The most important questions that e-Residents have when they want to start a business in Estonia are probably about taxes. Every country has its own rules and regulations about taxes, so you have to do some research before starting a company in Estonia. If something seems unclear or raises questions, then the best advice is to order a tax consultation to avoid any later disappointments with regards to taxes.
In general, Estonian company’s taxes are transparent and the system is easy to understand also for foreigners because of the flat rates. This is one of the reasons why many foreigners have decided to register for e-Residency and start a company in Estonia. Also, the bureaucracy level is very low compared to many other countries and the tax rates are fair. However, if you want to avoid taxes, then Estonia is not the place where you to do that.
In this article, we’ll give you a full overview of the most important aspects you need to know about Estonian company’s taxes as an e-Resident.
Tax Residency and Citizenship are Two Different Things
To explain tax residency and citizenship, we first need to consider that there are two separate parties involved: a private and a legal person. This means that your company is a legal person, and you alone are the private person.
Citizenship only applies to a private person and is determined by your passport. The tax residency on the other hand is not the same as citizenship and is determined by tax laws. The tax residency status can be in the same country as your citizenship, but it also might be different or change in time. Tax residency is the place where you actually have to pay the taxes. For example, if you are an Estonian citizen, but have lived more than 183 days per year in Finland, then you become a tax resident in Finland and have to pay the taxes there.
In general, a company’s tax residency is in the country where the company is established. So, if the company is established in Estonia, then by law the tax residency is in Estonia. There are exceptions to this rule that will change the tax residency of your company, which we will discuss later in this article.
When talking about tax residency or even e-Residency, it is important to emphasize that neither is an actual residency. So, if you receive your e-Residency card, then this doesn’t make you a resident nor a tax resident of Estonia – it is a common false perception. E-Residency is not related to visa or a resident permit and doesn’t enable you to travel to Estonia. E-Residency card is a digital identity that allows you to run a business in Estonia from the distance and fully online.
Tax Benefits of an Estonian Company
This is by far one of the most popular topics among e-Residents. Estonia has a very transparent tax system and it is easy to understand for the foreigners, because of the flat tax rates. Here are some of the main tax benefits of an Estonian company.
- The most important aspect about Estonian company’s taxes is that you only pay corporate income tax when you distribute dividends. If you don’t distribute dividends, then you don’t have to pay corporate income tax. So, you can use all the money that goes to your business bank account for reinvesting and growing the business and you won’t be taxed for that. In that sense, Estonia is the ideal place for growing your business compared to many other European countries where you have to pay taxes as soon as you earn income.
- In some cases, you can take out tax-free dividends, for example if you have a permanent establishment or when you receive dividends from a subsidiary. We will discuss permanent establishment separately in the upcoming sections.
- And lastly, a unique regulation about the Estonian tax system is that you, as a private person, don’t have to pay personal income tax additionally to the corporate income tax when the company pays you dividends. However, this applies only when you, as a private person, are a tax resident of Estonia. This is unique, because in most of the countries a private persons must pay personal income tax when they receive dividends. Nevertheless, this doesn’t mean that you, as a private person, don’t have to pay the personal income tax in your homeland.
It is very important to understand that there are different taxes for the company, and you as a private person. Therefore, you have to keep your personal and company’s money separate, as these are two independent persons: a natural person and a legal person.
This also means that it is not considered as double taxation when the company distributes dividends and pays corporate income tax, and when a private person receives dividends and pays personal income tax on that. We will discuss how double taxation works in the following section.
What is Double Taxation and Can It Be Avoided?
As the name says, double taxation stands for paying the same taxes in different countries. Double taxation can be avoided, if the country where your company is established, and where you as a private person live, have signed a double tax treaty agreement. See the list of the countries that have double tax treaty agreements with Estonia.
If the countries have not signed the treaty, then the double taxation can’t be avoided. For example, Estonia doesn’t have a double tax treaty with Russia, which means that the company may need to pay corporate income tax in Estonia as well as in Russia.
In the previous section, we already mentioned that income taxes for a natural person and a company are two separate things. If a company pays out dividends, then this is taxed with the corporate income tax. However, in most of the countries, private persons have to pay personal income tax from the received dividends. This is not considered as double taxation, because these are two separate taxes.
