Estonia

If you consider registering a company in Estonia, this is exactly what you have been looking for. The present article deals with advantages and nuances of establishing, registering, and managing your own enterprise in the EU. The country created worldwide buzz, because it is probably the best location for setting up a future-oriented business.

The national programme of e-Residency offers entrepreneurs an innovative way of incorporating and running digital enterprises, allowing to do it online from anywhere in the world. E-Residency provides access to electronic services delivered by the Estonian government, thus enabling you to carry out daily operations on a fully digital and remote basis.

6 simple steps to purchase a company

  1. choosing a country

  2. choosing a bank

  3. payment (by any method)

  4. sending documents

  5. company registration

  6. bank account opening

Main advantages:

Here are the four main advantages of registering a company in Estonia:

  1. Incorporation and management procedures are completely online. Undoubtedly, the most important benefit of establishing a business in the country is that, upon receipt of the e-Residency card, you may set up your company and exercise control over it from any part of the world. As an e-Resident, you can also sign documents and contracts with a digital signature, file taxes via the Internet and use online-banking services. You do not have to be physically present in Estonia to run your business.
  2. Corporate income tax rate on retained profits is 0%. As regards CIT, Estonia introduced the unique tax regime, which differs from traditional ones. The total income generated by the company is not subject to immediate taxation. CIT is only levied on distributed profits (e.g. dividends), whereas retained or reinvested income is exempt from taxation. Such regime means that shareholders may decide on whether and when distribute the profits and, therefore, pay the CIT.
  3. The country’s presence in the Single European Market. Being an EU member, Estonia is also a part of the world’s largest international single market. EU states and their citizens enjoy economic benefits of removed trade barriers and opportunity to move freely within the Union. The common currency and harmonized corporate legislation of the EU countries, among other advantages, facilitate trade and provide enhanced growth potential for businesses. Moreover, Estonia is a member of the Single Euro Payments Area (SEPA). Making SEPA payments is as simple as if dealing with cash. Enterprises incorporated in Estonia may carry out swift and secure transfers between bank accounts anywhere within the euro area. SEPA regulations ensure a better quality of banking services for all: transparent pricing, reliable guarantees of full and timely payments, and banks’ liability in the event that any problems related to money transfers arise.
  4. Estonia is characterised by favourable business environment, which has long been considered as one of the best in the world according to various international indices. For example, in 2019 the country ranked 18th in the World Bank’s Ease of Doing Business Index. Also in 2019, the U.S.-based think tank Tax Foundation published an annual research, having named the Estonian tax code the best one in the OECD for the sixth year in a row.

If you find these advantages convincing enough, do not hesitate to set up your enterprise in Estonia. The next step is choosing the appropriate organisational and legal form.

What types of companies may be registered in Estonia?

When deciding on the form of the business, you should first assess your opportunities and risks, so that you understand what type of company would be the best option, given your objectives and financial resources. The most common legal forms in Estonia are the following:

  1. Sole Proprietorship (FIE);
  2. Private Limited Liability Company (OÜ);
  3. Public Limited Liability Company (AS).

These types of business differ from each other in the amount of minimum required share capital, in the number of participants/members, in the extent of material liability, and in management arrangements. Which of the legal forms best suits your needs? We often recommend to our clients that they establish a Private Limited Liability Company since a sole proprietor shall pay social tax as well as income tax and is personally liable for debts and obligations of the business. However, some entrepreneurs opt for a Sole Proprietorship because, unlike the case of Private LLCs, there is no initial capital requirement.

Comparison of Sole Proprietorships and Private Limited Liability Companies in Estonia:

  1. Sole proprietors bear personal liability for all debts and obligations related to the organisation’s activity. With regard to a Private LLC, shareholders liability is limited to the amount of minimum required share capital (EUR 2,500) until such capital is deposited.
  2. Taxation of Sole Proprietorships is more complicated procedure than that of Public and Private Limited Liability Companies. Sole proprietors must file annual profit and loss reports, their income being subject to personal income tax (20%) and social tax (33%). Private LLCs may defer their tax liabilities until the profit is distributed (e.g. in the form of dividends). Distributed income is only subject to corporate income tax, i.e. social tax is not levied.
  3. The state fee for Sole Proprietorships registration is EUR 13, for Private LLCs the same fee is EUR 190.
  4. A sole proprietor cannot be an employer for himself or herself and pay salary to himself or herself, but may hire staff. Despite lower cost of entry, Sole Proprietorship is a less attractive option for many entrepreneurs due to tax and personal obligations it entails. Most of our clients choose Private Limited Liability Company as a legal form of their business in Estonia.

