Accurate taxation of salary and dividends for Estonian company
There is absolutely no point in starting a company if there is no money in it. But when it comes to money, taxes are always somewhere around the corner to cause you additional headaches and complicate things a bit for your company. Especially if you are starting or running a company in another country rather than one that you are familiar with.
In this article, we’ve focused on how salaries and dividends in Estonia are taxed and which complications you might face. Dive right in!
Main taxes for companies in Estonia
Personal taxes (payable on the income in the country of employee's tax residency)
Corporate taxes (declared where the company is registered and/or has a permanent establishment)
Payroll and social contributions (declared where the employees are registered)
VAT (declared in the EU country where the company is VAT registered)
and also customs tax, excise duties, environmental charges, taxes for cross-border operations, etc
Mostly, Estonia taxes distributed profits at a 20% tax rate. This means that if a business in Estonia earns $100 and pays that $100 to its shareholders, the business would be required to pay a tax of $20 on the distributed profit. Instead, if that business decides to reinvest that $100, the business would not have to pay tax on that $100. So, there is a 0% tax rate on the reinvested profits in Estonia.
Now, this does not mean that the income goes untaxed. Instead, the profit is potentially taxed as at Estonia's 21% capital gains rate. If the business reinvests its $100 profit, it is probable that the value of the business would increase and, with it, the value of a shareholders' shares. If a shareholder were then to sell their shares, they would face the 21% capital gains tax rate.
Note that there is also no annual corporate income tax in Estonia which means that a company doesn’t have to nullify its bank account or pay taxes for profits before the end of a fiscal year. A company can keep the money in a bank account and freely use it in the next years.
The social tax in Estonia is 33% (20% for social security and 13% for health insurance). Also, the 0.8% unemployment insurance tax is paid on the gross salary and an additional 1.6% is withheld from the employee’s salary. The personal income tax (PIT) is 20% in Estonia that’s withheld monthly and paid by the employer.
Taxation of dividends in Estonia
The distribution of dividends is subject to 20% corporate tax (CIT) in Estonia (paid by a company) and the receiver also has to declare the dividends in the country of their tax residency according to the local tax rate. This means that the total tax is 20% in Estonia + ~15-20% in the country of tax residency. But if a company distributes dividends to Estonian citizens, only 20% CIT is applicable.
Fortunately, if you are paying out the dividends regularly, the tax rate may be reduced to 14% starting from the third year of constant payments.
There are some rules for dividend payments:
Dividends can be paid once a year
Dividends should be paid after the end of the first financial year, after the full contribution of the share capital, and when the annual report is submitted and signed by all board members
The amount of dividends you want to distribute shouldn’t exceed the retained profits shown in the annual report
The decision about the dividend payments should be described as a resolution accepted by the majority of votes during the General meeting
Paying a salary to yourself as a shareholder
Shareholders are free to decide when and how to receive a salary. They can get it as a standard monthly salary or as a one-time bonus. To make this happen, you should transfer money from the company’s bank account to the personal one with a special indicator in the title such as “board member salary”.
Note that if you’re a shareholder and a single employee of your online company, you should pay yourself a 100% employee’s salary. If you live and work in Estonia and lead your Estonian company, you must pay a 100% board member’s salary (also called board member's remuneration). In other cases, you may pay a divided salary (for example, a 30% employee salary and a 70% board member’s one).
When receiving the divided salary the director's fee for the management work is taxable in Estonia, and the employee's part is taxable in the country of the tax residency. If you have any questions about the taxation of your income in your country of tax residency, we advise you to contact your local tax authorities or advisors.
The main benefit of board members' remuneration is that you have absolutely no min or max limits for a salary amount as your employees have by the law. Nevertheless, note that it’s better to pay a salary for yourself even if you receive dividends – Estonian authorities may consider dividends as salary payments and tax them accordingly.
How to declare these taxes properly
Director's fee is always taxable in Estonia with 20% personal income tax (PIT) and 33% social tax. Director's personal income tax is declared in Estonia with no exceptions. However, the residents of the EEA and the EU with Ukraine, Canada, Australia, and Switzerland are exempt from paying the social tax in Estonia if they are covered with social security schemes in their homeland. Note that in 2022, the monthly rate for minimum social tax liability in Estonia is 584 euros.
Employees' salaries are taxable in the country of their tax residency. Salaries of Estonian employees will be taxable under the 33+20+2% rates. If the employees are located outside Estonia, there's no need to register them in Estonian jurisdiction – their salaries will be taxed according to their local tax rules.
Note that when hiring employees from certain countries, your company might need to pay social taxes in their homeland (means your company has to become a taxpayer in such country). Instead, you can hire these employees as contractors/freelancers and they will formally invoice your company on an ongoing basis. So, your company won’t have to pay them salary and taxes in the country of their tax residency.
And that’s it, now you know how taxation of salary and dividends are structured in Estonia. Don’t forget that you don’t have to overcomplicate things and figure everything out all by yourself.
One thing that can help you is Enty’s free tool — payroll deductions calculator for Estonian Companies. It will help you calculate social taxes and taxable income in a matter of seconds.
And outside of that, Enty as a platform will help you manage your company with ease. Outside of a long list of automated services, we will also help you figure out the best way to benefit from your company or structure payroll for your employees. Start your way towards painless management of a company with Enty!
