Understanding how to pay yourself a taxed salary from your Estonian e-resident business is vital - otherwise, what’s the point!
Every business has bills to pay and commitments to meet, and here at Xolo, we do all we can to help ensure you meet your legal obligations to every creditor. But we also believe firmly that you are in business to make a profit and support the lifestyle you dream of, and there is one Very Important Person we want to talk about paying right now. That’s YOU!
After all, you’re the one doing the hard work. So, this article will address how you can take money from your business to pay yourself a salary or consulting fee — or alternatively to distribute dividends to yourself or other shareholders!
First thing to know about taxes when paying yourself from your Estonian business
Let’s just tackle one ancient myth we find ourselves having to debunk over and over… Estonia is NOT a tax haven! Whatever you earn, you are going to pay fair tax on it somewhere, eventually. Benjamin Franklin made it clear over 200 years ago, we all pay tax, and we all die, so — we have to learn to live with it.
Part of the reason the tax haven misunderstanding has stuck around so long though is the simplicity and clarity of the Estonian tax system; it almost feels like they are NOT going out of their way to trip you up or catch you out!
The consequence of this is though, ironically for those seeking to do anything dodgy, is that there are very few loopholes or strategies for reducing tax burdens in Estonia. People simply pay their fair share as they go along.
Xolo have always worked very closely with the Estonian tax office in Tallinn (in fact, we used to actually share a building!), so that means our experts are always right up to date with any changes to the tax codes or policies which affect our customers. There are no gray areas or space for misunderstandings or creative interpretation, just clear advice about what to pay and when.
Tax residency for Estonian e-Residents
There are many reasons why you may have chosen to establish your business in Estonia using the e-Residency programme. Creating a business which is resident in Estonia has great advantages, and frees you to operate from anywhere in the world, even from lots of different places if that’s what works for you.
However, unless you actually relocate to Estonia yourself and live there for 183 days (by right of passport or visa), nothing changes about your personal tax situation. Your business is located in Estonia for tax assessment purposes, but you are not. Understanding this crucial fact is very important for working out the best way to pay yourself, from the profits of your Estonian business.
By the way, depending on the activities of your company and how it operates, your e-resident business may also have some fiscal presence and tax liabilities in the country where YOU are tax resident. Estonia’s many tax international tax treaties will probably mean you don’t have to actually pay tax on the same income twice, but you could have to register and declare it.
That is outside the scope of this article, but, it’s a good reminder that any advice we offer you here can only be regarded as general. That’s why we recommend that for anything to do with your personal taxation, you get professionally qualified advice from a specialist in the country where you live — ideally someone who is well-informed about cross-border matters and international business. Xolo can’t help you with choosing that advisor, but there are a number of experts from different places in the e-Residency Marketplace, and being listed there means they have satisfied the Estonian government that they know what they’re doing.
For now the most important thing to understand is that operating as an e-resident does not make you a tax resident of Estonia.
How to pay yourself a salary from your Estonian e-resident business?
Assuming you have funds in your business, you can pay yourself at any time you like.
That means funds which are not committed elsewhere, to pay upcoming bills (including tax bills.) If you have any doubts about that, you can clarify it with your accountant at Xolo. The amount to be paid is negotiated between you-the-service-provider and you-the-company-director… in other words, you decide!
You will need to account for the payment in the Xolo portal, by creating an invoice from yourself to your private limited company, and that invoice needs to contain all the usual required information for your country where you are receiving the payment. This is usually your name and address, unique tax or identity number, a date, an invoice number, and a breakdown of the costs — what is being invoiced for (for example, professional services January 2023), and any taxes which are being added.
When you make the payment to yourself from your business account, use the invoice number as the reference for your transaction — this will help your Xolo accountant reconcile both sides of the deal, and account for it in the spreadsheets that you never have to see or worry about!
A lot of e-residents fall into the pattern of paying themselves at the end of each month or some other regular time, once the usual bills have been debited, and of course, your clients invoiced. It fits with a lot of outbound payment cycles, for software subscriptions and VAT. But there is no reason you cannot invoice more or less often — you’re not doing a job for an enterprise with a big payroll department! So you might want to pay yourself a bonus mid-month, or take out extra to meet a personal cashflow need if you choose.
Nor, even if you call it a ‘salary’, is there any reason to pay yourself the same amount every month! As freelancers we are used to the jokes about the feast and famine that drives our work, and we all know about the good months and the not-so-good months.
That being said though, one advantage of separating your business and private finances in this way — by operating as a company-of-one instead of a freelancer with everything mingled in the same account — is that you can use your salary withdrawal to smooth your income a bit. Accumulate a buffer zone in your business while the good times roll, and future-you will be grateful when the next lean month comes around. Most of us never know when the best client in the world will drop you overnight for reasons completely beyond your control, so building up some funds in your business account could be a lifesaver.
