Estonia is not a tax haven — here's why

David Bailey-Lauring
Written by David Bailey-Lauring
on October 01, 2020

Recently leaked FinCEN documents that are being shared by the International Consortium of Investigative Journalists revealed damaging revelations about shell companies and banks that laundered profits for criminal organisations.

Journalists have been delving through the documentation, the same they did for the 2014 LuxLeak papers and the 2016 Panama papers.

Money laundering and tax evasion are grim realities in today's globally connected and money-moving world.

The digital nation of Estonia, with its 0% corporation income tax rate has often been incorrectly labelled a tax haven by companies who assist in setting up companies offshore. 

Estonia's much-vaunted e-Residency programme can be used to set up companies without holding actual domiciled residence within the state. Most shell companies also run with no requirement for their directors to be residents of a tax haven state.

Although the 0% corporation income tax rate is correct, and e-Residency does permit tax-paying citizens to set up a company; labelling the transparent Baltic nation a tax haven is an unfair stereotype that needs changing.

What is a tax haven country?

A tax haven is a country or region that offers foreign individuals and businesses little or no tax liability. Tax havens rarely share any financial information with foreign tax authorities. 

Typically, tax haven countries don't require a permanent residence of the business owner or individual to benefit from the tax laws of that country. 

Source: Investopedia

Is Estonia a tax haven?


The Tax Foundation has ranked Estonia number one for tax competitiveness for six years running. 

The index mostly prioritises how well state tax systems are created so that citizens can pay their taxes easily.

Estonia ranks the best. The taxation is straightforward because it uses innovative and digital ways to pay while being transparent

Estonia doesn't tax companies on their profits, so what the company earns each financial year can be reinvested by the company.

The concept is to encourage Estonian businesses to grow using their profits—Estonia taxes companies corporation tax when they distribute profits as dividends to individuals who own the company.

Because of the 0% corporation income tax on retained and reinvested profits, the continued top position on the tax foundation each year; individuals and multinational corporations view Estonia as the number 1 place to invest their money and profits.

Why is Estonia (wrongly) assumed to be a tax haven?

0% Corporation Income Tax

Estonian resident companies and office branches are subject to 0% income tax concerning all reinvested and retained profits—only a 20% income tax concerning all distributed profits (mainly as dividends) is applied.

Distributed profits are:

  • corporate profits distributed in the tax period
  • gifts, donations and representation expenses
  • expenses and payments not related to business
  • transfer of the assets of the permanent establishment to its head office or to other companies

Source: Invest In Estonia

From 1st January 2018, if companies paid dividends regularly, they were able to benefit from a 14% corporate income tax rate. Most though, continue to pay 20%. 

Estonia's taxation system does appear favourable for investors for the reasons mentioned in the section above. 

Lower corporation tax rates appear attractive to those looking to evade paying higher taxes in their country of residence, giving the impression of the country as a tax haven.

However, investing in an Estonian company is excellent for the company if they are looking to grow. Yet withdrawing your investment as a form of profit would still be taxable; thus, taxes must be paid and reported.

e-Residency Programme

Estonia offers e-Residency, a governmental digital identity that is used to access Estonia's transparent digital business environment.

The e-Residency programme provides tangible benefits for legitimate entrepreneurs, including: 

  • remote business management 
  • having an EU company
  • lower business service costs 
  • the ability to reinvest your profits as per the section above.

What e-Residency is not, is a place for individuals and companies to become e-residents (not living in the Estonian state) and avoid their tax responsibilities. 

e-Residency is not an individual right, though, but a privilege that Estonia offers, which means that the nation can choose who is permitted to have e-residency. Every applicant is screened by the Police and Border Guard, who will vet applicants for sound business affairs. 

Understandably, tax evaders will not like any of this. If you don't wish for the Police to begin examining your individual affairs - don't apply to become an e-resident.

Because of these background checks, less reputable applicants are discouraged from applying, meaning only a small percentage of e-Residency applications are rejected.

Those with criminal or tax-evasion intentions shouldn't waste their time applying as this screening process will omit them.

Digital Nomad Visa Programme

Estonia's innovation does not stop at the e-Residency programme. August 2020 saw the introduction of a new Digital Nomad Visa that permits remote workers to live in Estonia whilst remaining employed by their own company or employer abroad.

Eligible remote workers can apply to live and legally work in Estonia for a year. Any worry they have of falling foul of working in the state through other visa types is removed. 

The Digital Nomad Visa also has had added benefits for the 'new normal' world of self-isolation caused by the global COVID-19 pandemic.

The world is suffering from the economic recession as workers are furloughed or unable to return to work. The new visa can help people keep working remotely using Estonian infrastructure yet remain employed with overseas employers.

Because of the perceived ambiguity of remote workers paying their taxes - has led to further scepticism of whether the visa can be used to avoid paying taxes at all.

You can read more concerning how to apply and eligibility for the Digital Nomad Visa here.



Why does Estonia continue to attract new business and entrepreneurship?

Solopreneurs, side businesses, startups and the self-employed

Growing businesses and self-employed people have found Estonia to be an excellent base for starting and nurturing their business. 

Partly because the business and tax environment makes it easier to manage their business, but also because the infrastructure makes it more transparent to conduct global business.

Despite this uniqueness and its (wrongly) perceived assumption that it is a tax haven, Estonia still collects corporate income tax on distributed profits at the rate of 20%.

With various company types, Estonia has a structure for everyone to use their digital, transparent, business and tax services. 

It is not because legitimate entrepreneurs and self-employed people wish to pay less tax. It is because for those looking to grow a global business, or even find a side hustle to back up their day jobs, Estonia provides that opportunity.

e-Residents can set up global EU companies; digital nomads can work through the visa programme. Self-employed people can use a virtual company for invoicing clients worldwide without the need to even to set up a business.

It is why legitimate entrepreneurs flock to use Estonia's business and tax infrastructure, whether they live or pay tax elsewhere.

Managing a company online

One of the fascinating aspects of the e-Residency programme is how anyone can open a company online in Estonia to entirely manage it from anywhere where there is an internet connection.

Great for those living under pandemic restrictions around the world.

To make it easier for business owners, and to take care of taxes, VAT submissions and annual reports, however, having a business service provider is a no-brainer. 

Business service providers have empowered Estonian businesses to focus more on building revenue for their companies.

Because it is a digital administrative haven, Estonia offers a globally competitive price of business services, from incorporation to accountancy, virtual office, banking and compliance.

Staying on top of invoicing, cash flows, taxes, and legal compliance are stressful enough - learning business lexicon and legal jargon only compounds the headache.  

Using a service like Xolo Leap for company owners takes care of all the administrative nightmares when thinking about running a company. 

For those working a side hustle, using Xolo Go will give you an invoicing solution without any company admin at all.

the freelancer's favorite pay-as-you-go invoicing tool

Here’s why Estonia is not a tax haven

Estonia is not a tax haven and more importantly, does not aspire to be one.

Tax haven countries are only useful if they can reduce an individual’s or company's tax bill by 100%. There are several tax havens and questionable shell company schemes where you can register a business without scrutiny.

Estonia cannot and will not do that. 

It is more of a company administrative haven, able to offer digital infrastructure that makes it easier for business people, from first time self-employed to more prominent companies to conduct global business.

Estonia's digital business environment has minimal administrative fuss, simpler taxation, yet higher transparency. Estonian business and banking laws are fully compliant with EU and OECD rules and regulations.

Legitimate entrepreneurs are both digitally and physically welcome to Estonia to conduct business. 

Tax evaders are not.