How to set up a subsidiary company in Estonia

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, licensing, etc.) online.

Due to the simple and straightforward processes involved with operating a company and a beneficial corporate income tax regime, Estonia can be considered one of the hotspots for businesses entering the European Union (EU) market, especially in the technology sector, and an ideal place to set up a subsidiary company.

Why is it a good idea to set up a subsidiary company in Estonia?

Having a subsidiary in Estonia is a good idea because it is fairly easy to set it up, it can be managed online with an Estonian ID 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 to that, Estonia belongs to the EU, so it would enable easy access to the EU market under the umbrella of the regulations applicable between EU member states.

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 company at a notary 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 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, the process can be done online without going to the notary in Estonia.

The minimum share capital of a private limited company (in Estonian osaühing or ) is 2,500.00 euros (however, to transfer shares of a private limited company without notarisation, the share capital should be at least 10,000.00 euros). The state fee for setting up a company ranges from 145 euros – 190 euros. The legal fees depend on the amount of assistance required.

Is it easy to open a bank account for the subsidiary?

This depends largely 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 country where the board members live or use a payment service 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. Profit is taxed when distributed; the general tax rate is 20 (income tax) /80 (net distribution)**.

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 tend to 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 employer3,880.20 euros100%
Social tax957,00 euros24,66%
Unemployment insurance (employer)23,20 euros0,60%
Gross salary2900,00 euros74,74%
Funded pension (II pillar)58,00 euros1,49%
Unemployment insurance (employee)46,40 euros1,20%
Income tax559,12 euros14,14%
Net salary2236,48 euros57,64

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 (accounting, office rent, salaries, legal fees, etc.).

If you are interested in starting a subsidiary company in Estonia, please contact our managing partner Merlin Seeman via merlin.seeman@hedman.legal


* 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.


« Back to articles
Hedman

Our memberships:
FinanceEstonia,
Estonian Service Industry Association,
Estonian Chamber of Commerce and Industry,
EstVCA, EstBan, FECC,
IBA & IBA European regional Forum