e-Residency and Tax Residency
E-residency does not have any direct influence on the tax residency; holding Estonian e-Residency does not confer Estonian tax residency.
Regardless of someone’s e-Residency status, a person must always pay personal tax in the country in which he or she is a tax resident. In Estonia, for example, a person is regarded as a tax resident of Estonia if his or hers place of residence (the place where he or she permanently or primarily lives) is in Estonia or if he or she has been living here for at least 183 days over a consecutive 12 month period.
For e-Residents who have established Estonian companies, it is important to note that there is a difference between personal tax obligations and corporate tax obligations.
An Estonian company registered through e-Residency is automatically tax resident in Estonia as according to the Income Tax Act a legal person is a tax resident if it is established pursuant to Estonian law. If a natural or legal person is regarded to be Estonian tax resident, it should also be taken into account whether the same person is tax resident of any other country under the law of the foreign country. In such case the tax residency in Estonia will depend upon the tax treaty between Estonia and the foreign country.
In general, if business activity is conducted online and you receive income from around the globe, your Estonian OÜ would be tax resident in Estonia. However, if your business activity is conducted physically in a different country your company is likely to be taxed there too. When the company’s activities abroad create a permanent establishment the business profits attributable to the permanent establishment are taxed in the country where it is situated.
An Estonian e-resident company can generally avoid double taxation if business activity is conducted abroad. If profits that are taxable abroad are paid out as dividends in Estonia, these profits might not be subject to tax in Estonia.
We strongly advise e-residents to consult a qualified tax professional in order to determine their tax obligations.
E-Residency enables the use of different Estonian e-services, including the ability to submit a tax return online if necessary.
You can find more information about tax residency here: http://www.emta.ee/eng/tax-residency
You can find more information about the countries with whom the Republic of Estonia has drafted double-taxation avoidance agreements and the full texts of said agreements here: “Conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital”
For further questions please contact the Estonian Tax and Customs Board via e-mail: email@example.com
If you are doing business in Estonia, you will be responsible for paying taxes in accordance with tax legislation in Estonia. Property, income, and benefits are taxable (unless there is a treaty that allows you to avoid double taxation). The general rule is that all companies are taxed equally and on the same substantive basis.
Corporate tax in Estonia consists of income tax, value-added tax, social tax, customs tax and excise duties, unemployment insurance premium, environmental charges, taxes payable in the case of cross-border operations and some other taxes.
Corporate income tax
In Estonia, income tax is not assessed on profit earned every year. Income tax is only assessed when profits have been distributed. Hence, there is no obligation to submit a tax return every year, regardless of profits or losses. The annual report is to be submitted to the commercial register, where the information is entered online and made accessible to the tax administration. Income tax is assessed monthly, thus taxable income must be declared monthly whenever profits are distributed or other taxable expenses are incurred.
Estonian resident companies and permanent establishments of foreign entities (including branches) are subject to income tax only in respect to all distributed profits (both actual and deemed), including:
- corporate profits distributed in the tax period;
- gifts, donations and representation expenses;
- costs and payments not related to business.
An Estonian company entered into the commercial register is regarded to be Estonian tax resident. Still, if a company is active in a foreign country, the other country may tax income received from there, in accordance with the rules applicable in the tax treaty. Possible double taxation is avoided in Estonia when distributing profits as dividends.
The corporate income tax rate is 20%, calculated as 20/80 from taxable net payment. Given the month-long corporate tax period, income tax should be declared and paid monthly by the 10th day of the following month (form TSD with annexes).
In case of VAT-liable persons, it is obligatory to submit tax returns monthly even if there is no taxable payment (nil-report).
The best way to submit tax returns is to fill in information online with the e-tax board. Most of the tax amounts are calculated online by the online application, making the process hassle-free for e-Residents.
Estonian tax payers are obliged to declare, calculate, and pay taxes for payments subject to taxation. The taxation period is a month and the tax return form is TSD with Annexes.
There is one form for income taxation, but different annexes for withholding taxes and for corporate income taxation.
The payer has the ability to withhold income tax from payments made to non-residents.
An employer is obliged to declare payment, calculate, and pay taxes on wages every month. Income tax, contributions to unemployment insurance, and pension payments have to be withheld from payment in Estonia. The employer is responsible for the cost of social tax, contributions to unemployment insurance, fringe benefits, and the taxes associated with each.
An Estonian entrepreneur (a company or sole proprietor registered in Estonia) is not automatically treated as a taxable person for VAT purposes. The entrepreneur must register for VAT liability if his taxable supply–the supply of the goods and services which shall be taxed in Estonia and which VAT rate is 20%, 9% or 0%–from the beginning of a calendar year exceeds the threshold established in Article 19 of the Estonian Value Added Tax Act. From 2018 this threshold is €40,000 (note that the transfer of fixed assets is not included to the aforementioned threshold). If the annual turnover of the entrepreneur is less than this threshold, than the entrepreneur has no obligation to register for VAT liability and has no obligation to pay VAT if he or she sells such goods or provides such services. Also the entrepreneur has no obligation to register for VAT liability, if creates only supply where the VAT rate is 0% and this zero-rated supply does not include neither intra-Community supply of goods nor services provided to VAT payers of other EU Member States where the place of supply is determined according to the basic rule (the place of supply is the Member State of the recipient). Every entrepreneur, however, has the right to register for VAT liability voluntarily before his or her taxable supply has exceeded the threshold.