Permanent Establishment Can Change Your Company’s Tax Residency
Permanent establishment is something that people are usually not aware of, but it is important to consider as it can determine where you have to pay the taxes. Permanent establishment occurs in a different country than where your company is registered, and in a location where the business management and selling goods or services happens. So, if you permanently manage your business from another country, then you have the risk of having a permanent establishment there. For example, if you have an Estonian company, but manage your business in Finland, then this might result in a permanent establishment in Finland and means that taxation will be according to the Finnish tax rules. Besides management location and permanently selling in some country, a permanent establishment might occur if you sign agreements with the clients and negotiate about the prices in some other country than where your company is established. Other aspects can also create a permanent establishment for your company in a foreign country. As taxes are case sensitive, then a tax advisor has to evaluate and analyse the nature of your company’s business and see whether there is a risk for a permanent establishment occurring somewhere else.
So, if the permanent establishment happens, then your tax residency might change, and you have to start paying taxes in that foreign country. In that case, you will be notified about the tax obligations by this country’s government. For example, the Finnish tax office might see that you’re conducting your business in Finland and therefore lets you know that, as you have a permanent establishment in Finland, you have to pay the taxes in Finland and according to their rules.
All the above means that once a permanent establishment occurs, then Estonian regular taxation rules do not apply to your company anymore. So, at the end of the year, you have to pay taxes according to the laws of the country where you have the permanent establishment.
It is important to evaluate all the risks that you have regarding the permanent establishment when starting a business. As mentioned earlier, permanent establishment mainly takes place if you manage the business or sell goods or services permanently in a different country from where your company is established, but there are also many other aspects to consider. So, it is recommended to get a tax consultation before starting a company in Estonia, just to save you money and nerves in the future and avoid arguments with tax offices about where you are obligated to pay the taxes.
Read more about tax consultations in 1Office here.
When Can You Pay Out Dividends and How Are They Taxed in Estonia?
- According to Estonian laws, dividends can only be distributed from the previous year’s profit. It is not possible to pay out profit for the current year.
- Secondly, the company’s annual report must be submitted to show last year’s profit and determine the amount that can be paid out as dividends.
- And finally, the share capital of the company must be paid in. As Estonia has made it very easy to start a company without paying the share capital in right away, then the idea behind this requirement is that you wouldn’t take any money out of the company before you have paid your contribution.
The share capital amount can be used for business purposes, meaning that it doesn’t have to stay on your business bank account as a deposit. As soon as it is transferred to the bank account, it can be used for business expenses, paying out salaries, and so on. After the share capital has been paid in, it has to be registered in the Business Register to pay out dividends. It is also required that you declare the share capital in the Estonian Tax and Customs Board (the ETCB). This becomes useful, if at some point you want to liquidate the company and are obligated to pay income tax on the company’s profit. If the minimum share capital of 2500 € has been declared in the ETCB beforehand, then in the case of company liquidation, 2500 € of the company’s profit will be tax-free.
In Estonia, the regular corporate income tax rate on profit is 20% from the gross amount. If you receive dividends from subsidiaries or permanent establishments, then these may be tax-free in case there is a double treaty agreement signed between the countries.
There is also an option to use a reduced corporate income tax rate which is 14%. When a company uses the reduced rate, then a private person has to pay 7% of the personal income tax. However, there are several rules for when the reduced tax rate can be used.
- First, you can start using the reduced tax rate from the third year after the company was established. But in that case, you had to distribute dividends in the second year, otherwise the regular 20% tax rate still applies.
- If you paid out dividends in the second year, then 1/3 of this amount can be taxed with a reduced rate on the third year and the rest of the amount with the regular 20% tax rate.
- In the fourth year, you have to sum up all the dividends distributed in the second and third year, and 2/3 of this amount will be taxed with the reduced rate and the rest with the regular 20% rate.
The 7% that is withheld as a personal income tax, can be deducted in the personal income declaration in your home country (in a country where your personal tax residency is). For that, you need to get proof from the ETCB that the income tax has been paid in Estonia and then your taxes will be reduced in your home country. If a company distributes dividends to another company with a reduced rate, then the company only pays 14% of corporate income tax on that. But if the owner of the second company is a private person, and the second company pays out dividends to the owner, then the 7% personal income tax will be withheld from that private person.
