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 definitely be considered as one of the hotspots for business entering into the European Union (EU) market, especially in the technology sector.
Why is it a good idea to set up a subsidiary 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 to establish the company at a notary in Estonia. This can be also 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 thereafter 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 OÜ) is 2,500.00 euros (however, in order 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 between 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. If the subsidiary rents an office in Estonia, hires employees who work and live in Estonia, and also transacts with Estonian entities, then there should be no issues in getting a bank account opened for the subsidiary in a bank operating in Estonia.
If the Estonian subsidiary will not have any real substance in Estonia (for example, the members of the board live outside Estonia, the subsidiary will not rent an office in Estonia nor hire employees to work in Estonia), then opening a bank account in Estonia could prove to be very difficult. The solution in this case is to either open a bank account at the country in which 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 at the moment it is distributed; the general tax rate is 20 (income tax) /80 (net distribution)**.
If the company operates in various jurisdictions, the relevant tax laws and treaties may apply in respect of the profits generated in the relevant other 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 on average around 2900 euros per month (gross).
Salaries are taxed with social tax (tax rate 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 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 business activities of the company (whether any licenses, reporting, etc is required), but at large 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 setting up a subsidiary in Estonia, please contact our partner Valter Võhma via email@example.com
* For more information on e-residency please see: https://e-resident.gov.ee/become-an-e-resident/
** For more in 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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