This article discusses how you can reduce your taxes by setting up an Estonian company. We discuss why the country is so popular with investors and startup founders, as well as the exact benefits of having a company in Estonia.
We also look at the country’s famous E-Residency program and how it makes company registration easier. If you’re weary from speaking with company formation agencies, you’ll be delighted to hear that in Estonia, company formation can be done online in just 24 hours – and we’ll show you how.
We also show you how you can legally reduce your corporation tax rate to zero in Estonia, with information about how its tax system works to help you determine whether or not it’s the right solution for you. And, of course, if you’re still unsure, we’re happy to discuss your options and help you find the ideal offshore solution for your exact business needs.
Why Estonia?
Estonia’s reputation as a modern, forward-thinking economy is well-earned. It is a high-tech, low-tax, investor-friendly country that scores high points for innovation and ease of doing business.
Its robust digital infrastructure and transparent business environment have made it a popular choice with tech-savvy individuals of various stripes, from digital nomads to tech entrepreneurs who prefer to use online services to augment their location-independent lifestyle.
Estonia’s E-Residency program continues to create the most online buzz, but the real story is not so much the fact that Estonia was the first to create such a program but rather why.
And once you start to understand the reasons why, and appreciate the unique combination of factors at play, you will begin to see exactly what it is that makes Estonia such an attractive prospect.
Benefits Of An Estonian Company
Estonia offers you a simple, streamlined path to EU company registration through its E-Residence program.
Once you have received your E-Residency card, you can then establish a company in Estonia online quickly and easily.
Similarly, you can manage various aspects of the company digitally, including banking and taxes. So unlike other countries that require you to perform certain operations inside the country, often though face-to-face meetings, in Estonia you can manage your business entirely remotely.
It’s ideal for those who are looking for a no-fuss solution that also provides swift access to the European single market and SEPA (Single Euro Payments Area).
The main tax benefit to having a company in Estonia is that you don’t have to pay any corporate income tax on profits, provided they are kept inside the company.
You are only liable to pay corporate income tax when that money is taken outside of the company, for example, as dividend payments. However, provided your profits are reinvested in the company or otherwise spent on business operations, you will not be liable to pay any corporate income tax.
Estonia’s E-Residency Program
Estonia’s E-Residency program allows you to set up a company fully remotely, thus allowing you to establish an EU company online.
It should be noted, however, that E-Residents are not true residents of the country.
Many have mistaken the program for an online path to gaining a residence permit, but that’s not the case. (But if obtaining second residence is something you are interested in, please get in touch with us.)
An Estonian E-Residency card does not, in fact, grant the bearer the right to reside in Estonia or enjoy free travel throughout Europe (unless they are already an EU citizen.)
Nor does it exempt you from paying taxes in your home country.
What it does provide, however, is easy access to Estonia’s vaunted digital services ecosystem, which includes banking access to the EU and the ability to register a company in an hour.
So no, contrary to common misconceptions, this isn’t some magical digital golden ticket that lets you obtain EU residence online.
But you can use it to set up a private limited company in 60 minutes, 100% online. And with your new E-Residency company, you gain access to European banking plus entry to a market of over 447 million EU citizens.
Estonia Tax Residency
Much in the same way that E-Residents are not actual residents of Estonia, your tax residence status in Estonia, is, once again, a completely separate issue to your actual residency status within the country.
If you are a resident of Estonia and live in Estonia more than 183 days and have links to Estonia, then you are also automatically deemed tax resident. However, non-residents can still be declared tax resident, depending on circumstances.
As with most countries, Estonia follows the 183-day rule, which means if you reside in the country for 183 days or more within a year, you will automatically become tax resident.
As such, you will be required to submit tax returns there, but, Estonia being Estonia, you can do so online quite easily.
Estonia Tax Rate For Companies
Estonia has a 20% flat corporate tax rate. But, as mentioned previously, Estonia will not charge your business corporate income tax provided you keep your profits in the company and you don’t remove the profits out of the company, for example, as dividend payments.
