Estonia: An Onshore Jurisdiction with 0% Tax on Corporate Profit

Estonia’s taxation system is unique for the European Union. This is a clean onshore jurisdiction where the corporate profit tax is 0%.

There are several other tax incentives for business companies registered in Estonia too. Let us give you one example that will show that Estonia offers some business opportunities that are not available in other EU countries. The corporate legislation of the country says that the charter capital does not have to be deposited at the moment when the company is formed. The minimum required amount of charter capital is 2,500 euros but it can be simply declared when the company is registered. The company By-laws can specify the time when the charter capital has to be deposited and it can be from one year to infinity. You have to bear in mind, however, that until the charter capital is deposited, the company owner (founder) is liable with his/ her own property in the amount of the declared charter capital. 

Below we provide information about the basic corporate tax rates in Estonia. In addition, we discuss the conditions under which these tax rates are applied.

Taxes for corporations in Estonia in brief

Corporate profit tax – 0%. There is no such notion as a ‘corporate profit tax in the Estonian legislation. Corporate profit is not taxed until it is distributed to the company owners in the form of dividends.

VAT – 20%. The VAT is payable only by companies registered as VAT payers. In some cases, a company in Estonia does not have to register as a VAT payer (see below).

Dividend tax (tax on distributed corporate profit) – 20%. Please seek professional advice to find out how exactly the tax is calculated.

Social tax – 33%. The tax is payable by the employer who pays a salary to an employee. The money goes to the social security fund.

Unemployment tax – 2% of the worker’s salary. It is levied only on residents of Estonia.

Additional taxes and duties payable by companies in Estonia include the following ones: excise tax, land tax, gambling tax, tax on heavy vehicles, and customs duties.

Personal taxes in Estonia

Personal income tax – 20%. It is payable if the person is paid a salary. The minimum wage is 540 euros per month in Estonia. 

Non-resident Management Board members in Estonia

In accordance with the Estonian legislation, a member of the company Management Board is entitled to act on behalf of the company. This means that a company in the country does not actually have to hire a company director even though it can do so.

If a member of the company Management Board is a non-resident of Estonia, a salary does not have to be paid to him/ her. Consequently, no tax is due. At the same time, the person can sign contracts and open bank accounts on behalf of the company. He or she does not have to apply for a work permit to be able to carry out all sorts of commercial activities on behalf of the company.

You should not confuse the status of a non-resident Board member with a D-type work visa. Unlike a D-type visa holder, a non-resident Board member has no right to enter Estonia let alone engage in any business activities on the territory of the country. To be able to do that, a non-resident Board member has to apply for a C-type visa. The visa allows legally staying in Estonia for 180 days and it is often referred to as a ‘business visa’. Please note that it is not a work visa and the Board member visiting Estonia cannot engage in any business activities unrelated to his/ her company.

Tax obligations for Estonian companies in more detail

To continue with our Estonian taxation system overview, let us discuss some specifics of the country’s corporate legislation that allow locally registered companies to save on taxes. The Estonian authorities set the corporate profit tax at 0% in 2000. The tax rate applies to those companies that have obtained profits but have not distributed them. ‘The company profits have not been distributed’: what does this phrase mean? It means that by the end of the fiscal year, the LLC founders or the company shareholders have not paid themselves any dividends. All the profits have been reinvested into the company. If this is not the case, and dividends have been paid to the company owners/ shareholders, the company has to pay a 20% tax.

We would like to emphasize the fact that Estonia offers a rare opportunity indeed: a company in the country can accumulate funds in its bank accounts while paying nothing in taxes!

Now let us discuss what happens when an Estonian company transfers money to low-tax jurisdictions. You have to study the ‘white lists’ of countries and the ‘black lists’ of countries used in Estonia with great care. The matter is that the Estonian authorities have their own methods of classifying offshores (or low-tax jurisdictions). For example, Liechtenstein, the UAE, and Hong Kong are blacklisted in Estonia. On the other hand, the Isle of Man has been on the white list since 2010 and Jersey has been on the white list since 2012.

If the money transfer goes to one of the blacklisted countries, the corporate profit is taxed at 20%. There are exceptions, however. If your company carries out regular business operations with a blacklisted jurisdiction, there is an official method of avoiding paying the corporate profit tax. You can file an application for tax exemption to the Estonian Tax and Customs Board and supply contracts with the company registered in an offshore jurisdiction.

The local fiscal authorities do not want Estonian companies to make one-off money transfers to low-tax jurisdictions. They classify such transfers as capital repatriation. However, if you are able to show that you conduct regular business operations with a company that happens to be based in an offshore jurisdiction, the Estonian fiscal authorities will not mind that. They will not think of the money transfers as capital repatriation and will not tax your company profits therefore. When filing an application for tax exemption, you have to pay a state duty of 700 euros.

If an offshore-registered company (that is, a company based in one of the blacklisted countries) acts as a co-owner of an Estonian company, a corporate profit tax of 20% is due. This requirement holds, however, only if the offshore company owns more than 15% of the Estonian company’s shares.

When the VAT is not charged in Estonia

The VAT is 20% in Estonia. The tax is called the ‘turnover tax’ in the corresponding Act. The VAT is charged on goods sold in Estonia and services provided in the country. If goods are imported to Estonia, the VAT is also charged.

An Estonian-based company has to register as a VAT payer when its gross income reaches 40,000 euros per year. There are exemptions, however, and your company in Estonia may have to pay no VAT at all. For example, if it buys goods outside the EU and it sells goods outside the EU too, it has no turnover in Estonia in this case. Such a company does not have to register as a VAT payer in Estonia. Moreover, the fiscal agency will turn it down if it tries to register for the VAT!

There are many more methods of reducing your fiscal burden in Estonia and you should certainly seek professional advice if you are thinking of starting a company in the country. The Estonian tax system has been listed among the fairest and the most beneficial tax systems in the world. 

 

Vivek is a published author of Meidilight and a cofounder of Zestful Outreach Agency. He is passionate about helping webmaster to rank their keywords through good-quality website backlinks. In his spare time, he loves to swim and cycle. You can find him on Twitter and Linkedin.