And if the good times continue, well… There’s always that conference that seemed just a bit too far away and expensive, or that gorgeous new laptop, right? Don’t forget how many things can legitimately be expensed by your e-resident business, before taxed income.
But equally, don’t forget about the bills you might have to pay out later in the cycle (for example, any VAT you collect, if you’re working with clients in Estonia.)
The rest you can simply invoice out to yourself, and make a bank transfer to your personal account. You do not need to create a payslip, and it probably won’t be helpful to do so, if you’re not being taxed on that income in Estonia (see below.) However, if in doubt, Xolo can assist you with creating payslips to account for your income.
Do you pay income taxes on your e-resident salary in Estonia?
Even in super-tax-transparent e-Estonia, the answer to this one is initially a ‘maybe’.
However, the first thing to understand is that most e-residents do not pay any income tax in Estonia at all, and this may well be true in your case.
This is particularly often the situation with Xolo customers, because the requirement rests on the decision as to whether you spend measurable billable time actually directing and administering your business, as opposed to simply delivering your service or product.
A great many Xolopreneurs do not. They chose Xolo Leap precisely because of the streamlined portal and amazing combination of under-the-hood tech automation and saintly skillful customer support, which means they spend literally moments in the month doing their actual business admin.
So, no one can realistically argue that any measurable proportion of the time spent at work is allocated to directing and managing the business as an entity in Estonia. All the number crunching is essentially outsourced to Xolo. How long did it take you to raise your last invoice? I would bet it could be measured in seconds, rather than minutes. Invoicing could equally be said to be part of your cost of sales anyway — there’s always admin to be done in any business, but most of that will relate to operational matters, when you’re not even wearing your ‘company director’ hat.
(Did you know you get a special hat? It’s a tax-deductible expense... Joke, sorry!)
But we are not kidding when we well you that, as a foreigner, you’re not working in Estonia — and therefore you can pay yourself in full, with no income taxes due in Estonia.
Do note that this situation is unique to simple solopreneur private limited companies, however, and even then, the status can vary. If you spend significant time on the administration aspects of your Estonian company as a board member (for example, restructuring it, or if you're involved in a legal dispute or something), you may be required to declare part of your salary as a board member fee. These payments are subject to Estonian withholding income tax at a rate of 20%.
Your Xolo advisor can help you to decide on an appropriate percentage of your invoice to mark as your director’s fee, if you have any unusual or temporary directorial activities, as opposed to your consultancy fee for professional services performed. It’s only that slice of income on which the 20% tax will be charged.
How to pay tax on your income from Estonia then?
You will need to declare and pay the tax on your income on your personal tax return, where you live and are personally tax resident.
Because the amazingly diverse population of Estonian e-residents live in 179 different countries, you’ll appreciate that Xolo cannot help you out with that (although we do now have separate freelancer products in Spain and Italy, and as mentioned above there are other specialists in the e-Residency marketplace to check out).
Every country has different rules and deadlines and rates and allowances, even different tax years… Hello, British e-residents with your strange April deadlines! So while you may be able to figure it out and file and pay everything yourself after you’ve received advice, you may also find it saves time and money to work with a qualified local professional to help you manage your local taxes on a long-term basis. As a freelancer and solopreneur, your time is money, and you should play to your strengths… outsourcing to an expert is one way to do this.
If you’ve never hired an accountant before, you should take the decision seriously, as bad advice can be expensive. Make sure you understand at a minimum what qualifications and indemnities they should hold, and then choose them like any other professional you need to trust. Ask advice from friends, check reviews, and see how you get on when you talk to them.
They will be able to advise you of any special procedures to register as a self-employed person and pay your social security contributions as well as income taxes. They can help you understand the payment cycles and critical filing dates, hopefully with appropriate reminders, and ensure you stay fully legal and compliant where you live.
Can’t I just avoid paying tax instead..?
Remember, we keep telling you that the Estonian business register is very transparent. Your business profits are a matter of public record, and Estonia has tax treaties with many other nations.
This is a good thing! For example, the tax treaties enable you to declare tax already paid on your income in one country, so you don’t pay it again somewhere else… but of course, it only operates because the different governments share information about who has paid what, where, and when.
There are as we all know various ways people seek to minimize tax, through careful attention to factors like where to be tax resident, and the timing of things like the sale of assets which have made gains or losses. Smart accountants can help you optimize for this, and these kinds of tax avoidance are usually perfectly legal.
Tax evasion, however, is a serious crime in most parts of the world, and attracts huge penalties. If you do it deliberately, you can go to jail — and that would put a serious crimp on your flexible freelance lifestyle. Also, taxes pay for schools and hospitals, and good things like that which we all enjoy.
