Estonian company and Estonian taxes — what you need to know

Key takeaways:

1. Estonian businesses can be incorporated online through the e-residency programme
2. Simple flat rate system
3. Corporate Income Tax is payable only if the dividend is distributed — with 0% tax on the reinvested profit, you will have more funds to invest without any tax burden
4. Companies can pay high salaries to non-residents. Salaries for non-residents are not taxed in Estonia
5. Unprofitable or unsuccessful investments are considered business costs and not taxed
6. All Estonian companies are Estonian tax residents
7. No thin capitalisation or CFC rules
8. Corporate services to run your company don’t cost as much as more well-known global jurisdictions

Why Estonia as a business tax advantage?

Estonia has been a member state of the EU since 2004, a Eurozone member since 2011, and a member of the OECD. The Estonian economy is one of the most liberal and competitive in Europe, offering a unique business environment with low taxes and a strong infrastructure.

Despite its small size, Estonia has been at the forefront of technological innovation for years. It was one of the first countries to introduce an e-residency programme, which allows people worldwide to set up a company and business account in Estonia and manage them remotely. And it’s not just for tech companies; many business types can and do benefit from e-residency.

Nowadays, Estonia is a well-established place for new businesses and investors to thrive. By 2023, over 100,000 e-citizens joined, and €150 million has been invested. These staggering figures prove how a small region could offer a hub for ambitious investors and entrepreneurs.

What is e-residency?

E-residency is a government-backed programme allowing foreigners to start and run their businesses in Estonia with minimal hassle. Entrepreneurs who qualify for E-residency can use the country’s digital infrastructure to do business from anywhere globally. Estonia’s advanced digital infrastructure — including fast broadband, e-government services and a strong digital economy — makes it an ideal location for companies looking to operate online.

Since 2014, Estonian e-residency has been established online and available to companies from outside the country, allowing them to register and operate a business in Estonia. Entrepreneurs worldwide can use e-residency to own business entities and enjoy the benefits of owning a business in Estonia while running operations from their own country.

Registration for a business in Estonia can be completed fully online. The e-residency programme enables new entrepreneurs or business owners to establish a legal address and fully functional Estonian company in Europe significantly faster than the traditional process of setting up a full business register, renting office space, or hiring employees. All you need is access to the internet so you can register and start operating an EU business from anywhere in the world.

How to open a company in Estonia

Setting up a full company online here in Estonia can be really straightforward — which is one of the main advantages of doing it in the first place, given how complicated it can be to do it elsewhere. Suppose you’ve decided Estonia is the right place for your business venture. In that case, it’s possible to incorporate a company online in just a few steps and start registering your company fully online. Here’s a list of documents you’ll need to have to complete the application:

• A passport or residency card
• proof of ID
• Your company’s registration document (if applicable)
• Certificate of Incorporation
• Memorandum of Association and Articles
• A business plan outlining your business goals and objectives
• Directors’ and shareholders’ registration details
• Tax ID or business permit (if applicable)
• A bank statement
• Copies of your company’s documents (if applicable)
• The application form
• The business account opening fee (if applicable)

Once you’ve got your documents together, here’s how the next stage of the process goes:

1. Apply for e-Residency: To apply for e-Residency, you must fill out an application form on the Estonian Police & Border Guard Board website.
2. Submit your application: Once you have submitted your application, the Estonian Police & Border Guard Board will initiate a procedure to verify your identity and eligibility. In most cases, this process should take no more than two weeks. After booking an appointment with them, you must also take a biometric test.
3. Choose a service provider: Once you have successfully applied for e-residency and verified, you must choose a service provider. As per Estonian law, if you are a foreigner applying for a company in Estonia, there should be a designated contact person who acts as a messenger if the Estonian authorities try to contact you.
4. Register the company in Estonia: After you have a service provider or a contact person, you can register your company structure online at the e-Business Registry. This process costs approximately €265.
5. Apply for a business account: Once you’ve registered your company in Estonia, it’s time to apply for a business account. You must provide copies of the company documents and an application form. The bank may charge you a fee for this service. Banks and other financial institutions will require some documents to check your eligibility. These documents are generally mentioned above and vary depending on your chosen provider.

How to become an e-Resident

Becoming an e-Resident isn’t difficult, but that makes it so appealing — all you need to qualify is to meet certain eligibility requirements and apply for the e-Residents’ programme. To be eligible for e-residency company here, your business must be legal in Estonia and have a valid business account there. The process to offer e-residency here is straightforward and can be completed in just a few simple steps. We’ve outlined these steps for you next:

Step 1: Gather your documents

First, you must gather all the documentation and legal address necessary to prove that your business is legal in Estonia. This includes:

• a copy of your government-issued ID
• a passport-style digital photo
• a motivation statement
• Visa or Mastercard

Step 2: Submit your application

Once you have gathered the necessary documentation, you can submit your application online. You will also pay a state fee an application fee, the Pay State Fee €100–120.

