As a Xolo Leap customer with an e-resident Estonian business, you'll want to optimize your business operations and how you pay for things, in your personal and business life.
Fortunately, Estonian private limited companies can deduct a wide range of expenses directly related to their business activities, and Xolo makes this very straightforward both to understand and administer.
What does “tax-deductible business expenses” mean in Estonia?
A deductible business expense, in the context of operating a limited company, refers to a cost incurred while running your business that can be subtracted from your company's taxable income.
In other words, these expenses reduce the amount of income left that is subject to taxes, ultimately lowering your tax liability. It means you can pay for quite a lot of things as your business, before you pay yourself out of what’s left (your profit.) In many cases you can easily pay your business expenses directly through your business bank account or linked payment platform, so you never have to cover them up front personally.
It’s important to understand that not all expenses are deductible, and your business can’t go on random shopping sprees, however!
Deductible business expenses are typically those that are necessary or supportive of your business operations. These can include costs related to carrying out your work, marketing, professional services, and more.
The rules about expenses are detailed and specific, and because there are part of the commercial code, they may vary from what you know or expect in other tax locations – that’s why we have prepared this guide for you, to explore each of these deductible expenses in detail, including examples and use cases to help you understand what you can and can’t claim, and how to go about it.
For example, in some countries it may be acceptable to account for certain expenses (such as travel tickets) via bank statement proof-of-purchase only, whereas in Estonia, you will require a proper receipt. However, still other countries will demand a full invoice for this including your personal/business details (which can be a challenge to extract from something like a bus company), while the Estonian tax office will be happy with a standard receipt including all the right information about the nature of the purchase.
But don’t forget, if you're ever uncertain about whether an expense category or proof of purchase document qualifies, our lovely team at support@xolo.io will quickly help you to clear it up.
And in the meantime, ask for a receipt for everything anyway, and hang on to it!
What kind of expenses are tax-deductible for my Estonian e-resident company?
Your e-resident business is unique in its exact mix of clients and activities, and as such, an exhaustive list of allowable receipts is not possible.
While we will discuss broad categories below, it’s important to appreciate that in the case of any tax inquiry, a test of reasonableness will be applied: It might be perfectly allowable for a science writer’s business to expense a subscription to an academic journal they rely on for professional development, but not one to Entertainment Weekly – while a culture journalist could make the opposite justifiable claim.
Payments made by your company will be checked on a monthly basis by your Xolo accountant to determine if they trigger taxation, and you may need to provide further information if the business case is unclear.
With that said, let’s explore some broad categories where you can definitely expect to legitimately expense payments through your Estonian e-resident business:
Expenses covered by your customers
Often, your clients will cover certain expenses related to your work. This can include anything from reimbursing you for materials used in a project to covering travel expenses for an on-site meeting. These expenses are deductible, as they are directly tied to your business operations.
These costs must be invoiced to your customer as well, and there is a template invoice type for this in the portal. Your expense receipts must be uploaded as well, in the expenses tab or business trip as appropriate, and of course, the amounts must match!
Example: A freelance graphic designer is hired to create a digital mural for a client. The client agrees to cover the cost of specific rendering software and other materials needed to complete the project. The designer can deduct these costs, as they are directly related to their business activity.
Fees of subcontractors
As your business grows, you may find yourself collaborating with other professionals to complete projects or provide services. It is straightforward to collaborate with fellow e-residents through Xolo, and the rest of the e-Residency marketplace!
You can deduct the fees you pay to subcontractors, as they are necessary for the execution of your business operations. They will of course need to provide you with a correct invoice.
Example: A solopreneur runs a small marketing agency, and their workload suddenly spikes on a tight deadline – so they hire a freelance copywriter to help with content creation for a client's campaign. The fees paid to the copywriter on receipt of their invoice can be deducted as a business expense.
Professional support services
Running a successful business often requires the assistance of various professional and support services. These fees are deductible as they are directly related to your business operations.
Your Xolo Leap subscription is one great example of this, as you need all the services it includes to operate, from the daily bookkeeping to the virtual office presence! But every business will have its own unique professional support needs at different times, and we pay for many human and digital services on via subscription in this way.
Example: A freelance photographer hires a virtual assistant to manage their calendar, book appointments, and handle other administrative tasks. The fees paid to the virtual assistant can be deducted as a business expense.
Marketing and Entertainment Costs (taxes may apply)
Marketing is essential for promoting your business and attracting new clients. Some marketing costs can be deducted, but certain restrictions apply. For instance, you can deduct the cost of advertising, website design and maintenance, and promotional materials.
However, costs related to entertainment or hospitality are more complicated, and only a portion of these expenses can be made exempt from tax, as they are regarded as only partially related to business activities. Building relationships with clients and collaborators often involves sharing meals and exchanging gifts. These expenses can be deducted, but they are considered taxable. Make sure to keep especially accurate records and receipts for these transactions.
By law, a fixed sum of 32 euros per month plus 2% of the payments which have been subject to social tax (i.e. the salary fund of the company) in the relevant month are exempt. Amounts above this threshold (which is different for each company) are taxed with CIT. If in doubt, please clarify with your Xolo advisor, and it may be easier to submit these receipts as out-of-pocket expenses in the first instance, to receive partial offset.
There are also restrictions on sponsorship, which may be taxable if there is not a clear business relationship or marketing connection for your business.
Example (of a straightforward deductible expense!): A solopreneur who runs a consulting firm invests in online advertising through Google Ads and via social media platforms. The cost of these advertisements can be deducted as a business expense.
