Doing Business in Estonia: how to avoid costly mistakes
Legal traps for e-residents to watch out for
This is a guest post submitted by Thompson&Stein, an international law firm serving e-residents. Learn more about working in partnership with the e-Residency programme here.
Every entrepreneur who has established a business knows that some mistakes cannot be avoided, even with the best preparation. Entrepreneurs conducting a business activity outside their own country — such as many e-residents — are particularly vulnerable to this risk. We collected the reasons behind the most common problems with which our e-residents come to us. On this basis, we created a 5-item list to help you avoid costly business mistakes. Read on before you establish your company to see what to watch out for.
1. The company’s structure matters
Only an individual (not a company) can be an e-resident. If an e-resident wants to establish a company, they have a choice of company structures e.g. private limited, public limited, not-for-profit, etc. Choosing the right structure will depend on your business activities and individual circumstances. Once you have established your company, you can transfer the shareholdings to another individual, company, or other legal entity (whether in Estonia or elsewhere) but this can only be effected under a notary deed certified by an Estonian notary. For this purpose, you will also need appropriate, Estonian-translated documents from the original register of the company or legal entity who is to become the shareholder.
2. Verify whether you need a licence or an operating permit
Many new entrepreneurs do not consider that some business activities require a licence when operating in certain sectors in Estonia. They may instead incorrectly follow the licensing regulations at their place of residence or origin. It is particularly noticeable in the case of entities wishing to operate in the financial, energy, food, pharmaceutical, construction and tourism sectors. Examples of such licences include: licence to conduct trade in medicines, to run a travel agency or an employment agency, or to provide financial services (including virtual currencies). It is also important to note that, like in many other countries, companies wishing to operate in the gambling or tobacco sectors are subject to significant requirements and restrictions.
3. Verify whether your country has signed a treaty for the avoidance of double taxation and whether you are subject to CFC rules
We have noticed that many e-residents, outside the EU in particular, may not be aware of or take into account the important matter of international regulations before establishing a company. One such regulation is the treaty for the avoidance of double taxation. From an entrepreneur’s point of view, this has a strategic meaning, since paying double taxes may inhibit a company’s development. Therefore, before you decide to establish a company, verify whether your country of tax residence has signed a treaty for the avoidance of double taxation with Estonia. You can do it by visiting the Republic of Estonian e-MTA website.
Controlled Foreign Corporation (CFC) rules are equally important. They, by definition, aim at tackling harmful tax competition from countries applying preferential tax rates (primarily from ‘tax havens’) as well as counteracting deferment and evasion of taxation, commonly attempted by transferring income to subsidiaries located in countries with preferential taxation systems. Before commencing a business activity in Estonia, it is therefore recommended to verify whether you are subject to CFC rules in the country of which you are a resident. Otherwise you may jeopardise your company’s budget and your business activity may no longer be profitable. It is also important to consider the location of the management board which may affect the company’s tax residency.
4. Register your company for VAT on time
Many entrepreneurs do not register their companies for VAT on time. In accordance with the Estonian tax law, every company with sales revenues exceeding EUR 40,000 as from the beginning of the calendar year is obliged to be registered as a VAT payer. An application for tax registration must be submitted to the Tax and Customs Board in Estonia within three working days following the day on which the such statutory obligation arises (i.e. the day that sales revenues exceed EUR 40,000).
Naturally, a company may also apply for the registration as an active VAT payer in advance of the statutory deadline to be prepared for all types of transactions.
5. Fringe benefits
The beneficial construction of the income tax in Estonia has resulted in the need to introduce regulations which aim at taxation of the so-called ‘hidden’ dividend payment or fringe benefit. For this reason, in the case when a company incurs expenses for e.g. housing needs, food, gifts, clothes or a car used for private purposes, they should be subject to both income tax and social tax (in the form of contributions).
This post was written by Krzysztof Sosnowski, Business Relationship Manager, at Thompson&Stein.