So, using the reduced tax rate is rather complicated and involves different calculations and nuances. If the reduced tax rate is used, the full structure of the dividends should be known to make better judgments. If you have filled the requirements for a reduced tax rate and want to use it, then we recommend consulting with our accountants who can explain how it will work for your company.
How does Salary Taxation Work in Estonia?
In general, there are two options to pay a fee from a company in Estonia: a regular salary and a board member’s fee. A regular salary is paid for active work that is done in the company to bring value. A board member’s fee is paid for administrative tasks that are done to manage the company.
If you are the only owner and an employee of your company, then you can decide which fee you pay for yourself. You can pay yourself a regular salary, a board member’s fee, or a combination of both.
A company has to pay out salary taxes on a regular salary only if the employee actually works in Estonia. If the employee is not an Estonian tax resident and doesn’t work in Estonia, but the company still pays them a salary, then the salary taxes should be paid in another country where the person is a tax resident and works in reality.
The regular tax rates for Estonian tax residents in Estonia are 20% for personal income tax, 33% for social tax, 1,6% for unemployment tax, 0,8% for employer’s unemployment tax and 2% for pension. In Estonia, employees can also get a maximum of 500 € income-tax-free, but the amount decreases depending on the size of the salary. To find out the actual amounts based on your salary, use the salary calculator.
If you work in Estonia and are tax resident here, then you also have to pay social tax in Estonia, which means that you can receive health insurance only in Estonia. Keep in mind that you can only get social benefits from one country. Therefore, the personal income tax can be paid in many different countries, but the social tax should be paid in a country where you live and where you need to get the social benefits.
The taxation of a board member’s fee is a bit different than that of a regular salary. If a board member is an Estonian tax resident, then all the taxes will be paid in Estonia. But if the board member is a foreigner and doesn’t work or live in Estonia, then the 20% income tax still has to be paid in Estonia. Social tax can be paid in Estonia or in another country where the board member wants to receive the social benefits.
In case you are a digital nomad and travel in different countries while working, then the salary taxation might become quite complex. If you are a tax resident in one country, then everything is simple, and you will pay taxes in that country. If, however, you don’t have a tax residency and receive a salary, then you still have to pay taxes somewhere. Otherwise, at some point, some government can claim that you need to pay taxes in their country. So, if you are staying in a certain country and doing work, then this is the country where you should pay the taxes.
When and Why to Register for the VAT in Estonia?
In Estonia, the threshold of registering for the VAT is 40 000 € per year, but it only applies to the turnover from the sales to the Estonian and EU clients. If you have clients outside of the EU, then this threshold doesn’t apply, and the company doesn’t need a VAT number. For example, if your clients are from the US and the company’s turnover is more than 40 000 €, then you still don’t need to register for the VAT number in Estonia.
The regular VAT rate in Estonia is 20%, but there is also a reduced 9% VAT rate for certain fields of business, for example, books, pharmaceuticals, medical equipment, hotel accommodation.
You can also register for the VAT before your company’s turnover is 40 000 € per year. There are multiple reasons why you might want to do that, even if you don’t need to use it right away.
- First, if you have an Estonian company and different expenses in Estonia, then you can get the VAT back for those expenses and use that money for your business.
- Second, if you have business partners in the EU who also have a VAT number, you can invoice each other with 0% VAT instead of paying the VAT amount additionally. There is, however, an exception to that rule. If you send an invoice to another Estonian company, you still have to add 20% VAT to your invoice, since it is a domestic turnover within the Estonian tax system.
- Lastly, a VAT number shows reliability to your customers and business partners.
In trading and e-commerce business, you need to register for a VAT in a country where your goods are physically located. So, if you are doing an e-commerce business with a company that is registered in Estonia, but the goods don’t move through Estonia, then usually you need to get a VAT number somewhere else. For example, if you have an Estonian company, but buy the goods from China and import them to Germany, from where you sell the goods to private persons, then you have to get a VAT number in Germany.