Step 3: Application review

The Estonian Police & Border Guard Board will verify your documents initially. If everything looks good, the board will issue you an e-residency kit.

Step 4: Opening a business account in Estonia

Once you’ve received your business licence, opening a business account in Estonia is important to start doing financial transactions with Estonian-based companies. You can do this by visiting any Estonian bank and requesting an account be opened for your company. The business bank account opening fee will vary depending on the platform or institution, but it is usually around €100–300. We at Anson|Baer will determine the exact fee before your visit.

What Estonian company types are there?

Private Limited Liability Company (OÜ)

Shareholders’ liability for OÜ’s obligations is limited to the amount of the share capital. The minimum share capital of a private limited liability company is €2,500, which can be paid as a monetary or non-monetary contribution.

This company type suits small and medium-sized companies, one-time project companies (SPV), and property management. A management board heads the company with at least one member. The founder can be a legal or natural person.

Public Limited Liability Company (AS)

The liability of shareholders for AS’s obligations is limited to the amount of the share capital. The minimum share capital of a public limited liability company is €25,000; it can be paid as a monetary or non-monetary contribution.

The managing body of a public limited liability company is a supervisory board, a supervisory organ of the management board. It includes the representatives of owners (at least three members) and the executive board (management board), which manages the company’s everyday commercial affairs.

Shares must be registered in the Estonian Central Register of Securities. A public limited liability company is suitable as a form of business for large-scale business projects, in the case of many shareholders/investors, and arising from the need for issuing different types of shares. Preferred shares can be issued that give the right to dividends. The annual report of the public limited liability company must be audited.

Non-Profit Association (MTÜ)

A non-profit association (MTÜ) is a voluntary association of persons. Its aim or main activity cannot be profiting through commercial activity. A non-profit organisation’s income can only be used to achieve the objectives specified in the articles of association. A non-profit organisation may not distribute its profit among its members.

Foundation (SA)

A foundation is a legal person in private law with no members, created to govern assets and used for achieving the objectives specified in the articles of association.

Limited Partnership (UÜ)

A limited partnership (UÜ) is a company with partly limited and partly unlimited liability. At least two partners operate in a limited partnership under a mutual business name. At least one of the partners — the general partner — is liable for the limited partnership’s commitments to the extent of all one´s assets, and at least one of the partners — a limited partner — has a liability limited to one´s deposit. The limited partnership has no minimum capital, thus for starting business no mandatory capital needs to be invested into the company. A partner in a limited partnership can be a legal person or a natural person.

General Partnership (TÜ)

A general partnership is a company with unlimited liability, i.e., its owners are liable for all their assets. At least two partners in a general partnership operate under a mutual business name. There is no minimum share capital in a general partnership, so no mandatory capital needs to be invested in the company. A partner in a general partnership can be a natural person or a legal person.

Estonian Branch of a Foreign Company

A branch is part of a foreign company, not an independent legal person. It can be used if the foreign company doesn’t wish to establish an independent legal person in Estonia but wishes to pursue commercial activity in Estonia. The foreign company is liable for the commitments arising from the branch’s activity.

What about Estonian company taxes and income tax?

Depending on what you need to use your Estonian company for, there will be personal income tax and corporate income tax. The tax rates are as follows:

Principal Taxes (Corporate)

• Value added tax 22%
• Social tax 33%
• Unemployment tax 0.8%
• Corporate Income Tax payable on dividend 20% (will be withheld in case the dividend is distributed — net 20/80). Starting in 2025, the CIT will be 22%

Tax Exempt Minimum

• Total annual — €6000

Payroll Taxes (initial data)

• Social tax 33%
• Individual income tax is 20%, and from 2025, the tax rate will be 22%
• Unemployment insurance tax 1.6%

Corporate Income Tax — if the employee receives the dividend:

• An individual being (an Estonian resident or nonresident);
• An Estonian legal entity;
• Non-resident legal entity who holds at least 20% of the company’s shares at the moment of payment of dividends and whose country of residence is not deemed Low Tax Territory, the dividend is taxed with income tax equalling 20/80 of the dividend paid.

Capital Gains Tax

• There is no separate capital gains tax in Estonia. Gains derived by resident companies or branches of foreign companies are exempt until a distribution is made.

Branch Profit Tax

• There is no specific branch profits tax in Estonia. Branches of foreign companies are taxed under the same principles as resident companies, i.e. taxed on the distribution of profits.

Fringe Benefits Taxes

• Fringe benefits are taxed as income; 20% income tax is levied on the gross value of the benefit plus 33% social security contribution.

What else should I know about Estonian taxes?

Determination of Taxable Income

• As Estonian-resident companies’ income is exempt from tax, there is no requirement to determine trading income for tax purposes. Tax is levied on dividends and distributions of profit in other forms, such as fringe benefits, gifts and other non-business-related payments.

