Benjamin Franklin was right — there are only two certainties in life, and those two things are death and taxes. So if you are considering operating as an e-resident, you’re probably wondering how you go about paying taxes for your Estonian company, especially if you are normally tax resident somewhere else.
Let’s start with some good news first!
The Estonian taxation system is regarded as one of the most business-friendly, and in particular startup-friendly, in the world. And of course, you can declare and pay your taxes completely online, just like everything else in e-Estonia. Best of all, in Estonia there is no corporate income tax on retained and reinvested profits — whatever you leave in your business to grow, will not be taxed by a single cent.
Of course, you still need to understand and declare your taxes in Estonia just like everywhere else, and before we dive in, a quick disclaimer: An article like this can only give general advice, and does not replace an individual consultation with a qualified professional, which is particularly important where issues of different countries’ tax laws are involved.
You can trust your business service provider in Estonia to help you get the Estonian side of things right, but it’s absolutely vital you get similar professional support where you live. This will not only stop you breaking any rules, but could also save you money — because Estonia has tax treaties with many other countries, to prevent you paying tax on the same income twice.
How does the Estonian taxation system work?
Don’t panic — there are good reasons why Estonia has been ranked as number one in the International Tax Competitiveness Index, and you may, in fact, find dealing with the Estonian Tax and Customs Board a refreshingly straightforward business, compared to where you are personally tax resident.
That distinction between these two things, however, is one of the most important concepts to grasp, if you want to get an overview of how the Estonian taxation system will affect you.
What is the difference between e-Residency and personal tax residency in Estonia?
Your status as an e-resident in Estonia is a powerful and valuable digital asset, however it’s critical to understand that e-Residency is not tax residency — it also does not confer any kind of citizenship of Estonia or the EU, nor the right to reside in Estonia (though there is a digital nomad visa you can check out, if you feel like spending time around the exceptional buzz of Estonian business culture.) It is your company that is a tax resident in Estonia, not you. In fact, some Estonian e-Residents do not pay any tax in Estonia at all.
That means your individual tax residency is unchanged, and you will almost certainly need to pay personal income tax where you live, regardless of whether that income is being received from your business in Estonia, or any other source. You’ll must pay social security too, to support the local services you use (but you won’t have to pay that in Estonia, if you’re already paying it elsewhere in the EU, EEA, Ukraine, Canada, Australia, or Switzerland.)
You may also have business tax liabilities where you reside if your company is subject to Permanent Establishment (PE) elsewhere — and this is why specialist local advice is essential, from a qualified professional and/or your local tax authorities. Many e-resident businesses which are operated completely digitally and require no premises or physical assets do not have PE anywhere, especially if the owners travel around, but again this is general advice that cannot be relied on in any specific situation.
Does Estonian e-Residency help me to avoid paying tax in my home country?
This is another essential point to understand:
Operating an e-resident Estonian business is NOT a way to avoid paying your taxes, anywhere!
You may find that the range of expenses allowable under Estonian tax law, and the simple ease of declaring and paying business taxes in Estonia, reduces both your overall tax bill and your administrative burden. But it will NOT help you to avoid, evade, or otherwise reduce, the tax you owe where you live. The main advantage of having a company registered in Estonia is a zero tax on undistributed profit. Estonia is not an offshore jurisdiction nor a tax haven, so it’s vital to dispel this myth, which can surface from time to time around digital nomad discussion groups and similar environments.
What are the tax obligations for Estonian companies?
While you may not pay taxes personally in Estonia, your e-resident Estonian company has a range of tax obligations, which your business service provider will help you declare and pay at the appropriate time.
The main tax types to be aware of are:
- Personal taxes — as indicated above, they will be payable in your country of tax residency, on the income that you pay yourself from your business, but if you pay yourself a Director's Fee (see below) that is taxable in Estonia.
- Standard Corporate Income taxes (CIT) — declared where the company is registered and/or has a permanent establishment, or both (although there may be double-taxation offsets in play).
- Payroll and social security contributions — declared where the employees are registered, rather than where they are tax resident (though social security payments in another EU country can usually be notified to the tax office in Estonia using form A1, and mitigate this specific requirement.)
- Value Added Tax (VAT) — declared in the EU country where the company is VAT registered, i.e. Estonia.
- Dividend distribution tax — paid in Estonia on dividends, when you pay yourself from your business in this way
Depending on the nature of your business activities, there may also be customs and excise duties to consider, environmental charges, taxes for cross-border operations, fringe benefits, and so on. Your business service provider will help you to comply with these where appropriate.
How does personal taxation work for Estonian companies?
Depending on how you choose to pay yourself from your Estonian e-resident business, you may not have any personal tax liability at all in Estonia.
This is because, while directors fees are taxable in Estonia, employees salaries are not. And yes, it is possible for a director or sole trader to be an employee as well, paying themselves a salary, and zero directors fees, especially if the business is highly digital and straightforward, and if you don’t have any employees to manage and direct.
This situation recognizes that many solopreneurs and freelancers find they spend next to no time actually directing and managing their e-resident business, thanks to the help of business service providers like Xolo — which is the main reason they opted for operating their business in Estonia in the first place!