Hardware and Software (may be tax implications)
Investing in the right hardware and software is crucial for streamlining your business operations. Some of these costs may be deductible, however you may need additional tax advice about any items which are large or fixed. These may indicate a permanent establishment locally, increasing your risk of substance and corporation tax liability where you live. As such, some items may be disallowed by Xolo, but may be possible to expense locally instead.
Example: A freelance web developer purchases a new laptop and updates their design software to use for client projects. These costs may be deductible as they are directly related to the developer's business activities.
Communication Costs (not local phone and internet bills)
Staying connected with your clients and collaborators is essential for running a successful business. While most communication costs can be deducted, phone bills are an exception, because these will need to be contracted wherever you are carrying out your work.
Furthermore, if your Estonian business funded your local services, this might have implications for permanent establishment of your business in that area. (You may be able to expense these costs against your taxes in your place of residency, for example against self-employment taxes, as with office equipment above.)
Example: A solopreneur who runs an e-commerce store pays for their storefront plugin and a video conferencing software subscription to communicate with suppliers and customers. These costs can be deducted as an Estonian business expenses. But their local internet package to connect to all of these, they expense against their local freelance income taxes.
Business Trips (Transport and Accommodation Costs Allowed)
Many Xolo customers are highly mobile in their lifestyle, and there is a special tab in the Leap platform for registering business trips of different kinds – these could be to visit a client, to attend a conference or event, or to undertake professional training and development.
All travel and accommodation costs can be expensed, including receipts for taxis etc. However personal expenses like meals are not covered.
Example: A freelance event planner is hired to organize a conference in another city. They can deduct the cost of their own flight and hotel stay, as these expenses are directly related to their business operations.
COVID-19 Tests for Business Trips
Let’s hope this is now an anachronism in the business code!
However, in the event that there are specific legal requirements of a similar kind in future which become mandatory for business travel, these will be allowable expenses.
Participation in Business-Related Events
Attending conferences, workshops, and networking events can be valuable for your professional development and business growth, as well as making new contacts in your industry. You can deduct the costs associated with participating in these events, such as registration fees and travel expenses.
Example: A freelance health writer attends a medical research conference to learn about industry trends, and network with potential clients. They can deduct the cost of the conference registration and associated travel expenses as above.
Business-Related Professional Training
Investing in professional development can help you stay competitive in your industry and provide better services to your clients. You can deduct the cost of business-related training, such as workshops, courses, and they do not have to be certified or licensed trainings – the important thing is the relationship to your professional activities.
Example: A freelance graphic designer enrolls in an advanced design course to hone their skills and expand their service offerings. The course fees can be deducted as a business expense. Their personal interest in pursuing a classical Italian course needs to happen on their own dime!
Bank and Transaction Fees
Managing your business finances comes with various fees, such as bank account maintenance fees, transaction fees, and payment processing fees. Just like your Xolo platform fee, these are directly related to your business operations.
Example: A solopreneur pays monthly fees for their business bank account and a per-sale payment processing fee for using platforms like PayPal or Stripe. These fees can be deducted as business expenses.
Office Costs and Supplies (Restrictions Apply)
Maintaining a functional workspace is essential for productivity and professionalism. You can deduct some office costs and supplies, such as furniture, and office equipment. However, certain restrictions apply, especially for home office expenses (in particular see communications costs, above.)
Generally for an e-resident business which is considered location-independent, you cannot deduct expenses for a permanent office premise. Again, this would directly implicate your Estonian business for local substance, from a corporation tax point of view.
Example: A freelance web designer rents a coworking space to work from temporarily (for less than 6 months) and purchases a new ergonomic wrist support. These costs can be deducted as business expenses. If the office rental was for a longer period, there may again be a substance risk, so this could not be expensed through your Estonian company.
Salary, and associated relevant taxes (dividend taxes, fringe benefits, etc)
As a business owner, you are responsible for paying various taxes related to your business activities, such as salary taxes, dividend taxes, and fringe benefits taxes.
These taxes are business expenses, but their specific treatment as deductibles should be discussed with your Xolo advisor, to ensure you do not have any surprises.
Conclusion: Deduct the hassle, with Xolo Leap!
The extensive range of deductible expenses for your Estonian company can help you optimize your finances and make the most of your hard work as a freelancer or solopreneur, and pay for all reasonable and justifiable costs as your business entity, rather than out of your personal income after tax.
By staying informed and maintaining accurate records, you can maximize your tax deductions safely and legally, so you can ultimately grow the profit retained or distributed by your business.
Remember that this guide serves as a general overview of deductible expenses, and your specific circumstances may vary. If you're ever uncertain about whether an expense qualifies as a business expense or if you have questions about the restrictions that apply, don't hesitate to reach out to us at support@xolo.io.
We're here to help you navigate the complexities of running a successful business and ensuring you make the most of the benefits available to you.
It’s all part of the amazing Xolo Leap streamlined service that you are used to – and which is of course a fully deductible business expense!
About Maya
Maya Middlemiss is a freelance journalist and author, excited about the future of work, business, money, and technology. She operates her e-resident business through Xolo Leap, so that she can work frictionlessly with brands and publications all over the world, and she is the host of the Future is Freelance podcast. Exploring the social impact of technology on our changing world, and bringing those stories to life in an accessible and inclusive way, is her passion — because all of this is far too exciting to leave it to the geeks. Maya is a 'digital slowmad', originally from London, presently living with her family in Eastern Spain.