Benefits to set up a business in Estonia - Is Estonia a tax haven?

Maya Middlemiss
Written by Maya Middlemiss
on December 12, 2022 11 minute read

Even if it didn’t have the innovative e-Residency programme, Estonia would still be a wonderful place to set up a business, due to its unique digital infrastructure. 

This system offers a huge range of benefits to Estonians from the day they are born, and has created the perfect place to bring your new business into the world as well, even if you are not Estonian. This article will explore the opportunities available to Estonians and foreigners who might be looking at setting up a business through e-Residency.

Why is Estonia a great place to open a business?

Since becoming independent in 1991, Estonia has grown its economy faster than any other post-Soviet nation, starting with a blank slate and an open mind — even growing through the Covid crisis, at a rate among the fastest in the EU.

Innovation and finding great digital solutions have always been at the heart of this growth, and led Estonia to create the most startups, unicorns and investments by number of citizens, anywhere in Europe (see below.)

This culture of creative innovation is reflected in the local startup scene and events like the annual Latitude festival, which brings together entrepreneurs and investors and tech pioneers from all over the world every year, to push the boundaries and explore the limits of what is possible.


Estonian’s digital infrastructure

Taking advantage of the unusual potential offered to create a nation state from a standing start in the 1990s, the Estonian government recognized the potential of online services early on. So, they were among the first to provide a digital national ID system for its citizens, and to make digital signatures via public-private key encryption legally binding.

Today that ID, which is fully encrypted and secure, can be used to access 99% of state services online — whether Estonians need to file their taxes or fill a prescription or vote in an election, the single digital ID service does it all. 

It’s not surprising that Wired has described Estonia as “the most advanced digital society in the world.” And it’s equally unsurprising that this has been supported by government initiatives to provide bulletproof connectivity across the nation, with over 94% of citizens having daily access to the internet. That means effectively all adults of working age are continually connected and online.


What is the Estonian e-Residency programme?

Until December 2014, these advances didn’t do a lot for anyone outside of the 1.3m residents of Estonia itself. 

However, at that time the groundbreaking Estonian e-Residency programme was launched, which has since enabled almost 100,000 foreigners to acquire this unique status, and become digital residents of Estonia — receiving an ID kit with similar functionality and access to the state systems that Estonian citizens enjoy.

One important reason that so many people do this, is because it enables them to open an Estonian e-resident business, without having to live in (or even visit) Estonia itself. 

Working with a local virtual office like Xolo, the Estonian e-Residency programme lets entrepreneurs and freelancers operate their business and serve their customers (who can also be anywhere in the world), through an Estonian-registered private limited company. The same digital signature system which lets Estonians register for a parking permit or cast their vote, enables e-residents to make bank payments and file taxes and raise invoices, entirely online.


What do you need to know about opening a business in Estonia as an e-Resident?

So while it was obviously created initially with Estonian citizens in mind, the Estonian digital infrastructure offers big advantages for foreigners, including:

  • The speed and simplicity of setting up a private limited company
  • Being able to access all digital infrastructure in English — not via flakey translation in-browser, but through native trilingual content provision in Estonian, Russian and English across the board by default
  • A diverse marketplace of suppliers of business services, including a growing range of fintechs and neobanks who are happy to collaborate with e-resident businesses (without the need to travel to Estonia even once for face-to-face identification, which many traditional clearing banks still require)
  • Easy invoicing and bookkeeping in multiple currencies
  • Transparent business and tax infrastructure (see below)


There are very few drawbacks and disadvantages you need to consider, however you might want to bear in mind that…

  1. Whether or not you form a business, Estonian e-Residency remains a virtual concept, and provides no physical access rights to be in Estonia. That is still all down to the rights in your passport. Almost anyone can visit as a tourist. Depending on your nationality you may be eligible for long-term residency (for example if you are an EU citizen,) or to apply for the Remote Work Visa… However, your status as an e-resident doesn’t change anything there.

  2. It is your business that is resident in Estonia, for tax purposes, not you. You remain liable to whatever fiscal rules apply personally wherever you are tax resident (see below.)  Depending on the nature of your work, it cannot be guaranteed that your business doesn't also have tax liabilities where you carry out the work as well, so you do need to take qualified local advice about that.


Business taxes in Estonia for e-Residents

Business taxes in Estonia are easy and straightforward, and if you partner with Xolo, you don’t need to know or worry about them much at all. You can read our detailed guide to everything you need to know about paying taxes for your Estonian company here — but between our slick business operations portal and our wonderful customer service team, everything will happen when it needs to.

Dealing with the Estonian Tax and customs Board is extremely straightforward, even for people who don’t have Xolo to calculate and set up the payment for them every month. Of course it’s all done through your digital ID and its two signature PINs.

