Table of Contents
UPDATED IN FEBRUARY 2023
Estonia is a very attractive destination for doing business due to its highly digitalized procedures, quality education, beneficial tax system and transparent business environment. Here is an overview of aspects you should be notified of (be told/be informed about) before starting a business in Estonia.
- Located in the Baltic region of Northern Europe with an area of 45,227 km2 neighboring Finland, Sweden, Latvia, and Russia.
- The capital of Estonia is Tallinn, which is also the largest of five cargo ports; the other cargo ports are Pärnu, Kunda, Sillamäe, and Paldiski.
- Estonia is a member of the European Union (EU), the World Trade Organization (WTO), the Organisation for Economic Co-operation and Development (OECD), and NATO.
- Practices parliamentary democracy.
- Population approx. 1,4 million, comprised of Estonian (69%), Russian (26%), and other races (5%). The religious composition of the country consists of Evangelical Lutheranism, Eastern Orthodox, Catholics, and Jehovah’s Witnesses.
- Estonian is the national language.
- Currency: Euro (EUR).
- Investment growth areas sectors in Estonia include engineering, electronics, wood products, textiles, information technology, and telecommunications.
- Estonia is considered as an advanced digital society where 99% of governmental services, such as starting a business can be taken online.
Doing business in Estonia is digitalized and transparent. There are several options on how to start a business in Estonia. Which type of businesses are possible to run?
- Private and public limited companies;
- General and limited partnerships;
- Commercial associations;
- Registered branches of foreign companies.
- The most common form of business organisation among foreign investors is the private limited company (“OÜ”), which requires one or more shareholders. A private limited company can even be established online in just minutes by an Estonian ID or e-residency card holder.
- If a foreign company wants to permanently start a business in Estonia by offering goods or services in its own name in Estonia, it is required to enter a branch in the Estonian Commercial Register.
- A foreign company shall be liable for the obligations arising from the activities of the branch. A foreign company that is starting a business in Estonia must ensure that a branch maintains proper accounting records in accordance with Estonian accounting laws and Estonian authorities may audit a branch at any time.
Foreign investment restrictions and conditions
Restrictions in equity participation
- No restrictions are imposed on foreigners owning equity in Estonian companies. However, certain sectors – such as banking and insurance are safeguarded and subject to general ownership restrictions as may be imposed in relevant legislation, but these restrictions are applied equally to foreign and domestic investors.
Restrictions in property acquisition
- Generally, no restrictions are imposed on foreigners owning real property in Estonia. However, a natural or legal person who is neither an Estonian citizen nor the citizen of any State which is a party to the European Economic Area (EEA) Agreement or a member state of the Organisation for Economic Cooperation and Development (OECD) may acquire agricultural or forest land only with the authorisation of the local county governor if he has resided in Estonia permanently for a period of at least six months immediately before applying for the authorisation or if he has been engaged in Estonia, for one year immediately preceding the year of applying for the authorisation, as a sole proprietor in production of agricultural products or forest management.
- A legal person of a Contracting State has the right to acquire an immovable which contains less than ten hectares of agricultural land, forest land, or agricultural and forest land in total without restrictions. A legal person of a third country has the right to acquire an immovable which contains agricultural or forest land only with the authorisation of the county governor if the legal person has been engaged in Estonia, or one year immediately preceding the year of applying for the authorisation, in production of agricultural products or forest management and if a branch of the legal person is entered in the Estonian commercial register.
- Transaction by which acquisition or disposal of real property is undertaken must be notarised.
Approvals and licensing
- Appropriate approvals and licenses are required for the operation of certain business activities (mining, telecommunication, financial services, etc). These may be obtained from the relevant government institutions, boards, and supervision authorities.
- The application process and prescribed fee payable vary depending on the type of activity and prescribed condition for the application.
- Estonian undertakings and undertakings of other Contracting States have the freedom of economic activity. Economic activity requirements may also arise from ratified international agreements or the legislation of the European Union. Service providers established in another Contracting State who wish to commence the provision of services temporarily in Estonia in the meaning of Article 57 of the Treaty on the Functioning of the European Union (OJ C 83, 30.03.2010, pp. 47–199), except for service providers providing the services specified in Article 17 of the Services Directive, have no notification obligation of their economic activities to the Register of Economic Activities (MTR).
