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Estonia, the digital nation?
With a population of 1,325 million, Estonia (located in northeast Europe next to Finland, Sweden, Latvia, and Russia) is one of the most digitally advanced countries in the world, enabling the use of various state services (company register, tax declarations, licensing, etc.) online.
Due to the simple and straightforward processes involved with operating business entities and a beneficial corporate income tax regime as well as all the available e-solutions, the e-residency program, to begin with, Estonia can be considered one of the hotspots for businesses entering the European Union (EU) market wishing for a transparent business environment, especially in the technology sector, and an ideal place to set up a subsidiary company.
t69Why is it a good idea to set up a subsidiary company in Estonia?
Having a subsidiary in Estonia to conduct business is a good idea because it is fairly easy to set it up, it can be established online and managed online with an Estonian ID card or e-residency card*, and as a general rule, there is no corporate income tax applicable to profit generated as long as the profit stays inside the company (allowing to reinvest the profit without paying any corporate income tax).
In addition, Estonia belongs to the EU, so that it would enable easy access to all the benefits of the EU market under the umbrella of the regulations applicable between EU member states.
It is also helpful to know that an Estonian company would be an excellent solution for freelancers, as it is almost impossible to act as freelancers in the EU (freelancers can not issue invoices).
How can I set up a company in Estonia, and how much does it cost?
There are multiple options for setting up a company in Estonia. The most straightforward solution would be establishing the new company at a notary’s office in Estonia. This can also be done under a power of attorney, so the representatives in Estonia (for example, a law firm) would perform all activities in the notary on behalf of the incorporator.
Another option would be for one of the key persons of the foreign mother company or a future management board member of the Estonian subsidiary to obtain an e-residency card, set up the Estonian company online, and then sell it to the mother company. This way, company formation, and registration can be done online, possibly in just a few hours, without going to the notary’s office in Estonia.
The company registration can be done in the e-business register – submitting documents and filing annual reports is hassle-free and easy for e-residents and Estonian citizens. Estonian e-residency card acts as a digital id card so the holder can give digital signatures for their company’s business needs while maintaining location independence and logging in to different registers and portals of Estonian government institutions even on a mobile phone using a mobile id. However, unlike some known tax havens, Estonia doesn’t give out tax residency to an e-resident.
The minimum share capital of a private limited company (in Estonian osaühing or OÜ, where shareholders are not personally liable for the company’s obligations) is 2,500.00 euros (however, to transfer shares of a private limited company without notarisation, the minimum share capital should be at least 10,000.00 euros). The state fee for establishing an Estonian company ranges from 145 euros to 190 euros. The legal fees depend on the amount of assistance and services required.
Is it easy to open a bank account for the subsidiary?
This depends mainly on the business activities of the subsidiary company. If the subsidiary rents an office in Estonia, hires employees who work and live in Estonia, and transacts with Estonian entities, then there should be no issues getting a bank account opened for the subsidiary in a bank operating in Estonia.
Suppose the Estonian subsidiary will not have any substance in Estonia (for example, if the board members live outside Estonia, the subsidiary will not rent an office in Estonia nor hire employees to work in Estonia). In that case, opening a bank account in Estonia could be very difficult. The solution, in this case, is to either open a bank account in the board members’ own country where they live or use a payment services provider (for example, Wise, Revolut, etc.).
No corporate income tax on profits?
Correct, no corporate income tax will be applied to profit earned by an Estonian tax resident company if the profit stays inside the company (including retained and reinvested profits). Profit is taxed when distributed; the general tax rate is 20 (income tax) /80 (net distribution)**.
As of August 1, 2020, eligible location-independent workers could also apply for the Estonian digital nomad visa*** for a chance to live in Estonia for up to a year and work remotely for a company outside Estonia. Digital nomads have a positive impact on local entrepreneurship and the Estonian economy. A digital nomad will also benefit from this system and not pay corporate income tax on earnings that will stay inside the company and are reinvested.
The relevant tax laws and treaties may apply to the profits generated in other jurisdictions if the company operates in various jurisdictions.
What about salaries?
The average gross salary in Estonia in 2020 was around 1450 euros*** per month. Salaries in the technology sector tend to exceed the average salary considerably. For example, based on publicly available information in the Estonian start-up sector, seasoned professionals earn around 2900 euros per month (gross) on average.
Salaries are taxed with social tax (tax rate of 33%) and income tax (tax rate of 20%); on top of that, additional minor tax may apply (funded pension, unemployment insurance).
Please find below an example payroll calculation for an employee earning a gross salary of 2900 euros per month:
|Total cost for the employer||3,880.20 euros||100%|
|Social tax||957,00 euros||24,66%|
|Unemployment insurance (employer)||23,20 euros||0,60%|
|Gross salary||2900,00 euros||74,74%|
|Funded pension (II pillar)||58,00 euros||1,49%|
|Unemployment insurance (employee)||46,40 euros||1,20%|
|Income tax||559,12 euros||14,14%|
|Net salary||2236,48 euros||57,64|
What are the annual fees related to having a company in Estonia?
This depends on the company’s business activities (whether any licenses, reporting, etc., are required). Still, you would have similar costs as operating the company in any other country (monthly accounting services, office rent services, salaries, legal fees, etc.).
If you are interested in starting a subsidiary company in Estonia, please get in touch with our managing partner Merlin Seeman via firstname.lastname@example.org
* For more information on e-residency, please see: https://e-resident.gov.ee/become-an-e-resident/
** For more information, please see https://www.emta.ee/eng/private-client/taxation-tax-system/e-residency and https://learn.e-resident.gov.ee/hc/en-us/articles/360000721597-Estonian-tax-basics.
*** For more information, please see https://www.stat.ee/en/find-statistics/statistics-theme/work-life/wages-and-salaries-and-labour-costs.
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