Nonprofit organizations in Estonia — Is an NPO really so beneficial?
Yes, Enty is focused to help businesses grow but of course, there is a place in the world for legal entities that are not focused on income — nonprofit organizations (NPOs). Unfortunately, sometimes the demand for opening an NPO is based not only on good intentions but also on an aspiration to save money on taxes. Today, we are going to talk about NPOs in Estonia.
What is a Nonprofit Organization (NPO or MTÜ in Estonian)?
A nonprofit organization is a voluntary association of persons whose main purpose is not connected with earning income during its economic performance. Commonly, NPOs are incorporated for socially oriented purposes and have the form of charities, universities, foundations, political parties, etc. It means that NPOs cannot share profits among their board members and pay dividends, only distribute income for the association's objectives indicated in the Articles of Association. Nevertheless, NPOs can open bank accounts, conclude contracts, and pay salaries to employees.
There are more than 30.000 associations and foundations in Estonia. They serve different goals such as sport and culture support, environmental protection, educational development, and so on. Besides, there are a lot of NPO's consolidations and communities that are eager to help each other.
Legal Takeaways for Nonprofit Organizations
We've thoroughly explored the Estonian Non-profit Associations Act and would like to indicate key takeaways to help you determine the real need for NPOs incorporation:
An NPO must be founded by at least two persons or legal entities. The Management Board of the organization must contain at least one member (that will become a director) or more.
For settling an NPO, founders must create and sign a Memorandum of Association and Articles of Association (both in Estonian or as parallel texts). Both documents must contain basic information about the organization such as name, address, objectives, and data about founders. Besides, the Memorandum of Association's goal is to establish the management board members and indicate their obligations. The Articles of Association must contain conditions and procedures for membership and exclusion from the NPO, rights and obligations of members, data about departments (if exist), the conditions and procedure for calling the general meeting, and other information.
It's extremely important to create Articles of Association properly because your organization's performance will be based on this document and must fully comply with it. But don't worry, our specialists will create Articles of Association according to the law to avoid future legal issues.
With these docs on hand, you can apply to the Estonian Register using a digital signature (with one of the Digital IDs) or through the notary. At the notary office, the founders submit a petition for entry into the register, the notary prepares all needed docs, collects a service fee (up to €50) and the state fee (€20). Using Digital IDs you can digitally sign and upload prepared documents, submit an application and pay gov fee by yourself and fully online. The registration is being processed within 5 working days in both ways. Please note that all board members must have their Digital IDs, otherwise they won't be able to apply without the notary services.
All board members of an Estonian NPO have similar rights and responsibilities, so all decisions are made at a general meeting — the highest body of a nonprofit association.
One of the NPO's obligations is the annual report that must be submitted online even in the case of no activity from the side of the organization. Take into account that the annual report is submitted at the general meeting therefore it must take place at least once a year. Actually, NPO's accounting process must comply with the Estonian Accounting Act — so it is completely similar to a usual private limited company's accounting process.
Nonprofit organizations might also be dissolved in many ways, merged with other NPOs, or divided. Learn more in the Non-profit Associations Act — there you can find all needed legal information on this topic.
Weigh a Whole Lot of Pros and Cons
Nowadays, many people contacting our team with the inquiry about opening an NPO without a thorough decision. They believe that this type of organization will save them from tax deductions and let them get many benefits through the whole lifecycle of the organization. At the same time, they want to earn incomes and do the commercial activity without setting as the main goal any of the charitable purposes.
This is absolutely uninformed decision. In the case of Estonia, nonprofit organizations are quite similar to usual businesses regarding the incorporation, daily operations, bookkeeping process, and so on. Yes, there are certain benefits for nonprofit organizations that we'll discuss below but there are also extra requirements, responsibilities, and obstacles for NPOs. That's why we advise opening this type of organization only taking into consideration all complexities and clearly understanding the objectives of this activity. Moreover, in some cases, there is no other way than incorporating NPO. This is determined by the Estonian Business Registry based on the objectives of a certain organization.
Taxation and Benefits of NPO
Talking about taxes, it's worth mentioning that according to Estonian law, there are united taxation rules for all legal entities including nonprofit organizations: no corporate income tax, a social tax that is 33%, and income tax is 20%. VAT rules are the same, too (read more about VAT in Estonia in this article).
So, what are the tax preferences for NPOs everyone is talking about? NPOs have several non-taxable expenses such as accommodation, transport, entertainment, and tax-free limits for some types of expenses. Other tax exemptions are for public benefit organizations (PBO) only. Each NPO can submit an application for a status of public benefit and charitable organization for getting tax incentives. But it doesn't mean that all nonprofit associations suit these requirements — you should consider it to be a nice possibility, not a necessity.
Explore all the requirements to become a part of the list of NPOs benefiting from income tax incentives here.
Why Opening an NPO in Estonia?
Despite mentioned complexities with nonprofit organizations, Estonia is still one of the best places for maintaining not only business but also nonprofit associations.
During the process of opening this type of organization in other EU countries, you can face several challenges. For instance, there are requirements in other countries for a huge number of NPO founders (may come up to nine while in Estonia just two).
Also, in other EU member states, you might be required to travel to the country to sign papers and open a bank account which is another issue during the already time-consuming and expensive process of organization registration. While in Estonia everything can be done fully online without overwhelming paperwork and waiting in queues (what a great possibility during the COVID pandemic).
The Estonian e-Residency program simplified the incorporation process highly. With the card, all you need for opening an NPO is to digitally sign documents, pay the government fee and fill in the application form. Wait for several working days and get your organization registered.
Take Into Consideration
So, Estonia is a nice place for everything connected with authorities cooperation: 99% of government services are done fully remotely, there is no such exhaustive bureaucracy and paper routine as in other countries and everything is being simplified and streamlined steadily.
Nevertheless, before opening a nonprofit organization you must review the purposes of the organization, think thoroughly about its future maintenance and financial aspects. Based on the insights, you should consult with a professional to avoid probable issues during the registration and future performance.
Anyway, the Estonian Business Registry has the final word — they will decide whether to register your organization or not. So, don't try to fool them because the circumstances are severe.
How Enty Can Take Care of Your Business Processes?
NPO's incorporation and maintenance is not an easy process. Like with each company, you still have to do accounting properly, file reports, and take care of consuming paperwork.
Here is the area where you can fully rely on Enty and outsource all of your back-office issues to focus on what matters most. With Enty, you can open a bank account, manage the accounting process, and orchestrate a bunch of other business processes in one place. Just create your company's profile, choose and pay the needed subscription and we'll take care of your back-office processes while you'll concentrate on the truly important things.