Estonia is known to be very tax-friendly for small and non-resident businesses. Which taxes should be taken into consideration while planning to start a business in Estonia? Here’s a quick overview of current taxes in Estonia.
Corporate income tax
- Pursuant to the Estonian corporate tax system Estonian resident companies do not pay income tax on annual undistributed profits. Instead, income tax at a rate of 20 % is charged on the gross profits distributed (the tax is calculated on the net amount of dividends by applying the rate of 20/80). A lower-income tax rate of 14% is applied to regularly payable dividends, i.e. the equivalent of one-third of the net profits distributed under normal tax rate in the previous three years is payable under a reduced tax rate.
- Branches of foreign companies which are doing business in Estonia (and permanent establishments in Estonia) are taxed under the same principles as resident companies.
- The tax period of companies is a calendar month.
- The source of income for Estonian companies has very little influence on the tax rate. An exception is dividends from a subsidiary company, which are not taxed at the Estonian level, provided the parent company owns 10% of the subsidiary and the dividends or profit has already been taxed.
Personal income tax
- Individual residents in Estonia are taxed at a rate of 20% on income accrued in or derived from all sources of income in Estonia and outside Estonia.
- Receiving dividends is generally tax-free income for Estonian tax residents, the dividends are taxed at the corporate level as the profit of the company. There is a 7% withholding tax on dividends paid out to natural persons, which applies when the distributed profit is taxed at a 14% CIT rate.
- A person is a resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months.
- In 2023, the basic exemption deductible from the income of a resident natural person during a one-year period of taxation is 7848 euros. If the total amount of all income is EUR 25 200 or more per year, there is no right to basic exemption.
- Within a two-year period, one immovable property used as a place of residence can be disposed of tax-free.
- Income of the following persons is not subject to tax in Estonia: foreign diplomatic or consular representatives, representatives of special missions or members of diplomatic delegations, members of representations of international or intergovernmental organisations, and persons employed by such representations, who are not citizens or permanent residents of Estonia.
- The period of taxation is a calendar year.
Taxable income of non-residents in Estonia
- Non-residents are taxed only on their Estonian source income. The withholding tax on dividends paid to non-residents was abolished in 2009. The income from dividends might be taxed at the country of residence of the non-resident.
- The income of non-residents from their Estonian source is generally taxed by the withholding of income tax at a rate of 20%. A non-resident is only required to submit an income tax return in certain cases. Income tax is charged on gains from the sale of real property (i.e. the difference between the acquisition cost and the selling price).
- Subject to a few exceptions, there is no income tax at a rate of 20% on interest payments to non-residents if the interest charged does not significantly exceed the arm’s length rate (market interest rate).
- Royalties paid to non-residents are generally subject to 10% income tax, but reduced rates may apply under double taxation avoidance treaties. There are some exemptions for parent-subsidiary companies in the EU and Switzerland.
- Rental payments to non-residents for the use of immovable property located in Estonia and movable property subject to registration in Estonia are generally subject to 20% income tax.
- The sale of shares in a company that has more than 50% of its assets in real estate is taxed at 20%.
Value-added tax (VAT)
- VAT rules are agreed upon at the EU level, so the system is more or less similar in all EU countries, especially when it comes to international transactions inside the EU.
- The supply of most goods and services is taxed at a rate of 20%.
- From 1 August 2022, the rate of VAT on press publications, both on a physical medium and published electronically, is 5% instead of the previous 9%.
- The VAT rate is 0% for example for exports, intra-European Community supply of goods, seagoing vessels, and aircrafts used mostly on international routes, non-European Community goods placed in a free zone or free warehouse in accordance with customs procedures and European Community goods placed under tax warehousing arrangements.
- If the taxable supply of goods and services exceeds 40 000 euros from the beginning of a calendar year, the company must register for VAT. The 40 000 euros does not include the sale of fixed assets. Voluntary registration is possible from the moment of establishing a company.
