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An individual who is a resident of Estonia is liable to tax on worldwide income, irrespective of the origin of the income. Non-residents are taxed on their Estonian-source income. Taxable income includes both active income, such as employment and business income, as well as passive income, such as capital gains, rents and royalties, interest, dividends, certain insurance proceeds, pensions, scholarships, grants, prizes, and lottery winnings, etc. This list is not exhaustive; consequently, any income derived by a resident individual not falling within the above categories is taxable, unless a tax exemption is available.
There are no special taxation rules for expatriates.
Estonia has a proportional (i.e. flat) tax rate of 20%, which applies to all items of income derived by a resident taxpayer. From 2018 onwards, dividends that have been subject to the reduced rate of 14% at the level of the distributing Estonian company will have a WHT of 7% levy. Certain pension payments are subject to a 10% income tax.
There are no local taxes on personal income in Estonia.
In Estonia, all undistributed corporate profits are tax-exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.
The taxation of corporate profits is postponed until the profits are distributed as dividends or deemed to be distributed, such as in the case of transfer pricing adjustments, expenses and payments that do not have a business purpose, fringe benefits, gifts, donations, and representation expenses.
Distributed profits are generally subject to the 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.
There are no municipal or local income taxes in Estonia.
Foreign businessmen who wish to open a company in Turkey can choose between a limited liability company, joint stock company, limited partnership, or commercial partnership.
The private limited liability company (OÜ – osaühing) is the most common business type e-residents create in Estonia. This is primarily because the Estonian law has been made easy to form, and easy to manage – can be set up within just one business day, the minimum share capital amount is quite low, and can be managed completely remotely – perfect for remote teams and digital nomads. The founders and the shareholders of the corporation will not be personally liable for any damages if they have fully paid their share capital.
In Estonia, the public limited liability company (AS – aktsiaselts) is a business type that can offer shares of stock to the general public and foreign investors. In turn, the buyers of those shares have limited liability. Because of the high entry costs, this is not the most common type of company in Estonia, and typically the AS companies are quite big in size and revenue.
There are two types of partnership companies that one can form in Estonia–a general partnership (TU – täisühing) or a limited partnership (UU – usaldusühing). Both these corporation types are quite uncommon forms of business in Estonia, even though they are quick and easy to form. The difference between the two is the amount of liability one or both owners will have. Both partnership companies, general partnership (TU) and limited partnership (UU), can be founded electronically using your e-Residency card.
A sole proprietorship, also known as FIE (füüsilisest isikust ettevõtja) in Estonia, is the company, which is undoubtedly the easiest to form, as it only needs one person to do so and only a few documents. FIE is the best form of business for individuals, who are doing business on their own (e.g. freelancers), or with their family members (e.g. family-owned restaurant). Because of its low formation costs, it might be an attractive option for freelancers.
In case a foreign company is looking to open a branch office in Estonia to start selling goods or services here, they must register it in the Estonian Business Register. Within the European Union, it is not mandatory to register a branch office in Estonia but is a suggestion as it makes managing them easier. A branch office is not a separate legal entity – the foreign enterprise is responsible for all the liabilities that the Estonian branch has. A foreign enterprise is only allowed to have one branch office in Estonia.
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Situated in northeastern Europe, Estonia juts out into the Baltic Sea, which surrounds the country to the north and west. As part of the interrelated Soviet economy, Estonia was an industrial region, with agriculture making a smaller contribution. Estonia was among the first eastern and central European countries with which the European Union (EU) started accession negotiations. The country’s most important mineral is oil shale, of which Estonia is a significant world producer. Reserves and production of peat also are substantial, and large deposits of high-quality phosphorites, limestone, dolomites, marl, and clay exist. Estonia’s major trading partners are Finland, Sweden, Germany, Russia, and Latvia. The country’s principal exports include machinery and equipment, timber, textiles, metal and metal products, and processed foodstuffs. The country’s principal imports include machinery and equipment, vehicles and transport equipment, and chemicals. In addition to membership in the EU, Estonia joined the World Trade Organization (WTO) in 1999.
The business opportunities in Estonia are very favorable to the needs of the start-up business as it offers a low taxation rate, less setup, and operational cost, a convenient registration process, and much more.
The business environment of Estonia is more favorable to the companies as the economic policies are framed to invite foreign direct investment from various businesses. The policies are aimed at inviting long-term investments for archiving long-term economic growth. Due to relaxation in the registration process, many companies are willing to invest in Estonia.
Estonia systematically updated its legal system after it regained its independence. The legal structure of Estonia favors an entrepreneurial mindset. Foreign entrepreneurs are placed on the same footing as local entrepreneurs. Foreign business entities in Estonia are subject to the same accounting obligations as local business entities. They are obliged to submit financial statements at such periodic times as prescribed.
The competition policy of Estonia is in line with the EU competition policies. It is one of the few countries that provide for the initiation of criminal proceedings against anti-competitive agreements and the formation of cartels. To safeguard the interest of the consumers, the Estonian government has enacted the Consumer Protection Act, Advertising Act, Trading Act, and the Law of Obligation Act. The implementation of these acts is vested with the CPA (Consumer Protection and Technical Regulatory Authority).
