Taxation for Estonian company: VAT, dividends, and social taxes
So you are looking to register a company in Estonia, huh? Or perhaps you already did? Anyway, understanding the taxation rules might be quite complicated anywhere from Estonia to Timbuktu. In order to help you, we have prepared a detailed guide that will help you get your taxes straight and avoid tricky situations in the future.
Even though the Estonian tax regime is considered to be one of the most comfortable tax regimes in the EU, taxation is one of the most challenging issues for companies and individuals no matter what the country is. In this article, we'll explain the taxation of dividends and salaries and other corporate taxes.
E-residency doesn't make you an Estonian tax resident
Even if you already received an e-Residency, your personal tax will stay in the country in which you are a tax resident. Being an e-Resident doesn't make you an Estonian tax resident and doesn't exempt you from double taxation, with the exception of the countries featured here. But in regard to companies simple rule applies — a company is a tax resident in Estonia if it is incorporated under Estonian law.
Right after the incorporation, companies will be automatically recorded into the taxpayer's registry (the company's registration number is also the company's tax identification number) and there is no separate registration as Estonian taxpayers, except for VAT purposes.
Note that if your company is subject to a Permanent Establishment (PE) in another state (like when you physically manage your business outside Estonia), you will have to declare your income according to local tax rules as well.
Which taxes a company needs to pay
As to which taxes have to be paid at which rate, this depends on the specific characteristics of your company.
Here are the main tax types:
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
In most cases, 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.
VAT in Estonia basics
The VAT rate is 22%. However, obtaining the VAT number isn't mandatory until you reach €40 000 in sales in a calendar year. After a company exceeds the threshold, there are only 5 business days to register yourself as a taxable person.
Note that companies whose intra-Community acquisition of goods exceeds €10,000 as calculated from the beginning of a year are registered as liable to VAT with limited liability (explore here). VAT payers must pay VAT to the Estonian Tax and Customs Board and submit monthly VAT returns (even for the months when there could be nothing to declare). Voluntary registration before reaching the registration threshold is also possible.
The VAT basics are:
1. Sales to non-VAT registered EU entity or natural person: 22% VAT must be added.
2. Sales to VAT-registered EU entity : 0% VAT
3. Sales to non-EU entities or natural persons: no VAT is added.
What about taxation of dividends?
Distribution of dividends are subject to 20% corporate tax (CIT) in Estonia and you're going to declare it in the country of your tax residency. 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
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
How to declare salary 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.
Employees' salaries are taxable in the country of their tax residency. 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.
One of the most frequently asked questions is about the ability of a director to be an employee at the same time. Yes, it is possible, as paying out the director's fee is not an obligation. It is also an option to pay out a divided salary. For instance, one part can be paid for the management work as a director's fee (taxable in Estonia) and the other part as the employee's salary (taxable in the country of the tax residency). Note that the salaries of Estonian employees will be taxable with the 33+20+2% rates.
You can learn more about corporate taxation in the article prepared by the Estonian government. 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.
E-tax system
Focus on growth, not numbers—let us handle your accounting
Estonia currently ranks first in the International Tax Competitiveness Index and, almost everything can be uploaded online.
Estonian officials set up an electronic tax filing system — E-Tax. Around 95% of all tax declarations in Estonia are filed electronically. If you have your e-Residency card, you should have automatic access permissions for the use of e-services on behalf of the legal person and for the management of the access permissions.
Through the e-Tax system you are going to be able to:
pay taxes and view payment history;
submit all your necessary tax returns;
communicate with the Estonian Tax and Customs Board;
register your company liable to value-added tax, etc.
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And that's it! Of course, each case is quite specific and taxation has never been an easy part. But with Enty your company's tax workload will be streamlined as much as possible.
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