The 20% tax on distributed profits can be reduced to 14% in certain cases. If for example, you choose to distribute dividends with a value equal to or less than the average value of dividends of the previous three years, the 14% rate will apply.
An additional 7% tax applies to dividend payments made to individuals living in Estonia.
It’s also worth noting that, if you are not tax resident in Estonia then you will most likely have to pay personal income tax on dividends in your home country.
Your tax residence and other factors will have a bearing on what taxes you are liable to pay in both Estonia and your home country, as will the matter of whether or not both countries have tax treaties in place.
As always, if you’re not sure about something, we recommend getting professional tax advice or if you’re interested in working with us, please contact us about becoming a client.
Other Estonian Taxes
The personal income tax rate in Estonia is also set at 20%.
Employees of an Estonian company who neither reside nor are tax resident in Estonia are required to pay income tax in their home country instead.
Estonian Social Tax
Though given Estonia’s highly-skilled workforce and relatively affordable labor costs, it might well be hiring locally. In which case, as an employer, you are obliged to withhold income tax from salary payments, once again at a rate of 20%.
VAT Rate In Estonia
If your company earns more than €40,000, you must register for VAT (Value Added Tax). However, this tax only applies to sales either within Estonia or within the European Union.
Generally, VAT is charged at a rate of 20%, with notable exceptions, for example, certain medical industry products, where the VAT rate is 9%.
However, the VAT registration rule does not apply if you do not have any customers within the EU, and so all your sales are to non-EU countries. If this is the case, and there are no exceptions, then there is no need to register for VAT.
If you are not sure about your company’s obligations in this regard, it’s best to get advice beforehand, to avoid having to pay taxes unnecessarily.
Or, if you think Estonia has potential but you’re curious to learn about other options, talk to us about creating your own personalized Action Plan.
Estonian Company Formation
Setting up a company in Estonia is fairly straightforward, particularly for E-Residents who can open an Estonian company in as little as one day by applying online.
So unlike many other jurisdictions, there is no need to shop around looking for a reliable company formation agency. You can do it all yourself, if you so wish, 100% online, and the cost is €190.
Generally, the most commonly used form of company in Estonia is a private limited company. This is a limited liability company known locally as an OÜ.
You will need to provide a company name, your company’s legal address (this can be a virtual office), and details of the company’s activities so that the authorities can classify your company correctly. (Note that certain industries may require additional licensing.)
You can add your company to the commercial register via the E-Business Register internet portal, which is generally the swiftest and best-recommended option.
In addition to setting up a company and adding it to the commercial register, you also can apply for banking services online and manage your taxes.
If you wish to set up a bank account online, E-Residency allows you to do so easily, perhaps even more easily than you can in your own country. The same goes for tax declarations and filing.
Depending on your business turnover and client base, you may have to also register for VAT and also register as an employee and pay social tax if you will be employing local talent. (see previous section on Other Estonian Taxes above.)
Estonian Company Tax Benefits
Estonian companies are quite flexible in terms of what you can do with them.
As mentioned above, the three main items you need to provide when setting up a company in Estonia are the company name, its legal address, and its main business activity.
But that doesn’t mean your new company has to stick to just that one narrow field of operations. You can set up a private limited company for various business activities, including commercial activity, investing, or for the purchase and holding of real estate and/or other assets.
Estonia’s business-friendly environment and efficient internet services make it a popular choice for startups. It also boasts a highly-skilled domestic workforce while providing wider access to the EU market.
Both personal and corporate income tax is set at a flat 20%. However, you pay zero tax on profits that you reinvest into the company.
Any profits shared are taxed at the rate of 20%, but this can later be reduced down to 14%.
For a foreign company looking to set up a base in Europe, Estonia might not necessarily be the best option. Other EU countries, including Lithuania, Ireland and Cyprus, for example, provide lower rates of corporate income tax.