Estonia has a central bank named The Bank of Estonia (Eesti Pank). The central bank regulates the financial market in the country and makes rules & regulations that facilitate the ease of doing business in Estonia. It also controls the activities of subsidiary banks. The Estonian banks offer the same banking services to local and foreign companies as they receive in other countries. The banks in Estonia have achieved success in online banking transactions and provide various solutions to businesses.
The taxation policy of Estonia is varied and stable. The country offers a more favorable corporate taxation policy so that doing business in Estonia becomes easy. The corporate tax levies only on the earned profits used for distribution as dividends. It means the tax is not levied on the profits earned by the company; however, it is taxable when these profits are distributed as a dividend to the investors.
An individual who is a resident of Estonia is liable to tax on worldwide income, irrespective of the origin of the income. Non-residents are taxed on their Estonian-source income. Taxable income includes both active income, such as employment and business income, as well as passive income, such as capital gains, rents and royalties, interest, dividends, certain insurance proceeds, pensions, scholarships, grants, prizes, and lottery winnings, etc. This list is not exhaustive; consequently, any income derived by a resident individual not falling within the above categories is taxable, unless a tax exemption is available.
There are no special taxation rules for expatriates.
Estonia has a proportional (i.e. flat) tax rate of 20%, which applies to all items of income derived by a resident taxpayer. From 2018 onwards, dividends that have been subject to the reduced rate of 14% at the level of the distributing Estonian company will have a WHT of 7% levy. Certain pension payments are subject to a 10% income tax.
There are no local taxes on personal income in Estonia.
In Estonia, all undistributed corporate profits are tax-exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.
The taxation of corporate profits is postponed until the profits are distributed as dividends or deemed to be distributed, such as in the case of transfer pricing adjustments, expenses and payments that do not have a business purpose, fringe benefits, gifts, donations, and representation expenses.
Distributed profits are generally subject to the 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.
There are no municipal or local income taxes in Estonia.
Foreign businessmen who wish to open a company in Turkey can choose between a limited liability company, joint stock company, limited partnership, or commercial partnership.
The private limited liability company (OÜ – osaühing) is the most common business type e-residents create in Estonia. This is primarily because the Estonian law has been made easy to form, and easy to manage – can be set up within just one business day, the minimum share capital amount is quite low, and can be managed completely remotely – perfect for remote teams and digital nomads. The founders and the shareholders of the corporation will not be personally liable for any damages if they have fully paid their share capital.
In Estonia, the public limited liability company (AS – aktsiaselts) is a business type that can offer shares of stock to the general public and foreign investors. In turn, the buyers of those shares have limited liability. Because of the high entry costs, this is not the most common type of company in Estonia, and typically the AS companies are quite big in size and revenue.
There are two types of partnership companies that one can form in Estonia–a general partnership (TU – täisühing) or a limited partnership (UU – usaldusühing). Both these corporation types are quite uncommon forms of business in Estonia, even though they are quick and easy to form. The difference between the two is the amount of liability one or both owners will have. Both partnership companies, general partnership (TU) and limited partnership (UU), can be founded electronically using your e-Residency card.
A sole proprietorship, also known as FIE (füüsilisest isikust ettevõtja) in Estonia, is the company, which is undoubtedly the easiest to form, as it only needs one person to do so and only a few documents. FIE is the best form of business for individuals, who are doing business on their own (e.g. freelancers), or with their family members (e.g. family-owned restaurant). Because of its low formation costs, it might be an attractive option for freelancers.
In case a foreign company is looking to open a branch office in Estonia to start selling goods or services here, they must register it in the Estonian Business Register. Within the European Union, it is not mandatory to register a branch office in Estonia but is a suggestion as it makes managing them easier. A branch office is not a separate legal entity – the foreign enterprise is responsible for all the liabilities that the Estonian branch has. A foreign enterprise is only allowed to have one branch office in Estonia.
Situated in north-eastern Europe, Estonia juts out into the Baltic Sea, which surrounds the country to the north and west. As part of the interrelated Soviet economy, Estonia was basically an industrial region, with agriculture making a smaller contribution. Estonia was among the first eastern and central European countries with which the European Union (EU) started accession negotiations.
Author: Chandrawat & Partners
Topic: Doing Business in Estonia
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Copyright © Chandrawat & Partners. All Rights Reserved.
Chandrawat & Partners stands as a dynamic and rapidly expanding full-service firm, specializing in the delivery of exceptional professional and corporate services to a diverse clientele, both foreign and local. We proudly represent companies and individuals across a wide spectrum of sectors through distinct entities established in various countries worldwide.
Chandrawat & Partners stands as a dynamic and rapidly expanding full-service firm, specializing in the delivery of exceptional professional and corporate services to a diverse clientele, both foreign and local. We proudly represent companies and individuals across a wide spectrum of sectors through distinct entities established in various countries worldwide.
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