Taxation in Agriculture

Chapter 14. Estonia

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

14.1. Overview

Under Estonia’s tax system there are very few exceptions for agriculture with farms and agro-food firms generally subject to the same taxation regime as the rest of the economy. There are differences in the taxation of income from sales of self-produced unprocessed agricultural products, a reduced land tax levied on land used in agricultural production, discounted fuel excise duty rates for agricultural producers and reduced excise duties for small producers of beer.

The state and local authorities collect taxes. State taxes comprise of income tax (personal income tax and corporate income tax), value-added tax (VAT), social tax, customs tax, excise duties, land tax, gambling tax and heavy goods vehicles tax. Taxes paid to the local authorities are 11.6% of the taxable income of a resident natural person and land taxes as well as some other local taxes.

14.2. Income taxation

In 2019 the personal income tax rate is 20%. A basic tax exemption applies to all combined income and up to the threshold of EUR 14 000 taxpayers are entitled to an annual basic tax exemption of EUR 6 000. Decreases on the basic tax exemption occur for annual income from between EUR 14 000 and EU 25 200 according to the following formula: EUR 6 000 – EUR 6 000 ÷ EUR 10 800 × (income amount – EUR 14 400). No basic exemption is granted for annual income over EUR 25 200.

A sole proprietor farmer can deduct up to EUR 2 877 from the income received from selling self-produced unprocessed agricultural products minus the documented business expenses. Cleaning, sorting, cutting, drying, cooling and packaging of agricultural products is not considered processing. In 2018, the supplementary deduction amounted to EUR 1.66 million.

Two income smoothing tax provisions allow all sole proprietors, including farmers, to smooth their taxable income over time to manage financial risks and enhance investment. First, income losses in one year may be deducted from the business income of the following seven taxation periods, thus reducing income variability over time. Second, a special account can be opened in a credit institution to save money for future investments. The money set-aside in the year can be deducted from the taxable income, but interest gains are taxed as income every year. Special accounts are not widely used. This may be due to the complexity of accounting for the changes in the special accounts over different periods of taxation.

A special feature of corporate income tax in Estonia is the fact that only dividends are taxed. Earnings are not taxed as long as they are reinvested in the company. Distributed profits are generally subject to the 20% corporate income tax at 20/80 of the net amount of profit distribution. For example, a company that has profits of EUR 100 available for distribution can distribute dividends of EUR 80, on which it must pay corporate income tax of EUR 20. In a calendar year, corporate income tax is levied on: 1) fringe benefits and the social security taxes; 2) gifts and donations; 3) representation expenses; 4) dividends and other profit distributions; and 5) expenses and payments not related to business.

To encourage Estonian companies to distribute profits subject to income tax more regularly, from the beginning of 2018 a lower income tax rate of 14% (compared to the standard 20%) is levied on regular profit distributions. Profit distributions are considered regular if the amount of the distribution does not exceed the company’s last three years’ average profit distributions subject to taxation in Estonia. The income tax rate for all amounts exceeding the last three years’ average profit distributions will remain at 20%.

From the beginning of 2018, natural persons (not sole proprietors) have the possibility to provide services and sell goods to other natural persons via a special business account. The special business account is a bureaucracy-free and affordable form of business for natural persons. It is subject to 20% income tax and is aimed at small entrepreneurs, whose annual income does not exceed EUR 25 000. Any amount that exceeds this income is subject to 40% tax. An entrepreneur who uses a special business account does not have to submit any accounting reports. Everything takes place automatically via the special business account. The bank automatically transfers 20% of business income tax on any income received to the bank account of the Tax and Customers Board every month. This means that entrepreneurs keep 80 cents of every euro earned.

14.3. Property taxation

The share of property taxes is very low in Estonia. Tax on land is a state level tax, which accrues entirely to the budget of the local governments. Paid by the landowner the amount of land tax is obtained by multiplying the assessed value of land by the land tax rate. Regular mass land evaluation based on market information determines the assessed value of land. The land tax is imposed on land only, without taking account of the value of the buildings, forests, plants and other accessories.

Under the Land Tax Act the land tax rate is equal to 0.1% to 2.5% of the annual taxable land value. For agriculture land the tax rates are reduced. For areas under agricultural cultivation and natural grasslands the tax rate is 0.1% to 2% of the annual assessed land value. With local governments responsible for setting applicable rates the land tax burden for agricultural producers may vary across regions.

Property transfers by gift, inheritance or sale are subject to income tax (for natural persons) and VAT (for enterprises). For tax purposes expenses directly related to the transfer of the property can be deducted from the income received from the sale. Inherited or gifted property is not taxed if it is not sold.

