Permanent Establishment in Estonia: What Foreign Companies Need to Know

Foreign companies increasingly operate in Estonia — setting up offices, hiring employees, or managing local projects. In doing so, many companies are aware that a permanent establishment (PE) may arise, but the precise scope of Estonian rules and their interaction with tax treaties can be difficult to navigate.

Understanding when a PE arises, and what it entails under Estonian law, is essential for any business with a physical or operational footprint in the country. Below we outline the main rules in practical, accessible terms.

 

1. When Does a Permanent Establishment Arise?

Under Estonian law, a permanent establishment is defined as a business unit through which a non-resident conducts permanent economic activity in Estonia (Income Tax Act § 7). A PE can arise either through:

  1. A geographically fixed or mobile place of business where activity takes place, or
  2. A representative in Estonia who is authorized to conclude contracts on behalf of the non-resident.

The domestic definition of a PE in Estonia is intentionally broad — it can cover almost any fixed place of business through which activity is carried out. However, specific tax treaties take precedence over the general rule. These treaties usually narrow the scope of what qualifies as a PE, setting clearer thresholds or exceptions for each country. Therefore, the existence of a PE must always be assessed in light of the applicable tax treaty.

For example, construction and installation sites are addressed separately in most treaties. While the Estonian domestic rule does not specify a duration, tax treaties typically set a time threshold — in most cases six months, though for some countries it might be longer. Projects shorter than that period are generally excluded unless the contractor’s activities in Estonia are recurring or form part of a broader continuous presence, which may still lead to the creation of a PE.

 

2. Permanent Establishment from a VAT Perspective

From the VAT perspective, the concept of PE serves a different purpose and can arise independently from the income tax definition. A VAT permanent establishment exists where a foreign business has in Estonia personnel, an office, or technical means for selling goods or providing services in its own name. In practice, if a foreign company actively operates in Estonia using its own resources — even without a fixed office — a VAT PE may exist.

Example: A foreign construction company carries out a project in Estonia lasting only 4 months. The period is too short to constitute a PE for income tax purposes, but a VAT PE arises, as the company performs taxable transactions locally. Once its Estonian turnover exceeds 40,000 euros per year, it must register for Estonian VAT, charge 24% VAT on sales, and submit monthly VAT returns to the Estonian Tax and Customs Board.

 

3. Registration and Reporting Obligations

A foreign company with activities amounting to a PE in Estonia has two options:

  1. Register as a non-resident taxpayer, or
  2. Establish a branch (filiaal) in Estonia.

Both forms have similar tax treatment and neither constitutes a separate legal entity. However, the branch is entered into the Commercial Register and has additional annual reporting duties.

A PE or branch must file a signed annual report to the Estonian Tax and Customs Board. A branch must also submit the non-resident company’s annual report to the Estonian Business Register within seven months after the end of the financial year (or one month after its approval). 

If the non-resident company is not required to publish financial statements in its home jurisdiction, the branch must prepare and file its own local report signed by the branch manager. However, this requirement does not apply to branches of companies established in an EEA Member State that are likewise exempt from publishing an annual report under their home country’s legislation.

In practice, it is also advisable to maintain a separate bank account for the Estonian operations to clearly distinguish revenues and expenses attributable to the PE.

 

4. Income Tax Obligations

A non-resident company with a PE in Estonia is liable to Estonian corporate income tax (22% on gross amount) on:

  • Fringe benefits (for example, providing meals to employees or allowing personal use of a company car etc.)
  • Gifts, donations, and representation expenses
  • Non-business expenses and other disbursements
  • Profits attributed to the PE that are distributed or withdrawn

Appointing a licensed tax representative of non-residents is strongly recommended. Magrat holds such a license from the Estonian Tax and Customs Board and regularly assists clients in managing PE compliance.

 

5. Estonia’s Corporate Income Tax Model

Estonia applies a unique deferred corporate income tax system, under which profits are taxed only when distributed rather than when earned. As long as profits remain reinvested or available for use by the PE, no income tax applies.

When is profit considered distributed?

A non-resident must declare profit earned through its Estonian PE in the period when that profit is no longer at the PE’s disposal — for example, when funds are transferred to the parent company or used outside Estonia. Profits are also considered distributed upon termination of the PE if they have not been taxed previously.

To substantiate that profits remain available to the PE, the company must keep detailed accounting records showing the assets under the PE’s control and their use. If such evidence cannot be provided, the Tax Board may presume that profit has been withdrawn and is therefore taxable.

To determine the amount of profit attributable to the Estonian PE, transactions between the head office and the PE must be valued at arm’s length. Even though they belong to the same legal entity, their internal dealings are treated as if they were between independent parties. If the PE purchases goods from the head office for resale, the transfer price must reflect market value; if the goods are for internal use, they may be recorded at cost. Services provided by the head office are recognised at market price, while general administrative expenses are allocated without a profit margin.

This ensures that the PE’s taxable profit — and any later distributed profit — accurately corresponds to the economic value generated in Estonia.

 

6. Employing Non-Resident Workers

Non-resident companies often assign foreign employees to Estonia. While posted workers are generally exempt from Estonian employment taxes if they stay less than 183 days per year, this rule does not apply where the employer has a PE in Estonia.

In such cases, the employer must withhold and pay:

  • 33% social tax and 0.8% unemployment insurance (employer’s side), and
  • 22% income tax plus 1.6% unemployment insurance (employee’s side).

If the employee provides an A1 certificate confirming that social security contributions are paid in their home country, only the 22% income tax applies in Estonia.

The employer must also:

  • Notify the Police and Border Guard Board of the foreigner’s employment,
  • Ensure the employee obtains a non-resident tax identification number, and
  • Declare payments to non-resident employees in the monthly TSD return.

7. Practical Support for Non-Resident Businesses

Establishing a presence in another country inevitably involves navigating local regulations, tax filings, and administrative procedures. At Magrat, we combine tax expertise with hands-on experience in assisting non-resident companies operating in Estonia — from short-term projects to fully staffed branches.

As a licensed tax representative, we provide end-to-end support:

  • Tax registration and reporting
  • VAT compliance
  • Payroll and social tax declarations
  • Annual reporting for branches and PEs
  • Advisory on profit distribution and transfer pricing

For a consultation, contact our team — we’ll help ensure your Estonian operations remain efficient, compliant, and structured for sustainable growth.