Of course your affairs in Estonia may be more complex and suggest a local director's fee is appropriate, to account for some proportion of your income, in which case this would be subject to 20% personal income tax in Estonia.
It might seem strange that some e-residents don’t pay tax in Estonia, however the Head of the Tax Department at the Estonian Tax and Customs Board (ETCB), Evelyn Liivamägi, noted in 2017 that e-residents have already paid more back to Estonia through income tax alone, than the amount invested in the e-Residency program by Estonian taxpayers. So, the e-Residency programme is a clear win-win for all parties!
How does VAT work with my e-resident Estonian company?
If your company offers services to European business clients and earns more than €40,000 per year, OR if you offer digital services or products to the public directly (and earn any non-zero amount), then you need an intra-community VAT number.
Your business service provider can help you register for this, and it’s worth doing so even before you reach the indicated thresholds for pure service businesses, because having a VAT number has many advantages.
Not only does it add credibility to your business presence, to have your company registered in the VIES database, it means you can invoice between different European companies at a 0% rate thanks to mutual treaty offsets (provided your client has a verified VAT number as well.) Your accountant will also claim back the Estonian VAT on a range of expenses, against your monthly bill. It is important to remember that when you work for clients in Estonia, you will collect the VAT from them on your invoices — but the software provided by your business service provider should take care of all of this for you.
The taxable period for VAT is one month, and you must declare and pay VAT to the Tax Authorities by the 20th day of the month following — this consists of all the VAT you have collected during the previous month, less any VAT you have paid out to other registered businesses in allowable expenses. If at the end of the month it turns out you have paid more input VAT than you have added to your taxable supply, then after official approval from the Tax Authorities these funds will be released to your prepayment account (so you will be use it to cover other tax-related liabilities or apply for a refund.)
You can file VAT tax returns in the e-Tax/e-Customs online environment, but if you are using a business service provider like Xolo all this will be calculated on your behalf, and the necessary payments prepared for you to sign off in your bank (if you use an Estonian bank), in good time for the required deadlines. They will also file the requisite zero return for you, on months when you don’t bill any VAT (because the requirement to declare remains, regardless of the status).
Related read: How to manage accounting for your Estonian e-resident business.
How are business expenses taxed in Estonia?
Business expenses are taxed in a transparent and straightforward style in Estonia, and pretty much any operational cost that relates to your business activity is easy to claim as a cost.
The main exceptions are anything which relates to a permanent establishment in another country, such as renting an office, or a fixed phone or internet line.
Further exceptions include non-business travel, or entertaining yourself alongside your clients (so just make sure you get an itemized bill.)
Out-of-pocket expenses
Forgot your business credit card on a trip, or accidentally tapped on the wrong source for a subscription payment?
This is not a problem in Estonia, you can still submit your expenses receipt, providing the actual expensed item is legitimate. This is then accounted for, and you can reimburse yourself directly from the business bank account, without paying any taxes or raising an invoice for it.
How are dividend taxes calculated in Estonia?
To return to one of the big benefits for e-resident Estonian companies, your profits will not be taxed at all until you actually distribute them — and one of the main ways you are likely to do this, is by paying yourself a dividend from your business.
Distributed dividends are subject to 20% corporate tax (CIT) in Estonia, and will also be subject to declaration in your country of tax residency, where it may be subject to different tax rates and allowances than regular income. So, the decision about when to take profits, rather than salary, from the company, is a complicated one!
There are also some rules which apply generally to dividend payments for Estonian businesses, which your service provider will assist you to comply with. These include:
- Dividends can only be paid after the first full financial year, once an annual report is submitted
- Dividends can only be paid once the share capital of the business is fully paid up and registered in the e-Business Register
- The amount of dividend paid must not exceed the retained profit indicated in the annual report
- Dividends paid regularly each year are subject to a 14% rate, calculated as 14/86 from the net payment you receive. Companies that distribute profit and pay 14% CIT on it are additionally obliged to withhold income tax of 7% from dividends paid.
How does electronic tax filing in Estonia work?
After reading all of this you should have a better idea of how taxation works generally, for your e-resident Estonian business. You should also appreciate that, alongside the streamlined administration costs of operating in Estonia, the tax burden itself is not onerous — in fact, it is deliberately generous and supportive of new startups, contributing to a real cultural infrastructure of innovation and entrepreneurialism, at the fiscal policy level. That’s a pretty amazing thing to be part of, as an e-resident!
Furthermore, Estonia provides an electronic tax filing system, E-Tax, through which 95% of declarations and be filed and paid online.
But the best part?
If you are a customer of Xolo, you barely have to interact with this system at all.
Every aspect of your Estonian e-resident business taxation is handled for you, with respect to each relevant deadline. The tax owed is calculated and filed, and all payment details provided for your bank with applicable references, so all you need to do is go in and sign it off with your EID.
It’s the same with the annual report, where you will have to briefly interact with the e-Business Register portal in order to approve it — everything will be prepared on your behalf, so all you have to do is check and sign off the document, in English, using your ID card or Smart ID. Before you do that, the annual accounting balances, (banks, investments, etc) and any missing documents or information (such as receipts) are confirmed/checked by the accountant.
But you will be guided through all of this process smoothly in good time, making this final requirement of managing your Estonian business tax filing, as smooth and straightforward as every other aspect.
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.