So, while we cannot advise you on how, when, or how much to pay in your local tax jurisdiction, we heartily recommend that you DO pay your taxes, people! And while we can’t help you do it, you should be ready to provide tangible evidence about the actual tax declarations and payments in your location upon a request by Estonian tax authorities, or Xolo.
What about paying dividends from your Estonian e-resident company?
One tactic your accountant might suggest to help optimize your total tax bill is to pay yourself dividends from your Estonian company instead.
That’s a perfectly okay thing to do as a company director, assuming that there are dividends, i.e. profits, available to distribute — in other words, that you have funds on hand, in addition to your share capital, and with all creditors’ needs considered. You can’t pay dividends if it would make the business insolvent, in other words.
To pay dividends, you must have paid your share capital, and be up-to-date with your accounts filing in the business registry. You also need to make and file a shareholder decision to distribute dividends of the specific amount at the given time — but this is simple enough to do, especially for the typical sole-trading Xolopreneurs (you basically put your special director’s hat on again and have a meeting with yourself, but there are forms of words we can help you to place on record.)
Dividends are typically paid once a year. The payments may also be periodical (e.g. twice a year).
Your company will pay 20% corporate income tax at the moment of paying the dividends (this is calculated as 20/80 on the net amount of dividends paid). If you choose to pay regular dividends, you may be eligible to apply for a reduced corporate income tax rate (14%). However, withholding income tax will be due at the rate of 7%.
Two things to understand though, and discuss with your accountant:
Firstly, if you leave your profits in the business, they’re untaxed in Estonia — considered reinvested, and supporting your growth.
Secondly, you will still need to declare your received dividends in the country of your residence and pay income tax on it. However, in many countries, the tax on dividends is lower than on salary payments, or there may be separate allowances or offsets you can deploy.
Taking both factors into account — the tax payment in Estonia, alongside the advantages of reduced payments locally — is not a straightforward question for your accountant, especially as the dividend tax in Estonia is not a personal income tax but a deferred corporate income tax (so it cannot be offset by way of double taxation relief).
In other words, make sure you are getting advice you understand and that makes sense in both countries — to ensure you are not paying more tax than necessary, while still remaining safely compliant and legal on both sides.
How to pay other people’s taxes if they work for your Estonian e-resident company?
Once you’ve figured out how to pay yourself, you may find that you need to pay other people’s salaries as well, as your business grows. Not every business scales in this way, and you might prefer to be a lifetime solopreneur. But for others, the intention will always be to scale by hiring.
The most straightforward way to do this is to simply contract, business to business, with other private limited companies.
That way, you simply receive an appropriate invoice and pay the amount stated, the same as any other business expense. You don’t have to operate a payroll, or be responsible for withholding and managing tax on their behalf. This is one reason that many freelancers find it advantageous to operate as a private limited company, as it makes things so straightforward for their own clients to pay them.
If you want to hire someone without a separate legal entity, however, Xolo can help you to do this, provided the people you want to hire are Estonian tax residents, or e-residents.
Operating the payroll of up to three employees is included in the Xolo Pro plan, and up to 10 in the Xolo Growth plan. Xolo will register the new employee in the employment register, and declare salary payments on the monthly combined corporate income and payroll tax return (called TSD in Estonia), and help you pay the taxes due, as well as social security and other mandatory deductions like pension contributions. You can get an overview of the rates and allowances here.
If you want to employ someone who is not an Estonian tax resident, things get a lot more complicated, and may involve you in establishing a branch of your business in another country.
It will be probably be much easier for them to contract with you via their own legal entity, if it is anything but a very temporary and local arrangement (European Economic Area (EEA) or Swiss citizens can work in Estonia for up to three months without registering the right of residence).
If they live anywhere else in the world, it is likely that your Estonian company would have to register as a foreign employer and start paying payroll taxes in that country. This would be outside the scope of Xolo’s services — but instead, we could help them become e-residents and simply contract with you directly through their own business.
Or, they could join the Xolo Teams marketplace through Xolo Go, and you can simply hire them for whatever work needs doing, for as long as it takes.
It sounds complicated, but so is the hiring and onboarding and retention of permanent employees. It’s good to realize that there are alternatives now to creating complex and lasting employment liabilities, in the new world of work that the Xolo suite of services enables. This way of working helps you to find the talent you need, and helps freelancers find the contracts they want, wherever you are both located.
Whatever your business ambitions, Xolo Leap is the simplest and most versatile way to start and scale your Estonian e-Resident business, and (at least until the time you become a multinational enterprise), it is designed to grow right along with you.
So you can pay yourself, and your collaborators, with the frictionless ease that Xolo customers are used to.
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.