How to avoid unnecessary taxation of your Estonian company?

We are in the high season of preparing and filing annual reports of limited companies in Estonia. Correctly prepared and approved annual report is the legal base for distribution of dividends to the owners. In the following article we bring out the basic rules and core requirements applicable to the accounting of your limited liability company. Compliance with the laws is essential for avoiding unnecessary taxation of your Estonian company.


General requirements for organization of accounting of limited company

Company is required to document and record all its business transactions on the basis of source documents in accounting ledgers and journals. A source document shall contain at least the following information concerning a business transaction:

  • date;
  • description;
  • quantity, price, amount.

Company must preserve accounting source documents for seven years as of the end of the financial year when a business transaction was recorded in the accounting journals and ledgers.

According to Estonian Income Tax Act, all certified expenses made by the company in relation to its business may be deducted from the business income. The law states that the payments for which the company does not have a source document are considered to be unrelated to the business and therefore the company shall pay income tax at the rate of 20/80.

Income tax also applies to expenses and payments made in order to:

  • purchase goods or services not related to the business of the company;
  • fulfil obligations not related to the business of the company;
  • acquire securities issued by a legal person located in a low tax rate territory (unless such securities meet certain legal requirements);
  • acquire a holding in a legal person located in a low tax rate territory;
  • pay fine for delay or a contractual penalty, or extra-judicial compensation for damage, to a legal person located in a low tax rate territory;
  • grant of a loan or making of an advance payment to a legal person located in a low tax rate territory or acquisition of a right of claim against a legal person located in a low tax rate territory in any other manner.

Therefore, all payments from the company must be accompanied with the source documents by the time of preparing and approving the annual report. Expenses and payments that are made during the financial year without source documents must be declared in income tax declaration and company must pay income tax at the rate of 20/80.


Annual report

The annual report is obligatory for all undertakings operating in Estonia (even if there is no activity during the financial year) and it must conform to the form established in legislation.

You are required to file the annual report with the Commercial Register within six months of the end of the financial year. The report has to be filed electronically via the e-Commercial Register Company Registration Portal. Annual accounts shall be prepared in Estonian language and in the currency officially applicable in Estonia (EUR).

The content and the form of the annual report depends on the size and business of the company.


Distribution of dividends

Company may distribute dividends to the shareholders on the following conditions:

  • contribution to the share capital has been made and share capital has been registered;
  • annual report has been approved;
  • distribution of dividends has been resolved by the shareholders’ resolution;
  • distribution to shareholders may be made pro rata of nominal value of the share, or other ratio decided by shareholders and registered in the bylaws of the company;
  • distribution is not allowed if it causes the net assets to become less than the minimal share capital 2500 EUR.

In conclusion – in order to avoid unnecessary taxation make sure that all of your companys expenses are related to your business and backed up by a source document. The deadline for submitting annual report is on 30th of June and our accountants are always happy to help you with it.

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