Permanent Establishment in Estonia

Doing business in Estonia through a Branch or a Permanent Establishment 

If you have a registered branch in Estonia, it does not necessarily mean that you also have a permanent establishment in Estonia. Whether a branch is treated as a permanent establishment or not depends on its activities in Estonia, and is determined in accordance with the Estonian Income Tax Act or a double tax treaty if there is one between Estonia and the home country of the headquarters of the branch. Please note that it is more favourable to decide on the existence of a permanent establishment in Estonia if there is a double tax treaty. 

If your activities in Estonia create a permanent establishment, the permanent establishment is taxed on distributed profits, gifts, expenses not related to business, fringe benefits, etc. If there is no permanent establishment, the office or branch in Estonia is taxed only on fringe benefits. In addition to income tax issues, VAT issues also need to be addressed as some transactions between the headquarters and a branch are taxable and some are beyond the scope of taxation. 

Permanent Establishment 

Estonian local law 

The existence of a permanent establishment is determined by the Estonian Income Tax Act or by a double tax treaty if there is one between Estonia and the home country of the headquarters of the branch.  

Starting from 2011, the Estonian Income Tax Act defines a permanent establishment as follows: 

A permanent establishment is an economic unit through which the permanent economic activity of a non-resident is carried out in Estonia. 

A permanent establishment will be created as a result of geographically fixed or movable economic activity or through a representative entitled to sign contracts on behalf of a non-resident concerning economic activities in Estonia. 

Double tax treaties 

As at the date of this letter, Estonia had concluded 47 double tax treaties. The treaties are based on the OECD Model Treaty. 

A permanent establishment is considered to exist under a double tax treaty if you have a fixed place of business through which the business of a company is wholly or partly conducted in Estonia. 

A permanent establishment is also created in Estonia if you have an agent or an independent who is acting on your behalf and who has, and habitually exercises, authority to sign contracts in your name in Estonia. 

Despite all this, there is no permanent establishment according to double tax treaties if: 

  • you use the facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the company or for similar activities; 
  • you maintain the fixed place of business solely for the purpose of conducting other activities of a preparatory or auxiliary character for the company; 
  • you conduct your business in Estonia through a broker, a general commission agent or any other agent of independent status, provided that this person is acting in the ordinary course of their business. However, if the activities of the agent are devoted wholly or almost wholly to the work of your company, he or she will not be considered an agent of independent status; 
  • you run a building site, a construction, assembly or installation project, or a supervisory activity connected with one of these, and the site, project or activity lasts for a period of less than 6 months (some treaties allow a longer period). 

Please note that according to generally accepted principle, if there is a conflict between different sources, the treatment that is more favourable for the tax payer shall be applied. This means that as the language of double tax treaties is more favourable for tax payers, the rules of the treaty shall be applied, if there is one. 

Taxation of Permanent Establishments 

A permanent establishment is taxed in Estonia on distributed profits. Please note that the law that was in force until 2011 had a slightly different wording and so any payments made out from Estonia should be evaluated carefully. 

As a permanent establishment or branch has no separate legal personality and it shares its income and expenses with its headquarters, the allocation of profit to the permanent establishment is of the utmost importance. 

How we can help you? 

ATTELA is well known and highly rated ifor its expertise in international taxation.

On questions of permanent establishment, we can assist you in the following: 

  • Permanent establishment analyses – We can do a comprehensive study, evaluating your activities carefully in order to determine whether they create for you a permanent establishment in Estonia. 
  • VAT – We can determine which transactions would be taxable and which would be beyond the scope of taxation.  
  • Business consulting – If there is a risk that your activities may create a permanent establishment, we can consult you on your options for redesigning your activities in Estonia as well as to do the study for allocation the profit correctly. 
  • Permanent establishment strategy – If permanent establishment cannot be avoided, we can assist you in setting up a tax strategy to minimise the overall tax burden and to prepare internationally accepted functional analyses for the tax accounting of permanent establishment. 
  • Day to day assistance – Analyses of specific payments made from Estonia in order to determine whether they would be treated as profit distribution. 
  • Administrative assistance – Registration with the authorities, reporting, etc.