In entrepreneurial circles, especially for those that work online, there is a lot of talk about the chance to start a business in Estonia.
Today we are going to analyze at length the advantages and disadvantages of Estonian businesses, discussing all of their special characteristics, the types of operations that can best benefit these businesses, and of course, the taxes and administrative requirements for these corporations.
The electronic residence program makes it very easy to establish a business in Estonia. And the special Estonian corporate tax system—you only pay taxes once you’ve distributed dividends—makes the country very interesting, especially for rapidly growing startups.
That being said, unfortunately there are also CFC rules that, if you fiscally reside in the UK or any other country with these types of laws.
Fortunately, there are more and more business-owners that live like permanent travelers or that have moved to countries with territorial taxation or, at least, without CFC rules (recently we talked about the different tax systems around the world). In all these cases, you can run a company in Estonia without any problems.
More precisely, as a subsidiary and investment business, an Estonian corporation could be useful to any type of person.
All about Estonian companies
The broadest type of corporation in Estonia is the Private Limited Company, comparable to the companies in countries like Great Britain. It can also be compared to a limited corporation, which in Estonia requires an initial minimum capital investment of €2500.
If this initial capital doesn’t exceed a sum of €25,000 and the founders are natural persons, they don’t need to disburse the capital. That said, the associates of the company will have to be responsible for the cost of the initial capital, namely a maximum €2500 to meet the minimum sum.
Every limited company in Estonia needs a director, who should be a natural person. Offshore corporations, therefore, can’t be designated as managers. In any case, the director doesn’t also have to be an associate at the same time.
At the moment, non-residents need an in situ agent for their Estonian corporation—a person who can be delivered the necessary official documents. Hopefully, with the increased growth in the electronic residence program, this step will soon be skipped.
These agents are generally cheap and also support the corporation’s commercial domicile. They assume the administrative jobs of the limited corporation and, if it is required of them, they can also take care of any necessary accounts.
Special characteristics of the Estonian tax system
Estonia is a very special country with respect to its corporate taxes. It’s likely the only country in the world that has implemented a system where corporations only pay taxes on their distributed dividends. This means—as long as the international tax laws of your country of origin don’t impede it—that you won’t have to pay taxes on profits or investments while the money remains in the Estonian corporation.
Taxes, at a rate of 20%, are only paid when you distribute dividends. In many countries, this will imply also paying income or withholding tax. But for those people that don’t have to pay taxes in their countries of residence, Estonia is an interesting alternative, and there is another aspect of Estonian corporate tax that may be even more interesting.
Up to a certain point, your salary is exempt from taxes in Estonia. The sum of the tax-exempt salary is determined by the volume of sales and work done by the administrators within the corporation. An accountant in my partner agency can help you with this (only after you register).
Furthermore, you can allot up to €1,230 a month tax-free as fixed travel expenses, as long as you don’t live in Estonia and actually have travel expenses relevant to the company. This is easy to argue for the majority of companies that aren’t tied to one place.
Although you won’t be receiving an immense amount of money, for many digital nomads this is more than sufficient to live on. In the end, geoarbitrage lets you live with considerably lower costs than the majority of people. With €1,200, you could live a life of luxury in any place outside of Western Europe, Australia and North America. What’s more, the money from these places can even let you get ahead.
On the other hand, nothing is stopping you from giving yourself more money if you need it. If this is the case, you will have to pay a 20% corporate tax on any sum beyond the limit.
This is precisely why, for people that plan long term, it makes much more sense to leave funds in the Estonian limited company rather than paying taxes. Ultimately, you can leave your money tax-free in the Estonian corporation as a legal person, which becomes an excellent vehicle for investment.
Estonia is a country with a good reputation within the European Union and offers many possibilities for investment vehicles that classic offshore companies don’t offer.
An Estonian limited company can invest in real estate within the EU, and in general, can make various types of deposits and other investments with no problems. Estonian businesses rarely have obstacles to accessing investment opportunities, plus they don’t pay taxes within the country.
With this, they are perfectly suited for pension plans. Instead of contracting them privately and having to pay capital gains tax, you can transfer them to an Estonian limited corporation, which will be able to invest them very flexibly. The capital yields obtained will be tax-free and, over time, will accumulate.
Naturally, all of this is only possible if you fiscally reside in countries without CFC rules. If you reside in the UK, Canada or Australia, you won’t be able to avoid paying taxes on capital yields.
In countries without so-called CFC rules, an Estonian corporation offers the possibility of circumventing taxes on private capital gains. In the case that you do need to pay taxes, they will only be in the form of a 20% tax on dividends. But, given that you can assign yourself a specific monthly salary, this is not a necessary requirement.
Consequently, an Estonian limited corporation can be run in a way that is totally tax-free if it uses long-term investment strategies. This makes it an especially interesting option as a subsidiary company for the many entrepreneurs that aren’t tied down to a physical place.
You can continue running your business tax-free through an offshore or hybrid company while taking advantage of the Estonian limited corporation’s investment advantages. You can also assign yourself a long-term monthly salary at the maximum tax-free amount, and if you need money later on, you can take out more money for a 20% tax.
Thus, the Estonian limited corporation has advantages if you use it as an operating subsidiary.
Advantages of Estonian limited corporations within the EU
Having an Estonian limited corporation is one of the few possible ways to run a business inside the European Union tax-free, even if this involves restrictions, all the while obtaining a tax identification number. This is increasingly difficult for other non-resident companies.