Tax rates are comparable to other EU countries, for example with VAT at 22% (. Most businesses will collect and pay VAT in Estonia (if you sell to the public, or sell to businesses at a rate exceeding €40000/year,) but this is automatically calculated and added to your invoices in the Xolo platform.

When you buy things for your business, qualifying expenses where EU VAT has been paid contribute to the offset, so this automatically lowers your bill. According to the Tax Foundation, Estonian VAT applies to a broad base and has a low compliance burden, which means you get fairly acknowledged for the VAT you kindly spend and collect on behalf of the government.

Depending on the nature of your business, you may have payroll taxes, and social security contributions to consider (although if you are paying social security somewhere else in the EU, this can be notified to the tax office in Estonia and you don’t have to pay it twice.) Property taxes in Estonia too, (if this applies to you) are very competitive, because they apply only to the value of the land.

Your business needs to do an annual tax return, but the costs for this are included in your Xolo monthly fee — and again all you will have to do is sign things when prompted, as well as providing any missing information. Like everything else, it's done completely online and on time, so you don’t need to worry about deadlines or cycles. 

You won’t need to do a personal tax return in Estonia as an e-resident (though you will probably need to do one where you live.) And if you do end up paying personal taxes in Estonia, you’ll be glad to know the country has entered into the Convention for the Avoidance of Double Taxation with many other countries — so you are most unlikely to get taxed on the same income twice. You may pay little or no personal income tax in Estonia, if you distribute your income via fees rather than dividends (however your personal taxes will still be payable in your country of residence of course.)

Sounds good? You needn’t take our word for it — there are good reasons that Estonia ranks number one in the International Tax Competitiveness Index 2022, once again! 

And there’s one more piece of good news, the biggest advantage of all, and the reason so many foreigners love doing business in Estonia:


Why do many e-residents pay no corporation tax in Estonia?

The objective of most businesses is to make a profit, right? And those profits within the business are usually subject to corporation taxes, (because, death and taxes are those two certainties in life that we learn about…)

However, because of Estonia’s intrinsic culture of encouraging enterprise and growth, there is a special perk here: you are fiscally encouraged to invest in your own business, by reinvesting the profits that you make instead of paying them out. So, there is a 0% tax rate on profits that you retain and reinvest in your business. 

Estonia doesn’t tax you for making a profit, only when you pay it out to yourself. How cool is that?

You can pay yourself fees instead of dividends, and effectively pay no business tax in Estonia, you just pay the applicable local income taxes where you live.

(Of course when you are reinvesting in your business in this way, you’re adding to its value, and as such you could create a liability for capital gains tax in Estonia if you sold some shares in it at a later date. But for most ‘Xolopreneur’ businesses-of-one this liability is essentially theoretical, and you just enjoy the zero rate!)

If you want to pay yourself through dividends that’s fine, and you will pay tax on Estonia on that at 20% (sometimes 14%, but talk to your advisor about the qualifying terms.) 

Assuming you’re in one of the 62 countries where Estonia has double taxation agreements, you won’t pay tax on the same income twice. But with that being said, you can end up caught between your business having been taxed not reducing your liabilities as a natural person being taxed… So, your local accountant (where you live and are tax resident) can best advise you on how to make the best choice for your own situation.


So, does that mean Estonia is a tax haven?

Let’s bust this myth once and forever: Estonia is NOT a tax haven!

According to Investopedia:

A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment. They have tax advantages for corporations and for the very wealthy, and obvious potential for misuse in illegal tax avoidance schemes.

Companies and wealthy individuals may use tax havens legally as a means of stashing money earned abroad while avoiding higher taxes in the U.S. and other nations.

Tax havens may also be used illegally to hide money from tax authorities at home. The tax haven can make this work by being uncooperative with foreign tax authorities. In recent times, tax havens are under increasing international political pressure to cooperate with foreign tax fraud inquiries.

While Estonia’s taxes are clearly highly competitive, the main drawback for anyone seeking a place to hide their assets or launder ill-gotten gains, is the total transparency of the Estonian business register.

For this reason, the global Tax Justice Network calculates that Estonia contributes to 0.58% of global tax haven losses, and is responsible for 0.14% of global financial secrecy. Estonia exchanges tax data with more than 100 different jurisdictions in the world under OECD conventions, not just those where it is legally required to do by treaty - so everything is out in the open.

In fact, according to a 2018 statement by Dmitry Jegorov, Undersecretary for Tax and Customs Policy at the Estonian Ministry of Finance and member of the High-Level Working Party on Taxes at the EU Council, many e-residents make a larger tax contribution to their home country as a result of their increased profitability by using the programme.

Anyone still think Estonia is a tax haven?

This inaccurate perception reared its head again in 2021, with the US government proposal to set a global minimum tax rate for businesses gaining support from over 130 countries. Estonia continues to hold out against backing the proposition based on its unfinished status. However, the proposal is pushing for a minimum corporate tax of 15%, while Estonia’s minimum is already 20%. 