- Postal, health, social, and insurance services, services relating to shelters for the protection of children, transportation of sick, injured, or disabled persons in vehicles specially designed for such purpose, supply of immovables, and the leasing and letting of immovables are VAT exempted.
Social security tax and contributions
- Employers pay social tax at a rate of 33% on gross payments made to natural persons. Tax is due monthly and accrues to the budget of the state health insurance fund and pension insurance fund.
- In addition, the unemployment insurance premium is paid by both the employer (0.8 % of the gross salary) and the employee (1.6 %). A funded pension payment is withheld at a rate of 2% for employees who match the criteria in the Estonian Funded Pensions Act (2004). Everyone who does not want to be joined to the system has to submit a withdrawal application.
- The only property tax imposed in Estonia is land tax. The owner (in certain cases the user) of the land is under obligation to pay this tax.
- The landowners are exempt from paying the land tax for 0,15 ha of residential land if the property is used as their permanent residence.
- The rate of land tax is 0.1 – 2.5 % of the taxable value of the land annually. The exact tax rate is established by the municipal council. For example, in 2020 in the Estonian capital Tallinn the land tax rate is 2.5%. The rate of land tax for areas under cultivation and for natural grasslands is 0–2% of the taxable value of the land annually.
- The taxable value of the land is determined by valuation. The last valuation was in 2001. In 2022, the Land Board carried out a mass valuation of land, resulting in a change in the value of the land. The results of the valuation do not yet affect the land tax in 2023. The results of the mass valuation of land will be introduced as of January 1st, 2024. New land tax rates will be established by local governments by July 1st, 2023 at the latest.
- A land tax of up to 64 euros from any land located in the local authority shall be paid by 31 March. At least half of the land tax, which exceeds 64 euros, shall be paid by 31 March, but no less than 64 euros. The remaining part of the land tax shall be paid no later than by 2 October.
- An employer (not an employee) is obliged to pay income tax at a rate of 20/80 and social tax at a rate of 33% on fringe benefits granted to employees. In general, all benefits in kind provided to employees are taxed as fringe benefits. There are exemptions from fringe benefits taxation on certain conditions, most notably share options and health care expenses.
- Expenses and payments not related to the company´s business are taxed at the rate of 20/80.
- Excise duty is imposed on alcohol, tobacco products, fuel, electricity, and packaging.
- In addition, there is a gambling tax and heavy goods vehicles tax.
- Local governments have the right to impose local taxes.
Tax and investment incentives
- There is no corporate income tax on undistributed profits when doing business in Estonia.
- Estonia has established free zones at Muuga Harbour (part of the Port of Tallinn), Sillamäe Port, and Paldiski, which are regarded as being outside the remit of the Customs area for purposes of import and export duties. VAT and excise duties do not have to be paid on goods brought into free zones for later re-export when doing business in Estonia.
- Start-up and development grants are available through Enterprise Estonia in conjunction with funding available through the EU.
- Estonia currently has 24 bilateral investment treaties (BITs) in force. There are BITs in force with all major trade partners and investors such as Sweden, Finland, Germany, the United Kingdom, France, and the United States of America.
- Estonia is a signatory to double tax treaties with 60 countries throughout the world.
- E-services offered by Estonian state and municipal institutions can be securely accessed with e-resident digi-ID.
If you’re interested in starting a business in Estonia and need more help, feel free to reach out to us. Our experienced team of startup lawyers is here to assist in all matters that you may come across on your journey.
- Estonia is a member of the International Labour Organization (ILO), and legislation is in compliance with the European Union directives on employment law.
- The regular working hours may not exceed 8 hours per day and 40 hours per week. In the case of calculation of summarized working time, the working time may not exceed 48 hours per period of seven days over a calculation period of up to four months. Upon lay-off, an employer must take into account the principle of equal treatment, whereas the employees’ representative and those employees raising children under three years of age shall have the preferential right of keeping their job.
