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There's a principle concept that every expense has to be for the purpose of doing business. If it's not, then it will get hit with income tax, and sometimes eve
by Strom 9y ago
There's a principle concept that every expense has to be for the purpose of doing business. If it's not, then it will get hit with income tax, and sometimes even payroll taxes.
In practice nobody really monitors these things and many do abuse the system to cater for themselves etc. However if you find yourself an enemy who will report you (even just on suspicion), then you better have a convincing case for the tax authority and/or judge as your accounting gets audited.
There are a bunch of special benefit rules that can be used for lawful cost savings though. There are lawful ways to split car costs with company money, there are lawful ways to get a tax-free daily allowance if you're traveling for business, limited to some X days per month.
In general I think the company tax rates are low enough to do everything lawfully. Taking out profits as an owner incurs a 20% income tax to the company and zero taxes to the individual. In addition, if you've taken out profits before, then the company income tax is 14%, up to the amount that equals the average of the last 3 years. So if you take out similar profits on a regular basis, the tax rate is only 14% on everything.
- davidverhasselt 9y ago> In addition, if you've taken out profits before, then the company income tax is 14%, up to the amount that equals the average of the last 3 years. So if you take out similar profits on a regular basis, the tax rate is only 14% on everything. As I understood it, this is only so for distributing profits to legal entities. If you're distributing to a private person, the private person will have to pay a new 7% income tax which sums up to a total of about 20%. This of course only matters if the private person is tax resident in Estonia. I find the PwC tax alerts very informative to be kept up to date on the tax laws in Estonia: https://www.pwc.com/ee/en/press-room/tax-alerts/estonian-tax-alerts.html https://www.pwc.com/ee/en/press-room/tax-alerts/estonian-tax...
- Strom 9y agoYou're very much correct, thanks for pointing that out! I hadn't seen any mention of the new 7% individual rate in any newspaper articles or even accounting firm articles. I now inspected the actual income tax law [1], and sure enough the 7% clause is there. One one hand this means a slight net tax increase to 20.02% [2], on the other hand if the total individual income is less than 25200€/year then a part of that 7% will be returned. -- [1] Unfortunately not yet translated to English https://www.riigiteataja.ee/akt/107072017022 https://www.riigiteataja.ee/akt/107072017022 [2] 100 * 0.86 * 0.93 = 79.98
- davidverhasselt 9y agoIndeed, I too had difficulty finding exact information on this new change. I then stumbled upon the PwC tax alerts where it was very transparently explained. Personally I wouldn't mind if they would take a bit longer to implement changes like this, so everyone can be accurately informed and optimise in time.