Companies like British limited liability partnerships have problems getting intra-communitary tax numbers if they don’t earn taxable income in the United Kingdom. The same thing happens with partnerships in other countries.
In contrast, authorities in Estonia
will willingly assign you a tax identification number (this has changed, obtaining a VAT number is not as easy as it used to be if you don’t have operations in Estonia); after this, you’ll only have to pay a 20% tax on small sums.
Estonia is very interesting for import and export company models like Amazon FBA because, thanks to being a part of the European Union, they rarely have problems with companies like Amazon or Ebay or payment services like PayPal or Stripe. You can use all these services without a problem if you start a company in Estonia.
An Estonian limited company can also be useful as an invoicing corporation. However, transferring profits to an offshore corporation is considerably more difficult than from the UK, for example, because Estonia isn’t ideal for double structures.
Anyone who has a classic consultancy business with digital products and services should consider invoicing its advice services through an Estonian business, while offering their digital products through external servers like Digistore in combination with an offshore company. Part of the earnings from the consulting services can be taken out as a specific monthly salary, tax-free, and the remaining money can be invested as contingency plans for the future. It’s a smart solution for anyone!
What is the administration of an Estonian business like?
Anyone with a goal to avoid accounting will have no luck with an Estonian limited corporation. In Estonia, all capital movement should be reflected in the business’s accounting so that the good reputation of the country’s businesses isn’t diminished. In contrast, you can ignore audits―which are mandatory in places like Hong Kong, for example―under a certain sum. This quantity is somewhere in the order of millions of euros, thus only a small minority of digital nomads reach this.
Given that Estonia is a more cost-effective country than the United Kingdom, it’s convenient to outsource accounting. The limited corporation’s registered agent is a good point of contact for this. Depending on total sum of transactions, a freelancer or small online business-owner shouldn’t have to pay more than €20-€50 monthly in accounting costs.
Because of electronic residence, you can handle this entire process yourself. Whatever the case, a requirement of Estonian electronic residence is that you have to be able to run the whole business online, always according to your verified electronic residence card. This translates into a minimal processing period; you can run your Estonian limited corporation in a few minutes a month.
Currently, this also depends on your in situ agent, who is authorized to receive official notifications. It’s likely that this won’t be the case in the future.
My partner agency LeapIN offers packages with monthly fee plans for different business models. You can pay between €50-€80 monthly to forget about all this. However, they currently only accept single-person companies and not FBA users or investors. If you need this service, you can get in contact with me.
All about Estonian bank accounts
In contrast to what happens with other businesses, Estonian limited corporations don’t have any type of problem opening company bank accounts. You can open accounts practically anywhere in Europe; what’s more, you can also do so on a global scale if your investments demand it.
Nevertheless, there are good reasons to open an Estonian bank account. For example, it will be easier to take money out of your PayPal account. This is a flourishing, modern country that has the lowest state debt in the whole EU, meaning it has good economic security.
One of the more interesting opportunities is to open a SwedBank account. This bank is the most open when it comes to non-residents who don’t have clients in Estonia, and is willing to open business accounts for practically anyone, including internet entrepreneurs and freelancers. SEB and Norvik Banka are among the other banks that have more requirements concerning sales volume and initial deposit. Of course, it will never be as difficult to open a bank account in Estonia as it is in Hong Kong.
Update june 2018: The banking situation is quite horrible now. Swedbank and SEB are no longer options. LHV maybe, but you need to have some economic interest/activity in Estonia. The best banking solutions at the moment are fintechs like Paysera, Holvi, Revolut, Transferwise etc.
Steps for establishing an Estonian business
One good thing about Estonian businesses is that they are very easy to establish; it seems like their start-up requirements get more and more simple by the day.
Currently, you can incorporate your business online using your electronic residence (e-residence), which you will need to have applied for over the internet prior to this. Of course, you will have to look for an agent there to run the corporation and give the business an address. With the LeapIN agency, you can contract all this with accounting and form presentation services for a fixed rate.
If you want to save yourself some work, you can establish your limited corporation directly with them (but this isn’t mandatory). Start-up doesn’t take more than a few business days and you can open a bank account in situ afterwards. If you decide to establish the business with the help of an agency, you will have to pay €700. Annual administration costs are €200 and monthly accounting is between €20-€50.
So in general, this is a reasonable price if you keep in mind the advantages of this kind of business.
Summarizing the advantages of an Estonian limited corporation
An Estonian limited corporation is very worthwhile in many cases, especially in the following:
- For anyone that can live at a low monthly salary or wants to be taxed based on this salary
- As a vehicle for investment, real estate and contingency in the long-run
- For invoicing services including consulting
- For simple import-export businesses
- As a subsidiary or tertiary for simple businesses that need a company with a good reputation
With an Estonian limited corporation you have the following advantages:
- Retained profits aren’t taxed, and distributed dividends are only taxed 20%
- The possibility of having a tax-free salary (within certain limitations)
- Business bank accounts with good services are easy to open
- Limited responsibility with reduced or null contributions (€2,500 responsibility)
- Good reputation within the EU
- Simple administration, likely to get even easier in the future
- Reduced creation and maintenance costs
Well, that’s all for today. Do you think having an Estonian company would suit you? Remember that if you need help to analyze your situation and decide where to establish your business or what structure to give it, you can book a consulting session with me here.
If you have any questions or doubts, take advantage of the comments section below and, as always, if you know anyone who might be interested in this article, don’t forget to share it.
See you soon!