However, none can match the ease of access and efficiency afforded to Estonian E-Residents when it comes to setting up a company.
And the zero-tax on reinvested profits option is also certain to appeal to startup owners and/or investors who are looking to maximize early growth.
Looking for a new base of operations?
Are you already impressed by Estonia’s can-do attitude, low taxes, and streamlined digital business infrastructure? Or are you also looking at other potential European countries in which to launch an EU-based startup?
Either way, Nomad Capitalist can help.
We’ve helped thousands of people, just like you, to legally reduce their taxes and go where they’re treated best.
HNWI entrepreneurs and investors choose us because our global knowledge and hands-on practical experience are hard to match. And because we know what’s truly important.
We’re here to share our knowledge with you and ultimately save you time, money, and hassle.
Our holistic approach will consider all your life factors, from your home to your business, your investments to your taxes, and help you find the best offshore solution for your needs.
We appreciate how busy you are, which is why we also provide additional concierge services to allow you to focus on the business day ahead.
So you can rely on us to handle all those small and time-consuming details, from submitting documents to immigration services to setting up a bank account for your new offshore business.To learn how you can enjoy total freedom; personal freedom, financial freedom plus freedom from all that unnecessary paperwork, talk to us about becoming a Nomad Capitalist client today.
Estonian Company Registration FAQ
No. Estonia is not a tax haven though it can be considered a low-tax jurisdiction, particularly compared to some of its other neighbors in the north of Europe.
Estonia has a flat tax system and charges both corporate and personal income tax, alongside VAT, each at a rate of 20%.
The corporate income tax rate in Estonia is 20%.
If you have a company in Estonia, you can save on tax by reinvesting your profits.
All profits which are reinvested in the company are tax-free, which means you can effectively enjoy a tax rate of 0% on profits.
If, however, you wish to withdraw those profits, for example, as dividend payments, these would once again be liable to a tax of 20%, though this can later be reduced to 14%.
To open a company in Estonia, you need to provide a company name and registered legal address (this can be a virtual office) as well as details as to your company’s primary business activities. You will also need to set up a bank account.
Thanks to Estonian E-Residency, all this can be done quite easily, from online registration of your company to banking and filing of taxes.
It is possible to open a company in Estonia in one day with the country’s E-Residency system.
Otherwise, it would generally take anything from one to five working days to form a company directly. This is still quite quick, though, of course, other costs, such as notary fees, would apply if you wish to do so remotely.
And, of course, it also means you don’t get the additional benefits of E-Residency, which includes the ability to gain full access to Estonia’s digital infrastructure.
E-Residency is a special program native to Estonia which grants foreigners access to the country’s digital infrastructure, allowing them to take advantage of a wide range of online services.
After you successfully apply for E-Residency you receive a special E-Residency card. However, it’s important to understand that E-Residency is not the same as actual residency.
With E-Residency, you can open a bank account and manage your taxes. You can also register a company with Estonia’s business register and then manage the company and its taxes remotely.
Therefore an E-Residency card grants you broad access to Estonia’s digital services infrastructure. However, it is not an actual residence permit and does not grant you the right to reside in Estonia.
This has been the cause of considerable confusion in the past and is sure to continue to cause confusion in the future. Indeed you may even hear of some people online talking about Estonian E-Citizenship – to be clear, no such program exists.
However, if you are looking to obtain EU residence and/or a second citizenship in Europe, then get in touch, and we can arrange a call to discuss your options.
We have helped over 2,000+ HNWI entrepreneurs and investors to move offshore and go where they’re treated best. And that includes guiding them through the processes of Europe’s Golden Visa programs.
Similarly, if you are looking for ways to save on taxes, or if you wish to set up an EU-based company and gain access to the lucrative European market, we can combine all of these factors together, from citizenship to taxes to your investment options, as part of a specially-tailored Action Plan.
