sold in the middle of the year, there is no right to deduct interest following the date on which the property was leased or sold.
It should also be noted that this incentive may be used by a person who is both the borrower and the owner of the home. In the case of co-owned property, interest can be taken into account in proportion to the share of ownership.
Besides expenses on one’s own education and training, the education costs for siblings, grandchildren and children under the age of 26 may be deducted, or in the absence of education costs for these categories of people, the education costs of an Estonian permanent resident under the age of 26 may be deducted (e.g. school and kindergarten fees, continuing education and hobby education).
By 1 February, education institutions submit information to the Tax and Customs Board on education costs; these are then entered on to the respective pre-filled tax returns. As such, it is important that the education institution knows the payer’s name and personal identification code as well as the name and personal identification code of the student. The taxpayer must themselves specify education costs paid to foreign institutions of education, certifying that the course was equivalent to one eligible for tax incentives in Estonia.
Gifts and donations
Gifts and donations may be deducted from income if they were made to a person on the list of non-profit associations, foundations and religious organizations with tax incentives approved by Tax and Customs Board decision. The list can be found here.
In general, recipients of gifts and donations send information to the Tax and Customs Board and therefore the gifts and donations already appear on the pre-filled return. If donations were made to equivalent organizations in some other EEA country or Switzerland, the taxpayer must enter the data on the tax return themselves.
Limit on deductions for housing loans, education costs and gifts/donations
Up to 1200 euros in housing loan interest, education costs and gifts and donations may be deducted (including up to 300 euros in housing loan interest) but not more than 50% of the person’s taxable income.
For example, if it is known that a family has more than 1200 euros per year in education costs, the payment of the education costs may be spread out so as to maximize use of the tax incentive.
Contributions to the supplementary funded pension
Contributions to the third pillar of the pension system – the supplementary funded pension – can be claimed as deductions up to 15% of taxable income in Estonia, not to exceed 6000 euros per year. The tax incentive also applies to payments made to pension funds and insurance companies located in the European Economic Area.
Compulsory social insurance premiums
If an employee pays social insurance contributions in Estonia (second pillar of the pension system, unemployment insurance), they are deducted from taxable income on an ongoing basis as part of the withholding obligation. If social insurance contributions are paid abroad, the person is entitled to deduct social insurance taxes and contributions paid abroad if they were compulsory under a foreign legal act or international agreement. Compulsory social insurance contributions paid to foreign countries on income taxable in Estonia may be deducted from income.
For example, this situation may come up if an Estonian company has a foreign board member whose remuneration is taxed under Estonian income tax but whose social insurance taxes are paid in their home country.
What types of income must be self-declared?
The Estonian tax return includes pre-filled data on income tax withheld in Estonia. The pre-filled return does not show data on income earned abroad and income on which income tax is not withheld.
For example, capital gains on sale of real estate, rental income, gains from trading or exchange of cryptocurrency, gains from sale of securities, foreign earnings, dividends received from abroad, etc. must be declared manually by the taxpayer.
Sale of real estate
Real estate sales are not always taxable. A tax exemption applies for sale of primary residence and summer homes. Sale of a residence is tax-exempt if the person uses the real estate as their place of residence up to the time of sale and an exemption on sale of residence was not used in the preceding two years. The sale of a summer home or garden house is tax-exempt if the size of the registered immovable is not more than 0.25 hectares and the immovable has been owned by the person for at least 2 years. Sale of tax-exempt real estate does not have to be declared.
If the sale of real estate is not tax exempt, the taxable gains are considered to be the difference between acquisition cost and sale price. Besides the purchase price, the acquisition cost can include expenses borne on renovation and improvement of the home, notary fees and state fees. The expenses must be substantiated by documentary evidence.
Up to 20% of rental income may be deducted to cover costs related to renting a home or apartment. The deduction is effected automatically when rental income is declared on the tax return, so no expense documents need to be submitted. Accessory expenses and duties (utility costs, expenses on upkeep of the residence), that the tenant pays himself or transfers to the lessor are not considered rental income.
It should be borne in mind that tax incentives apply only in regard to residential rental income, not income from granting use of the property through sites such as AirBnB or booking.com, nor if the dwelling is used for purposes other than a place of residence (e.g. as an office).
If the lease agreement was concluded with a company, the company withholds income tax when paying rent to a natural person. Upon filing a tax return, the taxpayer who uses the 20% tax incentive is refunded the overpaid income tax.
Sale of securities
Data on securities transactions conducted through the Estonian Central Register of Securities (EVK) appear automatically on the pre-filled tax return, while all other securities transactions, including ones alienated abroad, must be added to the return manually. Information on the acquisition cost of securities are likewise not entered automatically. If a taxpayer uses an investment account to defer income tax obligation, the transactions associated with the investment account must be deleted from the pre-filled data.
If a taxpayer has sustained a loss from sale of securities, this, too, must be declared, as the loss can be deducted from gains from the sale of securities in subsequent years.
If a taxpayer has received a security free of charge or at a discounted price from their employer, and it was taxed as a fringe benefit, a natural person declaring the sale of the security can also include in the acquisition cost not only the expenses they themselves incurred but also the amount that was taxed by the company as a fringe benefit.
Unlike securities, only the sale and exchange transactions that generated a gain must be declared. Every alienation transaction, including an exchange transaction is viewed separately and loss-making transactions may not be taken into account.
This can therefore bring up a situation where the individual has made a loss from trading crypto assets but still must pay income tax on the separate profitable transactions.
Income earned abroad and avoidance of double taxation
Estonian residents must also declare income earned outside Estonia, including salary and wages, dividends, sale of real estate, sale of securities, and so on. If the income was taxed in a foreign country, the foreign state’s income tax may be deducted from Estonian tax obligation. If the foreign income tax obligation is less than Estonian income tax, the difference must be paid in Estonia. If the foreign income tax obligation is greater than Estonian income tax, the difference is not refunded in Estonia.
In certain cases, income earned in a foreign country is exempt from Estonian tax. For example, the Income Tax Act provides for an exemption on dividends and salary and wages if the person has worked abroad at least 183 days during a period of 12 consecutive calendar months. In both cases, it must be substantiated that the income was taxed abroad. In addition, a tax exemption may stem from an agreement between Estonia and the country in which the wages were earned on avoidance of double taxation.
There may be situations where the person works abroad for an Estonian employer and income tax has been continuously withheld from their remuneration and paid both in Estonia and abroad. In such a case, the double taxation may be eliminated via the personal income tax return and a refund of the overpaid tax requested.
Taxation of non-residents’ income
Non-residents must file an income tax in Estonia if they have earned income in Estonia on which income tax was not withheld. For example, earnings from employment in Estonia must be declared if the employer is a foreign company that has not registered itself as a non-resident employer and has not withheld income tax.
Rental income from real estate located in Estonia and sale of real estate located in Estonia must also be declared.
Double taxation avoidance agreements may limit Estonia’s taxation right, so it is worth taking a look at the tax agreements in place between Estonia and the non-resident’s home country, and submitting a certificate of residency in order to exercise the incentive allowed under the taxation agreement.
Residents of the European Economic Area and Switzerland may also claim deductions from their income taxable in Estonia.
The deadline for income tax returns is 30 April, but often the final tax obligation payable in the foreign country has not been determined by that time. Income tax returns may be filed and corrected retroactively for 3 years, both for paying additional income tax due and for requesting tax refunds.