- Employees within the protection of the Employment Contracts Act (2009) are entitled to social benefits such as rest days, public holidays, paid annual leave (28 calendar days), maternity leave, the limit of working time, safe working conditions, restrictions of termination of employment contracts by employers, and termination benefits.
- The minimum wage corresponding to a specific unit of time is established by the Government of the Republic (in the year 2023 it is EUR 4,3 per hour and EUR 725 per month).
- All conditions of the regular employment agreement which differ from the law (such terms regarding working time, rest time, pay, benefits, etc) to the detriment of the employee are considered void. Therefore employment agreements must comply with at least the minimum requirements. This is with the special exception of employment with independent decision-making capacity, which allows some deviation from the regular conditions regarding working and rest time.
- Any agreement for working or providing services that can only be expected to be done for remuneration is presumed to be an employment contract. Even if a person is hired as an independent contractor, the nature of the relationship of the parties must be considered. If a person is in a clear subordination relationship with the company e.g. has assigned asks, financial dependence, fixed working hours, designated place of work, used company property or materials to work, they most likely must be or will be considered as being hired as an employee.
- Trade unions in Estonia are regulated by the Trade Unions Act (2000). In individual employment relationships, trade unions shall represent and protect the rights and interests of their members on the basis of authorization from the members unless otherwise provided by law. However, union membership is quite low (at around 10%) and the bargaining structure in Estonia is decentralized. Thus, the power of unions is relatively low, however, their opinions are still considered when developing new legislation.
- The Collective Agreements Act was passed by the Estonian Parliament already in 1993 and the current law is in compliance with the EU requirements. In practice collective agreements are in place only between employees and an employer of larger companies and approximately 10% of Estonian workers are covered by collective agreements.
- When hiring foreign employees, the employer and, in the case of temporary agency workers, the user undertaking has to make sure that the employees have a legal basis to stay and work in Estonia and can be held liable by government authorities in case foreign employees perform work that is not compliant with the purpose of the visa and/or residence permit issued to the employee.
- The right to organise a strike arises only if there is no prohibition against disruption of work in force if conciliation procedures prescribed in the Collective Labour Dispute Resolution Act (1993) have been conducted but no conciliation has been achieved, if an agreement is not complied with, or if a court judgment is not executed.
- An employer is obliged to withhold income tax (20%) from employees’ wages and other remunerations payable to employees.
- Employees, who work on the basis of a contract of employment entered into for a term exceeding one month or for an unspecified term and for whom the employer is required to pay social tax, are provided health insurance by the Estonian Health Insurance Fund.
- In general, the system of protection of intellectual property rights follows international as well as EU standards. Intellectual Property protection in Estonia comprises patents /utility models, trademarks, industrial design, copyright, geographical indications, and layout designs of integrated circuits.
- Registered patents/utility models, trademarks, industrial design, and geographical indications enjoy exclusive rights /protection for specific periods of time. For example, the maximum duration of a patent would be 20 years from the application date and the duration of the protection of a trademark is indefinite but subject to renewal every 10 years.
- Unregistered trademarks shall be granted legal protection if these marks are well known in Estonia within the meaning of Article 6bis of the Paris Convention.
- Copyright protection for literary, musical, or artistic works, sound recordings, broadcasts, and films. The protection furnished by copyright would not depend upon formal procedures.
- Estonia is a member of the World Intellectual Property Organization (WIPO) and a signatory to the Paris Convention, Berne Convention, and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and legislation is in compliance with European Union directives on Intellectual Property Rights.
- Estonia’s intellectual property laws provide adequate protection to both local and foreign investors.
- Estonia has a three-level court system. County courts and administrative courts adjudicate matters in the first instance: county courts for civil and criminal cases and administrative courts for administrative matters. Appeals against decisions of courts of the first instance shall be heard by courts of the second instance. Courts of appeal are courts of the second instance (called circuit courts or district courts). The Supreme Court is the court of the highest instance.
- There are no specialist courts in Estonia. However, in employment disputes, the parties wishing to protect their rights can either approach a Labor Dispute Committee comprising the representatives of employers and employees or a court of the first instance.