This treaty is designed to plug the loopholes created by around 15 countries who impose no general corporate income tax at all. No big tech corporates are hiding profits in Estonia! As then Estonian President Kersti Kaljulaid told CNN, the country is confident in the transparency and fairness of its tax code, and simply waiting to see the technicalities of the new global tax system in detail before declaring official alignment.

So, while tax evaders will be disappointed, let's finally consider:


What kind of businesses are suited to Estonian e-Residency?

Among the nearly 24,000 businesses established by e-residents in Estonia, there are many who are attracted to the transparent fiscal regime and entrepreneurial culture, as well as the frictionless digital environment for conducting businesses of many different kinds, entirely online.

Some particular use cases include:


Estonian e-Residency for international partnerships

If you want to collaborate on a new venture with partners who live in a different country to you, there can be unforeseen complications. Some countries require that all company directors be locally resident, or impose fees or restrictions on foreigners, which can get any new business off to a bad start.

Why not come together and incorporate in a neutral third jurisdiction, where everyone can engage on a level playing field from the start, and conduct their business administration from wherever they are located?

Estonia is the perfect place to base such collaborations, and provide a springboard for international growth.


Estonian e-Residency for emergent technology startups

If you want to do something really innovative with your new business, there can also be difficulties in some parts of the world, where business regulation is steeped in traditional categories and cultures, and the penalties for failure can be high — discouraging risk, and stifling bold business thinking.

Even within Europe this can be the case, and Estonia is also attractive and familiar to investors and VCs, thanks to its world-renowned startup ecosystem. This includes incubators and accelerators created to nurture such talents, especially in fields like clean energy, finance, and biotech. The ‘Estonian mafia’ of fellow business owners and innovators provides a supportive and inspiring atmosphere, as well as a community of collaboration and healthy competition. You can be part of the technical pioneering drive of Estonia, as you work together to tackle some of the biggest problems facing the world today.

A highly skilled and digitally enabled workforce available locally in a stable economy is also a big attraction for scaling in Estonia, along with its global reputation for the creation of unicorn success stories (with Wise becoming Estonia’s first ‘decacorn’, worth over $10bn, in 2021.) According to the State of European Tech 2021, Estonia is the most entrepreneurial company in the world, with the highest number of startups per head of population, with over 1000 startups per million residents — and that’s before you take the digital population into account!

So, the sky’s the limit, for your innovative startup. To find out more, contact Startup Estonia, a governmental initiative created to support and supercharge the Estonian startup ecosystem.


Estonian e-Residency for freelancers and solopreneurs

Wherever you live and work, freelancing is a great option for flexibility and lifestyle design. 

But operating as a simple sole trader has its drawbacks too, including the unlimited personal liability it brings, and the way that some people still don’t take freelancers quite as seriously as ‘proper businesses’. That applies to customers, service providers, financial services and more. 

No, we don’t agree with this prejudice — but we do have a great solution!

Using Estonian e-Residency to open a private limited company of one, gives you all the protection and credibility of any enterprise. You’re still you, the sole trader — but you are also a company director and owner, which can help you access funding, clients, events, and opportunities. Whether you choose to make it clear to people in your marketing communications that you’re an independent operator, or give the impression of something larger, is totally up to you.

Separating your business and personal income and assets too can make planning easier for your cashflow and lifestyle, as well as making any tax inquiries simple and easy to comply with.

When you form a business with Xolo, you get an impressive address in Tallinn, the heart of E-Estonia, where your business can live virtually… while you can live anywhere you choose.

In fact, you can live in plenty of different places, or even none at all:


Estonian e-Residency for digital nomads

Because Estonian e-Residency makes it so easy to operate your company entirely online, many freelancers in knowledge-based industries refuse to be pinned down to one location. 

When all you need is your laptop and phone, the increasingly well-connected world is all yours, and you can travel wherever you like within it — all the while, working your business and generating profits via your Estonian entity.

Some people have a home base and travel to visit clients and attend events, while others may choose to have no permanent home anywhere, becoming entirely nomadic in lifestyle. They may even manage not to be personally tax resident anywhere (but note that this is NOT specific tax advice, you must seek that locally and individually, for avoidance of doubt!)

For years many people have enjoyed the digital nomad life, but found it challenging to manage the logistics and legalities, which go far beyond taxation. Today, the combination of a growing range of digital nomad and remote working visas let offer increasing flexibility to travel, explore, and experience the world, while being able to carry on working and earning from your laptop. 

And when you combine this status with the permanence and credibility of an Estonian e-resident business, then the world really is at your feet to enjoy.


Estonian e-Residency and Xolo Leap: Your passport to freedom

Wherever you see yourself travelling, whatever you see yourself building, the simplest, fastest, and most reliable way to get started on your new venture, is by establishing an Estonian e-resident company through Xolo Leap.

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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.

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