If a company already has an Estonian VAT Identification Number, the company must submit the VAT returns and pay VAT to the Tax and Customs Board. The taxation period for VAT purposes is one calendar month and the VAT return must be submitted and VAT must be paid to the Tax and Customs Board by the 20th day of the following month. The VAT return should be submitted even if there was no taxable supply for that particular period.
The standard VAT rate is 20% in Estonia. A list of goods and services that are taxed with reduced VAT rate 9%, 0% VAT rate or exempt from VAT, is available here: https://www.rahandusministeerium.ee/en/tax-and-customs-policy/taxes
More detailed information about the Estonian VAT rules in English is available here: https://www.emta.ee/eng/business-client/income-expenses-supply-profits/overview-charging-value-added-tax . English instructions on filling in the VAT return and its appendix are available here: https://www.emta.ee/eng/business-client/income-expenses-supply-profits/filing-value-added-tax-return. Information about the VIES declaration (when the VAT payer must submit this declaration and how to complete it) is available here: https://www.emta.ee/eng/business-client/income-expenses-supply-profit/submission-report-intra-community-supply.
Example Cases of Taxation
If I pay myself salary, is it taxed as dividends?
Salary and dividends are taxed according to different rules. Salary is taxed as an active income, dividends refer to passive income accrued by the owner.
Income tax should be withheld from employment income. If work was conducted in Estonia, you may have to pay social security taxes (depending on the place of work).
If paying a fee to a member of a company’s board, income tax must be withheld and social tax paid (there is no unemployment insurance). Taxation in Estonia does not depend on the location in which the work was completed.
In general, dividends are not regarded as a source of taxable income for the recipient and no income tax shall be withheld from the payment. In 2019, a company can pay regular dividends with lower tax rate.
Different rules apply for the avoidance of double taxation with regards to wages as compared to dividends.
What if I am the only employee of my company and also the director of the company?
The income tax of an employee or a member of the board of directors is different. These types of income must be distinguished. The tax assessed on employment income depends on where business activity is conducted. Any fee for board members is taxed according to the rules of the country of in which the company is tax resident.
I am a freelancer, doing business inside and outside of EU — do I need to pay VAT for the revenue from clients outside of EU? What about inside? What if my revenue inside of EU is less than €16,000?
At first – only a registered VAT payer must pay VAT. A company established in Estonia is not automatically treated as taxable for VAT purposes. If you are an Estonian e-resident who has established a company in Estonia – you must register your company for VAT liability if your total supply of all goods and services, which shall be taxed in Estonia and which VAT rate is 20%, 9% or 0%, exceeds from the beginning of a calendar year the threshold established in the Estonian Value Added Tax Act. From 2018 this threshold is€40,000, not €16,000 any more (note that the transfer of fixed assets is not included to the abovementioned threshold).
If the annual turnover is less than this threshold, than the company has no obligation to register for VAT liability and has no obligation to pay VAT. Also the entrepreneur has no obligation to register for VAT liability, if creates only supply where the VAT rate is 0% and this zero-rated supply does not include neither intra-Community supply of goods nor services provided to VAT payers of other EU Member States where the place of supply is determined according to the basic rule (the place of supply is the Member State of the recipient).Every entrepreneur, however, can register for VAT liability voluntarily before his or her taxable supply has exceeded the threshold. Usually a company does not need to pay VAT if it sells goods or provides services to people from non-EU countries (such transactions are taxed with 0% VAT).
Also, if an Estonian company sells goods or provides services to a customer who is a VAT payer of from another EU Member State, the VAT rate is usually 0% – but in the case of the transfer of goods the Estonian company can apply 0% VAT rate if the transport of goods from Estonia to another EU Member State is certified. If the recipient of the service is a non-taxable person of another EU Member State, but the service is provided in Estonia – the service shall be taxed according to the Estonian VAT rules (the valid text of the Estonian VAT Act in English is here). If the Estonian company provides service to a non-taxable person and the service is provided in another EU Member State (not in Estonia) – the service shall be taxed according to the VAT legislation of the Member State where the service was provided and the Estonian company shall contact with the tax authorities of that Member State to clarify its possible VAT obligations. We can give you an in-depth answer if we have an exact description of your business. Please write us at firstname.lastname@example.org if you have a specific case that needs clarification.
I need to buy some equipment/supplies to run a business. Can I personally issue a loan to the company to be repaid later. How do I do this so this is not considered revenue by the Estonian tax board?
This depends on the circumstances of the loan. Though it may be taxable, there is no general provision dictating that loans are taxable.
I currently work in Germany as a freiberufler (self employed), providing writing services in the IT and possibly travel industry. I travel a lot while providing these services, mostly to non German companies. I'd like to look at the possibility of running through an Estonian company, and would like to make sure the total gross income would not be considered German income, but only the "salary" I take out of the company.
In this case, Germany’s taxation rules apply to your company’s profits if the work is completed in a permanent establishment in Germany. If a company is managed from Germany by a tax resident of Germany, the company becomes tax resident in Germany.
If I create a one-person company in Estonia and use it to invoice my clients in the UK for consultancy and I stay tax resident in the UK, wouldn't UK claim corporate tax from my Estonian company because of the Controlled foreign corporation rules?
Yes, they may make that claim because of the presence in UK. Estonian tax residency may be disputed in this case.
India and Estonia have a tax treaty. If I incorporate a company in Estonia being a resident of India. Will I have to pay taxes in India and not in Estonia?
A company registered in Estonia is regarded to be the Estonian tax resident. If no income tax is payable on your Estonian company’s profits in India, the company has to pay income tax in Estonia. There are provisions that allow for the avoidance of double taxation in Estonia.
This section is powered by the Estonian Tax and Customs Board.
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