If the PE pays tax in the state where it is deemed to exist, what happens in Estonia?

If your Estonian company’s PE pays tax in the state where it is created and registered, don’t worry – generally there are rules and tax treaties in place to avoid double taxation, i.e. this profit should not be taxed again at the level of the Estonian company.

Estonia’s domestic rules make sure that no double taxation arises for income that has already been taxed in another state at the hands of a PE. There is a distinction depending on where the PE is located: the profits of PEs located in the European Economic Area (EEA) or Switzerland are exempt from tax, while for PEs located in any other state, you get to credit the tax paid against any Estonian corporate income tax liability in the future.

Let’s have a look at an EEA or Swiss PE example with illustrative numbers and CIT rates:

1. Your non-Estonian PE makes a profit of 100 and pays CIT of 25

2. Your Estonian company declares the PE’s taxed profit of 75 in its tax return

3. Your Estonian company can distribute dividends of 75 exempt of tax at any time