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How to Reinvest Profits in Estonian Company. How 0% Tax on Reinvested Profits Works

Mar 29, 2023 · 3 min read

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The excitement of seeing your venture generate some first revenue is truly a feeling unmatched. But as you begin to contemplate how to allocate these profits, you have to consider the tax implications of each decision. Taxes always take something away, don’t they?

As a matter of fact, sometimes they don’t have to. Estonian law allows for an exemption from corporate taxes if you decide to reinvest your profits, which makes for an excellent opportunity for you to push your enterprise even further. That is, of course, if you follow some crucial rules that we’re about to go over in this article. Strap in.

Corporate Tax: Basics

First things first, there are two legal ways to withdraw profits from your business: through dividends and salaries, both of which are covered in detail in our previous articles. Naturally, they are subject to corporate taxes.

Corporate tax is levied on all distributed profits (hold on to this particular phrasing), regardless of the method used for distribution. This includes dividends, gifts, donations, representation expenses, expenses that are not related to the business, and fringe benefits for the employees such as health insurance among others.

This brings us to the other part of your hard-earned profits, which remains undistributed. Technically, this means just that — the profits that remain in the accounts of the company. But if you're looking to make the most out of them and utilize the 0% corporate tax rate even when moving into the next tax year, you can either keep them undisturbed or you can reinvest.

What is Considered as Reinvestment?

Ever heard of corporate expenses? Course you have.

They can cover a wide range of expenses, such as fees of subcontractors, marketing costs, business trips (limited to transportation and accommodation costs), bank and transaction fees, office costs and supplies, etc. — basically any expenses as long as they're used for your business operations.
The funny thing about them is that any money spent on business development or reinvested is not subject to 20% corporate tax. This tax exemption applies to both active income, like trading, and passive income, such as dividends, interest, and royalties. Also, it covers capital gains from the sale of any asset, such as stocks, bonds, or real estate.

To make this as clear as possible, any profits you put into further expansion of your company are 100% tax-free. How’s that for an opportunity?

It's worth noting though, that this tax regime is only available to Estonian resident companies and permanent establishments (PEs) of non-resident companies registered in Estonia.
As good as they might be, tax initiatives always generate a great deal of questions, don’t they? Let’s see if yours are on the list:

Q: Are there any limitations on how much I can invest?
A: Nope, invest as much as you need.

Q: If I want to buy cryptocurrency or stocks from other companies, will I have to pay capital gains tax?
A: The income earned from selling stocks by a legal entity is not subject to taxation. Income from investments is added to profits and is subject to taxation according to the general rules when profits are distributed.

Q: What if I open an investment business in Estonia? That is, if I deposit a certain amount of money into a company and start trading stocks. Are there any special requirements for this?
A: No, if you are using only your own money and not trading on behalf of third parties. The accounting will be the same as for a regular company.

Q: I invest through a broker to earn money for my pension and don't want to pay social tax in Estonia. Will this be considered a valid reason?
A: No, pensions are only accrued from taxes by law.

Q: Which tax allows for deducting expenses?
A: "Deducting expenses" is a term used in countries with an income tax. In Estonia, we simply have expenses related to business activities. All taxes paid by a company are considered as such.
Overall, understanding the various types of corporate expenses and tax exemptions can be a game-changer for any business owner. By taking advantage of this particular incentive, you can effectively reduce your tax liabilities while simultaneously investing in the development of your own venture. Estonian laws are really generous when it comes to that, but there’s also the matter of declaring all these expenses — and we know a thing or two about it. Enty’s all about knowing stuff, so you don’t have to.

We also know that you probably still have a few questions and nothing would thrill us more than to get you rid of that burden. Book a call with us and we’ll take care of all this tedious paperwork like it’s nothing. You just focus on that business of yours.
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