Registration procedure:

  1. Office. A registered office address is required by law. You may opt for a virtual office instead of the physical one. The first has numerous advantages since no premises maintenance and management activities are to be carried out. Virtual offices is a great way to save money and put it to better use for the needs of your business. Such offices represent the company in Estonia and forward all the incoming correspondence to you by mail or by e-mail.
  2. Management board. At this stage, you should choose the persons to take up the relevant positions. If you want to establish a Sole Proprietorship (FIE), it is plain and simple: you are both the owner and the manager. In the case of Private (OÜ) or Public (AS) LLCs, the corporate structure, the articles of association and the management board members are of considerable importance since the latter act as the company’s representatives, provide the whole business management, and may enter into transactions on behalf of the owners and supervisory board members. Our experts will assist you in designing your enterprise’s organisational structure.
  3. Filing the articles of association and registering with the Commercial Registry of Estonia. In order to incorporate an enterprise in Estonia, you shall either be physically present in the country, or draw on a trustee, or implement all the procedures remotely upon receipt of the e-Resident card. Our specialists will help you to get one. If you already have an e-Resident card, we can provide assistance in registering a company under your name in just one working day. Should you decide not to obtain e-Residency, we shall file the necessary documents with the Government and make sure that you company is entered into the e-Business Registry, which is the national registration portal.
  4. Share capital. The minimum required share capital of a Private Limited Liability Company is usually EUR 2,500. When initiating the incorporation process, you are to decide whether to register the share capital at once or postpone the capital payment. You shall make such payment prior to or during the distribution of the company’s dividends. It is important to note that a Private LLC cannot make any form of payments to the shareholders and raise or reduce the share capital until the latter is fully paid up by all the members. Estonian regulations on Private Limited Liability Companies also provide for personal liability of the founder for all debts and obligations related to the enterprise’s activity as long as the share capital is not paid in full. In accordance with the local legislation, such liability is limited to the amount of minimum required share capital (EUR 2,500).

Key points on taxation

In order to carry out business activities in the country, a bank account and a tax identification number are necessary. Requirements prescribed by various legal acts made bank account opening a more difficult and costly process than it used to be. So as to assist our clients seeking support in starting a business in Estonia, we cooperate with the largest financial group in the country.

Once the company is set up, it is subject to the provisions of the corporate taxation rules. Moreover, it may be liable to pay value added tax. Due dates for payment and rates vary depending on the tax.

As mentioned earlier, one of the advantages of establishing a company in Estonia is that the corporate income is not subject to immediate taxation. Instead, the CIT is levied if distributing profits, for example, if paying dividends.

In the general case, the CIT rate is 20%. However, since 2019, the lower rate of 14% is available for the companies that make regular distributions. The corporate income tax of 14% is imposed on the payment of dividends in the amount that is below or equal to the extent of dividends paid and taxed during the three preceding years. Thus, the tax rate on the net distribution is 14/86 instead of 20/80. In the event that the company enjoys the lower CIT rate of 14%, it is additionally obliged to withhold income tax of 7% from dividends paid to natural persons, regardless the residency of the latter. Except as noted above, there is no withholding tax on dividends paid to non-residents (20% or 14% tax on distributed profit is considered as CIT, and not WHT).

Reporting

In Estonia, enterprises are not assigned a value added tax (VAT) number by default. Unless the company is subject to VAT, it only has the registration code, which is also used for tax purposes. Companies are free to choose whether to register as legal persons liable to VAT at once, on a voluntary basis, or do it later, upon exceeding the predetermined turnover threshold. If registered as a VAT payer, the enterprise shall add value added tax to the invoices and declare it in the relevant tax return. Thus, in the case that the company does not have to pay VAT, its clients may purchase goods and services at a lower price.

If an Estonian company sell goods or provides services that are neither imported to nor exported from Estonia, such goods and services are taxed in accordance with the regulations of the country where the actual trading is performed. In the case that an Estonian company registered as a VAT payer supplies goods to and provides certain services in the EU member states, 0% value added tax rate is applied in Estonia. Many of our clients opt for getting a VAT number since their business partners across the EU prefer to cooperate with those companies that have such number.

The turnover threshold for mandatory VAT registration is EUR 40,000 from the beginning of a calendar year. Companies may register as VAT payers voluntarily, before the above-mentioned threshold is reached.

In order to obtain a value added tax number, the enterprise is to apply to the tax authorities. The applications are generally processed during 5 working days. This procedure may take more time, should the relevant bodies need further documents or information. As a rule, the latter is requested so that to determine whether the company carries out or plans to carry out actual commercial activities.

We offer VAR registration services to our clients and support them throughout the entire process, inter alia by providing legal advice.

Our company will also assist you in getting an EORI number and a LEI code. If the enterprise is registered as a VAT payer, it shall prepare and submit two monthly tax statements (VAT return and CIT return).

Companies incorporated in Estonia have to be familiar with the local legislation and be ready to communicate with tax and other authorities in the Estonian language. For that reason, we help our clients to comply with their tax and reporting obligations upon setting up a business in the country.

Our tariff plans on subscription-based service packages include accounting software licence fee and charge for monthly monitoring of your company’s accounting records (e.g. payment reminders etc.). You may also seek advice from our specialists before conducting various transactions and get consultations regarding which of the enterprise’s costs can be covered without tax consequences and which cannot.

In order to use our accountancy services, you should provide us with all the relevant documentation, such as invoices and bank statements, which is necessary for preparing annual reports.

The cost of such services is dependent on the volume and complexity of the work to be done.

Business-friendly environment makes Estonia an ideal location for registering a company. If you are interested in setting up an enterprise in the country, let us help you with it. Just give us a call, and we will provide all necessary assistance.

If you have any questions, please fill in the contact form below, and we will reply as soon as possible