Being awarded the title Best Christmas Market this year, Tallinn seems like a pretty appealing destination to visit during the holiday season. Nevertheless, for start-ups and other establishing and expanding businesses, visiting Estonia’s capital and making it your place of business should be considered a good idea always. Tallinn, an IT/tech hub already referred to as Europe’s Silicon Valley, offers one of the liveliest start-up communities (see, for example, Lift99 ecosystem). It is, therefore, no wonder groundbreaking companies such as Skype, Transferwise and Taxify were all founded there.
When thinking of the reasons why move your business to Estonia, the first thing that comes to mind is its society, which is digital in full. Everything from voting, to setting up a new company and declaring taxes can be done with just a click on the computer.
In 2014 Estonia initiated the e-Residency program (discussed below), it offers a reliable and stable financial system, it is well known for its low corruption index, transparent government policy and liberal and motivating taxation system. All this in itself explains Estonia’s ranking among the top 20 countries in the World Bank Ease of Doing Business Index (link).
What is more, similarly as Slovenia (read our report on why Slovenia is the best choice to establish and grow your EU based business) Estonia has a perfect strategic location.
It is a gateway to the Baltic and Nordic markets and also most convenient for trade between Russia and Europe. With that, it is an ideal option for many non-EU companies and founders to expand their business — they can even get a special Start-up visa to help grow their start-ups. What should not be overlooked is also the social perspective, the potential of Estonian people and the good work-life balance which Estonia offers.
Estonia’s tax system
Estonia has one of the most liberal tax systems in the world. The two most appealing features are the zero corporate tax on reinvested profit and the possibility to fully declare taxes online.
A legal person is considered a resident and will be taxed on the worldwide income principle in Estonia if it is established pursuant to Estonian Law (an Estonian company registered through e-Residency is therefore automatically tax resident in Estonia). Estonia levies corporate income tax on Estonian resident companies’ distributed profits, both actual and deemed. This means that profits are taxed only when they are distributed and there is no corporate income tax on retained and reinvested profits. As income tax is not assessed on profit earned every year, but monthly, there is no obligation to submit a tax return every year, regardless of profits or losses (the latter consequently cannot be carried forward/back).
The corporate income tax rate is 20%, calculated as 20/80 from taxable net payment. It applies to dividends and is paid by the resident legal person making the distribution. Starting in 2019, a reduced rate of 14% will be phased in for regular dividend distributions (i.e. distributions that do not exceed the average taxable dividend amount distributed during the prior three years, calculated at the level of the payee).
There is no separate dividend withholding tax on dividend payments to legal entities. As from 2019, dividends that are subject to the reduced corporate income tax rate also will be subject to a 7% withholding tax if distributed to resident or non-resident natural persons (subject to tax treaty limitations). Capital gains are treated as ordinary income of resident companies.
Participation exemption applies in two cases (when the underlying dividends are received from a subsidiary that is tax resident in an EEA member state or Switzerland and the Estonian parent holds at least 10% of the shares or votes of the payer company and when the Estonian company holds at least 10% of the shares or votes and income tax has been paid on the underlying share of profit, or income tax on the dividends has been withheld in a foreign jurisdiction).
There is no withholding tax on the dividends or interests other than interests derived by a non-resident investor from an Estonian contractual fund or other pools of assets. A 10% withholding tax generally applies to royalties paid to non-residents, unless the rate is reduced or an exemption applies under an applicable tax treaty. Royalty payments to qualifying EU or Swiss-resident companies may be exempt if they meet the requirements for application of the EU interest and royalties directive. A 10% withholding tax generally applies if technical services are rendered in Estonia.
An Estonian entrepreneur (a company or sole proprietor registered in Estonia) is not automatically treated as a taxable person for VAT purposes. Only a person whose taxable supplies (excluding imports) exceed EUR 40.000 in a calendar year is required to register for VAT. The latter is charged on the supply of goods and services in the course of business activities and the self-supply of goods and services. The standard VAT rate is 20% and a reduced rate of 9% is available on certain items. Zero-rated items include exports, intracommunity supplies of goods, the sale of certain services to foreign persons and goods supplied on vessels and aircraft.
Estonia offers the possibility to file taxes electronically. Each year 95% of taxes are in fact declared online. The system enables you to file enterprise’s declarations for income tax and request VAT returns among others. Non-residents can also choose a tax representative, to whom the Tax Board issues a license to represent them for the performance of (tax) obligations arising in Estonia.
Other taxes one should bear in mind when deciding to do business in Estonia are also social tax, customs tax and excise duties, unemployment insurance premium, environmental charges, taxes payable in the case of cross-border operations and some other taxes.
As the name suggests, e-Residency gives foreigners the ability to apply for a secure digital residency in Estonia, even though they do not actually live there. As such, e-Residency is not related to citizenship and does not grant you tax residency or give you the right to physically enter or reside in Estonia. It is a government-issued, transnational, digital identity available to anyone in the world. Estonia started the program in 2014 with the aim of creating a borderless digital business society and enable anyone anywhere in the world to fulfil their entrepreneurial potential. It is particularly aimed at digital nomads, freelancers and start-up companies as it offers freedom to easily start and run a location-independent business online, using the advanced digital infrastructure of Estonia.
The e-Residency program gives an e-resident a smart digital ID card that contains a special chip with two PIN numbers for secure digital authentication and digital signature. The card enables e-residents to use Estonian public and private sector services and resources, sign documents online (as the digital signature is legally valid just as the physical one), exchange encrypted documents, access international payment service providers and conduct secure e-banking.
Doing business is made easy, taxes can also be declared online and the costs of administration are low. As the process of becoming an e-resident is made easy (all you need to do is fill out the online application form and personally collect your ID card at an Estonian embassy after a background check is done), today there is already almost 50.000 Estonian e-Residents, most of them coming from Finland, Russia and Ukraine. The e-residents have already created 4,500 new companies in Estonia and, according to an economic impact analysis by Deloitte conducted in 2017, have contributed €14.4 million to the Estonian state and economy so far. In December 2018, the Estonian government approved the new course of action for the e-Residency program, e-Residency 2.0. More and more focus is now being shifted towards the development of the e-Residency community and the introduction of Estonian culture to e-residents.
How can Nobile help you?
To sum up, it is clear that advantages of e-Estonia, especially the e-Residency and online tax system, create a uniquely favourable environment for developing your start-up.
Nobile Law Solutions legal agency has helped establish many companies in Estonia and we have a lot of experience and knowledge about Estonia’s tax system. We will help you decide whether Estonia offers the most suitable jurisdiction to start or further your business.
With the help of our local partners, we will help you establish and register your company in Estonia and will protect your IP rights in this regard. Furthermore, we will advise you on, draft and negotiate agreements, covering all aspects of your business, taking care that they address your evolving business needs. We will navigate you throughout the whole process and make sure that starting or expanding your business in Estonia will be carefree, uncostly and fast.
*I thank Ms Barbara Kompan for support with drafting this country report.