Double taxation of Income in estonia: e-Residents or internationals
What if you try hard to find jurisdiction for doing business, compare tax regimes, look for a favorable one, then open a company online, and then… Your homeland comes and says ‘My child, you have to pay taxes here too.’ A nightmare, isn’t it?
In this article, we’re going to consider double taxation, when two countries impose a tax on the same income of the same taxpayer. Nobody, of course, wants to pay twice. Let’s see how to check whether you already fall under this case, how to prevent it, and what legal tools can help you to cope with it.
What is double taxation?
Double taxation results from the simultaneous implementation of domestic tax laws of the two countries. One country imposes a tax because you generate a profit there, and another country makes demands on the grounds you receive this profit there.
Double taxation may refer both to natural and legal persons. But in the case of the e-Residency of Estonia, it’s 99% an issue of legal persons. The e-Residency program gives aliens an option to incorporate a company, but no benefits in getting a visa or permanent residency in Estonia.
Well, you can apply for a Startup visa or Digital Nomad program and move to Estonia, but that’s a different story. As a rule, e-Residency doesn’t make you a tax resident of Estonia as a natural person, thus you have to care only about double taxation of your company.
Double taxation pre-screening
If you live in one country and do business in another country, you’d better know the tax systems of both places, and, in case of a contradiction, study the tax agreement between them.
You need to know which country has the right to tax all of your company's income and which country has the right to tax your local income. It’s extremely important to determine your company's residency correctly to know which country you need to file your company's annual declaration.
Every country has its own tax regulations, and rules vary greatly from country to country. For example, Estonia and its Baltic neighbors - Finland, Latvia, Lithuania, and Sweden, - proceed from the idea that the company is a resident of the country of incorporation.
You’ve opened a company in Estonia, your company is a resident of Estonia. If your company is listed in the Commercial Register of Estonia while doing business in Finland, your company does not become a resident of Finland and doesn’t file its annual declaration there.
However, many countries, for example, Germany, France, or Spain, believe that if a company is managed from their country, then the company is their resident. Each country has its own special rules for ‘managing’, and they should be clarified by the local tax inspectorate.
When you fall under the issue
So, your company is ‘managed’ from a country other than Estonia, and it gives this country ground to make you liable for taxes. But how does a country know you’re running a business from there?
A situation is legally called a ‘permanent establishment’. You have a permanent place of business in another country that can be identified by several features:
permanent physical location (for example, if you own or rent an office for a company);
temporary continuous location (when your clients constantly come to this office to get some physical services or staff);
the economic activity takes place through a location (for example, a sales representative signs contracts or agrees on all important conditions), while, for example, storing goods or conducting marketing research in this case is not considered economic activity.
Since the taxation of the permanent establishment of a business of foreign companies is a pleasant additional source of income for the state, tax authorities also try to find them, paying attention to purchases from companies from other countries during the routine inspection of companies.
How to legally cope with double taxation
The first helper in this situation is a Double Taxation Agreement (DTA) between two countries. DTA distributes taxation rights among countries and gives a more favorable regime for a common taxpayer.
The conditions for the creation of a permanent establishment are also set out in this international treaty. Local regulations may differ, but a double taxation avoidance agreement takes precedence over them.
So, you follow the permanent establishment regulations described in DTA. Then, you pay taxes from business profits received through a permanent establishment in accordance with local rules.
Although it is often difficult to challenge the creation of a permanent place of business, sometimes it is worth discussing the methodology for calculating business profits. By the way, local tax specialists are not usually good at international taxation.
Thus, the second helper is a consultation with an international tax specialist. At least, for the first time, it’s better to clarify where and how much taxes you have to pay, and where and how you have to file annual reports. And still, it’s good to know local rules as long as they can be more lenient, you can use them.
In short, a course of action is following:
check the DTA between Estonia and your country;
open a permanent establishment in your country according to the DTA;
calculate and pay taxes and file an annual report there;
submit to the Estonian Tax and Customs Board a certificate of residency approved by a foreign tax authority on Form TM3 (valid for 12 months);
apply for tax incentives and get your more favorable tax rate in Estonia.
How to prevent double taxation
Basically, preventing double taxation is about being online as much as possible. You have to avoid conditions for a creation of a permanent establishment. Sign contracts via digital signatures, provide services or even goods online and do not maintain a ‘traditional’ physical office.
If you run your international business fully online, you don’t have to care about DTAs ever. Imagine, you’re an IT professional spending the winter in Gran Canaria. There’re no physical features you’re making a profit in your seaside apartment, so there’re no risks of creating a permanent establishment there.
The truth is that we still go physical from time to time even if the nature of our business is digital. Then a good idea is to take a consultation with an international legal specialist and discuss an optimal business model to prevent your company from a double taxation burden.
Find your country in the estonian DTA list
To date (Sept 2022) Estonia has effective Avoidance of Double Taxation Agreements with 62 countries. If your company becomes a resident of two countries, you need to study this agreement.
Europe: EU members, Iceland, Norway, Switzerland, Balkans (except for BiH), Caucasian countries, Belarus, Moldova, Ukraine, UK, Guernsey, Isle of Man, Jersey
Asia: Turkey, Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan, China, Hong Kong, Republic of Korea, Singapore, Thailand, Viet Nam, Japan
Middle East: Bahrein, Israel, UAE
Africa: Mauritius
North America: Canada, US, Mexico
2 more DTAs are not in effect yet, 8 DTAs are in preparation. Negotiations between the tax authorities of the countries play a decisive role in the DTAs implementation, thus it can drag on for quite a long time. Until then, you must declare your income and pay taxes in both countries.
