Overview
In the music publishing industry, VAT (Value Added Tax) and Withholding Tax (WH tax) are key considerations when paying royalties to composers. Under Estonian law, providing songs to a music publisher is treated as a service transaction, and the composer charges the publisher VAT on their royalties.
VAT for Estonian VAT-Registered Composers
For VAT-registered Estonian residents, publishers must calculate and pay VAT in favor of the composer. The process is as follows:
Revenue: €1,000 (total earnings generated).
Composer’s Royalty: €800 (80% of revenue).
VAT: 24% of the royalty (€800 x 24%) = €192.
Total Payment to Composer: €800 + €192 = €992.
In this case:
The publisher adds 24% VAT to the composer’s royalty and pays it to the composer.
The composer then accounts for this VAT in their own VAT filings.
Withholding Tax for Non-VAT-Registered Composers and Non-Estonian Residents
For composers who are either not VAT-registered or are non-Estonian residents, the following applies:
A 10% Withholding Tax (WH tax) is deducted from their royalty payments.
This is in accordance with § 41 of the Estonian Income Tax Act, which requires withholding tax on royalties paid to non-residents and non-VAT-registered individuals.
Example Calculation:
Revenue: €1,000.
Composer’s Royalty: €800.
Withholding Tax (10%): €800 x 10% = €80.
Net Payment to Composer: €800 - €80 = €720.
Summary of Payment Rules
Composer Type VAT Withholding Tax Payment Example VAT-registered Estonian Resident 24% (added to royalty) No €800 + €192 = €992 Non-VAT-registered or Non-Resident Not applicable 10% deducted €800 - €80 = €720
Legal Reference
The withholding tax requirement is based on § 41 of the Estonian Income Tax Act. This law mandates a 10% tax on royalties paid to non-residents and individuals who are not VAT-registered in Estonia.
Conclusion
Music publishers must differentiate between:
VAT-registered Estonian composers (where VAT is added to royalties).
Non-registered or non-resident composers (where 10% withholding tax is deducted).
By adhering to these principles, publishers ensure compliance with Estonian VAT and income tax laws and provide transparent payments to composers.