If a company becomes VAT liable in Estonia, then it has the obligation to file tax declarations every month. If you fail to submit your tax declaration, then there will be a penalty from the tax office in the amount of 100 € for each missed declaration. If a company registers for a VAT number in a different country, then this other country’s tax rules apply.
What is EORI Number?
EORI stands for the Economic Operators Registration and Identification System and is needed when your company exports (or imports) goods from (to) non-EU countries to (from) the EU. EORI code should be applied in the country where your company is established.
For example, if you have an Estonian company, but import the goods directly to Germany, then you still have to apply for the EORI number in Estonia.
What is MOSS and Who Can Benefit From It?
MOSS stands for Mini One Stop Shop and is part of the VAT, but it only concerns digital goods or services. For example, services covered under the MOSS scheme include website hosting, a supply of software, access to databases, downloading apps or music, online gaming and distance teaching.
When selling digital goods and services, the regular rule is that the place of turnover is where your customer is located. So normally if you sell physical goods to a certain country, then at some point you have to get a VAT number in that country. But MOSS simplifies the process for digital goods and services which means you don’t have to get a VAT number in many different countries. For example, if an Estonian company sells digital services to different private persons all over the EU, then the company’s invoices will have an Estonian VAT number, but a client’s home country VAT rate. Meaning that your company will pay all the other countries’ VAT to the Estonian tax office who will then spread the VAT itself between those countries where the customers purchased your digital goods or services. Therefore, MOSS will save you a lot of time and money in the end.
MOSS scheme can be used only if the company is VAT liable. In Estonia, you have to declare MOSS in a special quarterly declaration. So, it is not part of the regular monthly VAT declaration, but additional reporting. You still have to submit monthly VAT declarations, even if most of the goods or services you sell, are covered with MOSS.
It is very important that you fully understand what selling digital goods and services means when it comes to MOSS. You will have to set up a very good system to gather all the information about your clients, the countries where they’re from, and the VAT rates of the countries where your customers completed the purchases, as this will greatly help from the tax reporting point of view.
How Are the Expenses Taxed in Estonia?
It has to be emphasized that every country has its own rules for taxing the company’s expenses. In Estonia, all justified business expenses that can be used for business purposes, are not taxed. These expenses include buying equipment or technology, such as computers, for your business, paying for web hosting, renting an office, paying for the office utilities, and so on. Plane tickets and accommodation for business trips are also considered as regular expenses and are therefore not taxed.
The fringe benefit tax applies to all expenses that are considered as a benefit to the people related to the company (employees etc.) Fringe benefits include food, drinks, representation expenses, and so on. All these expenses are additionally taxed with income and social tax. Therefore, it is very important to keep your personal and company’s expenses separate, otherwise you might have to pay some taxes that you didn’t expect.
Also, according to the Estonian rules, it’s important to document all the expenses. If you don’t, then you have to pay 25% taxes for the missing accounting source documents.
You can get more information about the fringe benefits in the article by Estonian Tax and Customs Board.
Keep in mind that for the representation costs of the company, the tax-free limit is only 32 € plus 2% from the payroll per month. Everything that exceeds this amount will be taxed with a 25% income tax. The tax free amount is cumulative throughout the financial year.
If you have business trips, then you can use a daily allowance. This is meant to cover the expenses when you are on a business trip, such as meals. The daily allowance is up to 50 € for the first 15 days of the trip per month and 32 € for the rest of the trip, and it can only be used for the trips that have specified dates and purposes.
Quick Overview of an Estonian Company’s Taxes
These were some of the most important aspects of an Estonian company’s taxes that concern e-Residents. As mentioned, every country has its own tax rules that need to be followed.
Here is a brief overview of the most important points that e-Residents and non-residents should know about Estonian taxes.
In Estonia, you have to pay corporate income tax only when the company distributes dividends. But if you are not an Estonian tax resident, then you probably have to pay personal income tax in your home country on the dividends you received as a private person. Also, all the salary taxes of the employees who work in Estonia have to be paid in Estonia. If you have any non-business-related expenses, then be ready to pay the taxes. But make sure that all the transactions are shown on your company’s invoices.
In case you need some assistance with regards to Estonian company’s taxes that specifically concern your business, then order a tax consultation from 1Office and avoid any unnecessary taxes in the future.