The biggest advantage of having a business in Estonia is no corporate income tax on retained and reinvested profits. This means that there is 0% taxation on profits as long as the company keeps reinvesting it into further expansion. So, if the profit is not distributed, then it is tax-free in Estonia.
Another advantage is various e-services and the ability to grow business with "0 paperwork" (but electronic archive instead). In addition, no start-up capital is required for establishing a business in Estonia.
However, there are some taxation issues that the company's owner/management should take into account before starting its Estonian company:
PE (permanent establishment) risk
PE in simple words means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse or other building used for the sale of goods;
g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
PE is quite a regular risk for e-residents. Especially for those, who have a "one-man company" and manage their Estonian company from their home country.
PE arise income tax obligation in the other country.
Examples:
- If an e-resident is a tax resident of USA, having a service business, managing Estonian company from USA, most probably he/she needs a branch in USA for his/her Estonian company. Eventually, income tax on profit from such branch should be taxable in USA. Having an Estonian company does not have any point.
- If an e-resident is a tax resident of Poland, whose Estonian company is managed from Poland. The company is bringing goods from China and selling those in the free zone of Poland. Most probably the Estonian company needs a branch in Poland. Eventually, income tax on profit from such branch should be taxable in Poland. Having an Estonian company does not have any point.
- If an e-resident is a tax resident of Italy, whose Estonian company is dealing with investments into financial instruments & being managed from Italy, then most probably the Estonian company needs a branch in Italy.
If an e-resident manages the company from outside of Estonia, such an Estonian company will probably have a permanent establishment abroad and income tax must be paid on the profit earned by this Estonian company in that foreign state.
Estonian companies will be able to deduct income tax paid for its foreign branch, i.e. the profit won't be taxed double, if there is an agreement between Estonia and the other country. A list of double taxation agreements can be found here.
2. Paying yourself a salary
Many e-residents mistakenly believe that paying yourself a salary does not bear any additional tax risks.
If you are a member of the board of an Estonian entity but have tax residency in the other country, your salary may be taxable in Estonia: "If an e-resident receives remuneration paid to members of the management or control body (supervisory board) of an Estonian company, such Estonian company must pay income tax and social tax in Estonia regardless of the location where work is carried on or the place of business of the company" (Source: Tax Authorities' website, more info here". This clause applies if you are working for an Estonian company under a board member agreement.
The good news is that in the majority of cases, your personal income won't be taxed double (if there is an agreement between Estonia and your home country). A list of double taxation agreements can be found here. If a board member is not providing the company's management and working from outside the country, then such salary is not taxable in Estonia. However, it may be fully taxable in the country, from where the person is working from (i.e. Estonian entity may need to declare all salary taxes in the other country instead of the physical person).
3. Paying a salary to non-resident employees
Paying a salary to non-resident employees does not bring any additional tax risks in Estonia. However, there might be an obligation of registering a branch in the country of this employee and declaring all salary taxes there.
As each county's rules & regulations are different, you will need to find this info from local tax advisors. Estonian accountants won't be able to assist you with this matter.
The safest way is to deal with subcontractors-individual entrepreneurs or subcontractors- legal entities. Then, the risk will be minimized.
#e-residency #accountancy #taxes #taxesEstonia
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