Although, as a rule, gains from the transfer of property are subject to taxation, there are some exceptions. For example acceptance of succession is exempt from income tax. If a taxpayer transfers more than one permanent or primary place of residence in two years, the tax exemption will only be applied to the first transfer.

14.4. Tax on goods and services

The standard VAT rate is 20% (with a reduced rate of 9% and some goods and services are exempt from VAT). The standard rate applies to farm inputs and to agricultural and food outputs.

Taxpayers are obligated to be VAT registered when their taxable turnover exceeds EUR 40 000. A person liable to pay VAT is entitled to deduct input value added tax.

Excise duties are applied to liquid fuels, gaseous fuels, electricity, solid fuels, alcohol, tobacco and packaging brought into Estonia. Diesel fuel used for agriculture (including grain drying) has a 73% lower excise duty rate. For small beer producers the excise duty rate is halved.1

A heavy goods vehicles tax is levied on trucks with a maximum authorised weight or gross laden weight of not less than 12 tonnes. The tax based on the maximum authorised weight, number of axles and type of suspension, is paid by the owners or users of the vehicles.

From 2012, agricultural plastic (bale plastic wrap, silage cover, tunnel plastic, plastic mesh and plastic twine) is not subject to packaging excise duty. The company responsible for selling packaged goods to the end user or consumer is obliged to collect the farm plastics waste from the agricultural producer without any possible additional administrative burden.

14.5. Environmental taxes

The Environmental Charges Act sets out taxes for "environmental use" including: extraction of mineral resources; water abstraction; fishing; hunting; emission of pollutants into the ambient air, water bodies, groundwater or soil; and waste disposal by way of depositing in landfills or other activities that result in the discharge of waste into the environment. Environmental charges are jointly administered by the Tax and Custom Board and the Environmental Board.

Environmental permits grant rights to remove natural resources from their natural state, emits pollutants into the environment or disposes waste. Environmental charges are paid for these rights. Exceeding quantities permitted or not holding a permit for the activities, will result in the person paying a higher rate of environmental charges.

There are two types of environmental charges: natural resource charges set in regulation and pollution charges to decrease pollution from point sources. Pollution charges are imposed in the event of emission of pollutants into the ambient air, groundwater or soil, and upon waste disposal. The sensitivity to pollution of the emission site, the hazardousness of the pollutant and the use of the best possible technology are taken into account to determine the charge rates.

Agricultural producers who have been granted the following permits are subject to environmental charges:

• integrated environmental permit (including the water abstraction permit and ambient air pollution permit)

• water abstraction permit for the right to abstract water (abstraction charges are not levied for water for the irrigation of agricultural land, including greenhouses)

• water permit for the right to discharge waste water into any receiving water body

• ambient air pollution permit.

14.6. Tax incentives for R&D and innovation

Estonia does not provide any tax rebates to research and development (R&D). The corporate tax system of only taxing dividends encourages businesses to reinvest their remaining profits.

14.7. Other taxes

In accordance with the Social Tax Act, the Estonian social security system is financed by a social tax imposed on employers and sole proprietors (self-employed persons) and by the state. The social tax rate is 33% of the gross salary and entrepreneurial income of sole proprietors.

From 1 August 2012, a self-employed person entered in the commercial register has the right to register their spouse and pay social tax for them, thereby ensuring their social security cover. The spouse participates in the activities of the self-employed without being in employment, a model which is very relevant for farming households.

Self-employed persons and companies are subject to different treatment as regards social taxes. Self-employed persons receive benefits (sickness and pension insurance) and there is a maximum limit for the social tax they pay, whereas a company pays the social tax, and there is no maximum limit for the social tax they pay and the employees receive the benefits.

In 2019 the unemployment insurance premium is 1.6% of the gross salary of an employee. Employers pay the unemployment insurance premium at a rate of 0.8% of the amount of gross salaries monthly. From 2012, the rate of a funded pension payment is 2% of the gross salary of a resident employed.

Earnings coming through the recently established special business accounts are taxed income tax of 20%, social tax of 33% and for those who are members of the obligatory funded pension payment a rate of 2%. No additional payments are made by government. Upon payment of the business income tax, the social guarantees of a person arise or increase as a part of the tax is paid to ensure social protection. Such an additional benefit increases the taxpayers' motivation to declare their unofficial income through an enterprise account.

There are no specific provisions for agricultural labour. Provisions for taxes and social contributions on labour, including pensions, apply equally to hired, self-employed or family labour in agriculture.

Note

← 1.  Excise duty rates in Estonia: www.emta.ee/eng/business-client/excise-duties-assets-gambling/about-excise-duties/rates-excise-duty.