What you absolutely need to know about your taxes in 2021

Taxes are an essential part of personal finance that people cannot afford to exclude from their financial budget. Yet, it is so confusing that even experienced people have trouble grasping the intricacies of taxes. All financial gains are affected by taxes, including investments. However, taxpayers worry about their investment income taxes because the European Union does not have harmonised tax laws - they vary from state to state. Member States have their own tax rules with their rates. Although the <a href="https://ec.europa.eu/taxation_customs/individuals/personal-taxation/taxation-securities-income-received-individuals_en" target="_blank"> EU backed off</a> from regulating taxes at the Union level, it has mandated that states not tax EU residents higher on gains from cross-border investments. They must treat it as a local income. Taxpayers should know a few fundamental elements of taxes.

Why do we pay taxes on investments at all?

States treat investment gains like any other income which needs to be taxed. That is the end to paying taxes on investment income, and one cannot go around that. However, taxpayers can arm themselves with the practical know-how of declaring and paying the income tax rate to avoid penalties for non-payment.

Here are what you absolutely need to know about taxes in 2021:

1. Paying taxes on your investment income

As mentioned above, Member States cannot require an investor to pay a tax on his income earned from a cross-border investment higher than the domestic rate. Likewise, an investor in another EU state does not have to pay a higher tax rate than the residents in that specific member state. However, they do need to declare their investment income. Here is what you need to know about the declaration.

Declaration

Investors must declare their income earned through investments to the relevant tax authority. There is no uniform standard about the declaration of taxes on interests. Some states require investors to declare the taxes on investments; others do it on their behalf - Estonia being one of them. The declaration and the tax rates depend on the distinction between (tax) residents and non-(tax)residents. It is sufficient that the investor is a tax-resident to be subject to the specific state's tax declaration rules.

Residency can mean merely residing in the country and not necessarily a citizen of. Again, there are no EU regulations that define this. All states usually agree that the tax-residency requires the investor to live for more than six months.

You can check the tax rates and the declaration rules right here.

Double taxation

Due to the EU's free movement (goods, people and capital), many Europeans are moving and investing their money in businesses across the border. Hence, the duality will always come up. Generally, residents will still be subject to their country of residence's tax rules, but they may have to pay taxes back home. It is called double taxation. A resident pays taxes on his investment income in his country and the country he is investing or residing in. It is not unlawful, but it is an obstacle to the free movement of capital. Fortunately, most countries have agreements to avoid double taxation under bilateral treaties between two member states. The investor will need to claim relief from double taxation through evidence of residence and prior payment of taxes on other income (e.g. employment). Investors need to contact the relevant tax authorities to find what documents they require to submit.

2. Paying taxes in Estonia on investment income

Taxes on income in Estonia are declared before payment, and investors need not report it separately. It includes income made on investments. Estonia's mandatory income tax rate is 20%, and Estonian residents receive the net income on their investment. The rest receive the gross amount.

Under the Conventions for avoiding double taxation and preventing fiscal evasion concerning taxes on income and capital between Estonia and other states, residents can claim relief from double taxation upon proving the residence. Both EU/EEA states and non-EU/EEA states are included in the Convention. (Check out the Overview of bilateral Convention and its future preparations).

Additionally, Estonia will treat an investor as a tax-resident even if they do not reside there. It is called a 'fictitious tax residency', and it is legal. An EU/EEA citizen/resident can register as a tax-resident to receive an Estonian Tax Identification Number to have the investment institution pay taxes on their behalf. They may or not have to pay it again in their state (subject to the Bilateral Convention). Some investors may opt for this option if they wish to save time on the declaration. (Investors should contact the EMTA before applying for tax-residency).

3. What happens if you don't declare your taxes on investments?

Not declaring your income from investments will be deemed as tax evasion, which is illegal. If you do not, you are exposing yourself to the threat of a financial penalty. Every member state has its punishment that is proportional to the evasion.

Estonia considers tax evasion to be a crime and a misdemeanour charged with a monetary fine or imprisonment up to 5 years. Hence, you need to declare your interests earned from your investments.

Note from Quanloop

Quanloop declares taxes on behalf of investors who hold an Estonian Tax Identification Number (TIN), regardless of their residence. It includes interests, sign-up bonus (it is a gift), cashback and referral program.

Last update: 08/03/2021