- Arbitration has also become a common method by which commercial disputes are resolved. Upon agreement of the parties disputes can be solved either in the institutional court of arbitration (the Arbitration Court of the Estonian Chamber of Commerce and Industry is the most prominent institution) or in an ad-hoc arbitration.
- Mediation and conciliation are still rarely in use, although relevant legislation is in place.
Passport and visa requirements
- All persons entering Estonia must possess valid national passports or other internationally recognized travel documents (ID cards) for travel to Estonia.
- Nationals of the member states of the EU and the EEA and any third-country national who is a holder of a residence permit of a Schengen state do not need a visa to enter Estonia.
- Application for visas must be submitted to the Estonian representations abroad or other Member State representing Estonia in issuing Schengen visas in person.
Business passes and residence permits
- A citizen of the EU (also citizens of an EEA member state and Swiss Confederation) may stay in Estonia without a residence permit on the basis of a valid travel document or identity card for a period of up to three months. In order to obtain the right of temporary residence, an EU citizen must register his or her residence within three months from the date of entering Estonia (which will be initially granted for a period of five years, after which a permanent residence can be applied). No residence permit is needed.
- A residence permit for a maximum period of 5 years for doing business in Estonia may be issued to an alien (from third countries) who owns shares in a company and who has continuous financial means. The company must be registered in the Estonian Commercial Register and the settlement of the alien in Estonia must be important for the business. The company that wants to start a business in Estonia is required to have a business plan which states the character and range of the business, number of staff, necessary qualification and know-how of the staff, and the alien has invested in Estonia a capital sum of EUR 65 000 under his/her control.
- A temporary residence permit may also be granted to an alien who has made a direct investment of at least EUR 1 000 000 in an Estonian company that invests mostly into the Estonian economy. Such investment must be permanent during the period of validity of the residence permit. In this case, the alien is not required to have an actual place of residence in Estonia and has no obligation to register his or her place of residence in the Estonian Population Register.
- The Estonian startup visa is a new measure for entrepreneurial non-EU nationals who wish to come and start doing business in Estonia; or an Estonian startup wanting to recruit abroad. Startup Committee, consisting of members of the Estonian startup community, will review the application for startup and make a decision within 10 working days whether the company qualifies for pursuing the startup visa or not.
- A start-up visa can be short-term (up to three months) or long-term (up to 12 months), which can be extended by 183 days. After it is possible to apply for a temporary residence permit under the start-up status regime.
- An alien, who is residing in Estonia on the basis of a temporary residence permit, has a right to work in Estonia. An alien may register for short-term employment for up to 365 days in a 455-day period. This period may be longer for teachers, lecturers, researchers, or employees of start-up companies. In these cases, additional requirements apply. Short-term work can also be registered as seasonal work for up to 270 days per year. The registration of temporary employment in Estonia may be applied by the employer.
- Foreign companies can start doing business in Estonia as an e-resident. A transnational digital identity is available to anyone in the world interested in administering a location-independent business online. e-Residency additionally enables secure and convenient digital services that facilitate credibility and trust online. Any physical person who has been issued an Estonian digital identity will become an e-resident and thus receive access to Estonia’s digital services. Digital signatures and authentication are legally equivalent to handwritten signatures and face-to-face identification in Estonia and between partners upon agreement anywhere around the world.
- E-residency will be especially convenient for entrepreneurs who want to start a business in Estonia because the digital identity will provide the opportunity to establish a company in Estonia within an hour, purchase Estonian companies through the internet and participate actively in the management of companies from a distance.
Limited Partnership Fund
- No requirement to publish the identity of its limited partners (investors);
- No requirement to publish the amount of the investments made by each investor;
- Considerably lower cost of establishment compared to the UK and Luxembourg;
- Fast registration process – up to 5 working days for the LPF, up to 2 months if the General Partner registers its activities with the Estonian Financial Supervision Authority (“FSA”). Estonia currently has 24 bilateral investment treaties (BITs) in force. There are BITs in force with all major trade partners and investors such as Sweden, Finland, Germany, the United Kingdom, France, and the United States of America.
An extensive overview of the Limited Partnership Fund can be found HERE.