Foreign Tax Relief

• Under Estonia’s double tax treaties, foreign tax is mostly relieved by exemption.

Corporate Groups

• Corporations are taxed separately in Estonia. There is no concept of consolidated tax returns.

Related Party Transactions

• Related party transactions may be adjusted for tax purposes if the transactions are not at arm’s length.

Withholding Tax

• Withholding taxes must be deducted from interest, royalties and dividends paid to non-resident corporate shareholders. Withholding tax applies to the interest payments only if the interest rate is over the market rate and only to the proportion above the market rate.

Why is Estonia attractive to startups, investors and new businesses?

Estonia has become a startup hub due to its favourable business environment, innovative spirit, and digital infrastructure. The country has made significant investments in building a robust IT infrastructure, contributing to transforming its people and resulting in a highly connected and tech-savvy society. Estonia is also known for its business-friendly policies, including a simple tax system, low corporate tax rates, and minimal bureaucracy.

These factors have attracted various entrepreneurs to set up shop in Estonia. The country has a thriving startup scene, with numerous accelerators and incubators that provide resources and support to new businesses. The government has also introduced several initiatives to promote entrepreneurship, including tax incentives and funding programs. Estonia’s current startup scene proves how effective the e-residency programme has been.

Which sectors can benefit from establishing a business in Estonia?

Estonia has a diverse economy, and businesses from various sectors can benefit from establishing a presence there. The most prominent industries are IT (information technology), software development, e-commerce, finance, and logistics. Estonia became a regional hub for technology and innovation, with a highly skilled workforce and a supportive business environment. The country’s investments in digital infrastructure and e-government services made it an attractive destination for businesses looking to leverage technology.

Estonia is also popular for startups looking to access the European market. As an EU member since 2004, Estonian financial services, customs, and business infrastructure are well adapted to Eurozone regulations.

Some examples of sectors that can benefit from opening a business in Estonia:

IT — Information Technology: Estonia has a highly developed IT sector, with a strong focus on innovation and emerging technologies. The country is home to many software development companies and startups specialising in blockchain, artificial intelligence, and cybersecurity.

E-commerce: With a well-established digital infrastructure and a tech-savvy population, Estonia is an ideal location for e-commerce businesses. The country also has a favourable tax regime for established online front businesses.

Finance: Estonia has a well-regulated financial sector, a stable financial system and a growing fintech industry. The country’s share capital is home to many international banks, crowdfunding platforms, and payment service providers, making it an attractive location for financial services companies and personal investment funds.

Logistics: Estonia is strategically located between Scandinavia and Central Europe, making it an important transit point for cargo shipments. The country has invested heavily in its transport infrastructure, including seaports, airports, and rail connections, making it an attractive location for logistics and transportation companies

Healthcare: Estonia has a well-developed healthcare system, with most companies focusing on digital health and e-health solutions. The country has many health tech startups and companies offering telemedicine and medical data management solutions.

Creative industries: Estonia has a vibrant creative scene, with many talented artists, designers, and musicians flocking to the country to merge their art with technology. As a result, many creative startups and companies working in sectors such as game development, animation, and digital media prefer to move operations to Estonia.

Environmental technology: Estonia strongly emphasizes sustainability and has invested heavily in renewable energy and waste management. The country is home to many companies specialising in environmental technology, including solar energy, wind power, and waste-to-energy solutions.

How should you decide to open a company in Estonia?

Whether you operate public limited companies in a similar sector as above or not, moving your company operations to Estonia with e-residency or as a personal investment company can be one of your smartest decisions. We have detailed its pros and cons and summarised the tax implications for you.

Estonia is a business opportunity if you are looking for new markets, opportunities to extend your network, and access to the Eurozone while saving on costs, taxes and resources. Managing Estonian companies while you live offshore is less expensive than in other global jurisdictions like Asia or North America. Our corporate services can handle this and your tax management while you focus on your business or investments.

Estonian taxes FAQs

Is Estonia considered a tax haven?

The Estonian tax code has numerous benefits for investors’ businesses, but it has limitations and cannot be described as a tax haven. For example, the income tax is only paid when dividends are distributed; all profits can be reinvested.

Are taxes high in Estonia?

All products are taxed at 22% VAT, which is included with most items. Lower rates are also applied to goods and services such as books.

Are dividends taxed in Estonia?

Corporate income taxes on dividends are payable by the company distributing the dividend to shareholders if they are paid. The same rules apply to Estonian PEs from non-residents. The dividend payment of a legal entity is not taxed separately.

What are the taxes for expats in Estonia?

Residents and non-residents are liable for the same 20% of their income. Residents must declare only their world income, while non-residents can only report Estonia-sourced income.

Originally published at https://ansonbaer.com on April 16, 2024.