estonia tax residency

Understanding Estonia E Residency Company Taxes

Thinking about setting up an Estonian Company? you need to understand the Estonia E Residency Company Taxes Regime. This guide explains what you need to know.
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Estonia has received significant interest over the past few years with the introduction of their “E” Residency system targeted at entrepreneurs and digital nomads. However, before rushing online and creating your new company it’s important that you take a serious look at the Estonia E Residency Company Taxes.

Read on to find out how the various Estonian taxation regimes could potentially add to the cost and complexity of your business operations.

Estonia E Residency Company Taxes
Estonia’s “E” Residency Card Might Not Be Worth it in 2022

What is the Estonia E Residency?

Firstly, it’s important to state upfront that this program is simply a fancy term for a digital identity card and easy access to state and company services. It does not lead to physical residency or a passport in any form.

The E Residency is also not a form of personal taxation residency which means you can’t simply claim Estonian tax residency and then pay nothing to your home government. I only wish it was that easy in real life!

Effectively, the E residency is a program that makes it exceedingly easy to setup an Estonian company remotely. It is designed to attract inward investment in Estonian services by attracting digital nomads and solo entrepreneurs with the goal of providing easy business formation and access to a legitimate nation. In this regard, it has done very well for Estonia with the program cost being far outweighed by the additional tax revenues it has generated for the nation.

In short, the program provides you with a fancy digital ID card which makes it exceedingly easy to do everything remotely from incorporating a company to filing your taxes and dealing with banks.

Estonia E Residency Company Taxes – An Overview

Estonia Taxation is 20% on Companies
Estonia’s Corporate Head Line Rate of 20% is Attractive…..but Read on for the hidden details!

Global and cross border taxation is a complex business which is why the E residency program is neither simple nor ‘one size fits all’. Unfortunately, Estonia has largely billed the program as an easy and tax effective way to access Europe.

On the face of it, this may be correct, but it ignores the fact that entrepreneurs will face their own tax issues in their country of residency as well as Estonia. All Estonian companies are automatically tax residents on the nation, and you will be expected to lodge annual returns and pay the appropriate corporate income taxes.

However, the sticking point for those of us based in the West is that most major countries have Controlled Foreign Company (CFC) rules which largely invalidate the idea of simply setting up an offshore shell company. In practice, your local tax authority is likely to treat your Estonian company as if it was a locally based one.

Unfortunately, the CFC rules mean that you will need to pay tax on your company profits locally as if it was based in your home country. This can potentially get worse if your home country has no Double Taxation Agreement with Estonia which means you could potentially face being hit with taxes twice!

Additionally, the following basic taxes will apply to your company:

 Tax Rate
Personal Income TaxLevied in Your Home Country
Corporate Income Tax20%
Payroll and Social Contributions Tax0.8%
Dividend Distribution Tax20%
VAT20%
Estonia Does Not Tax Retained Company Profits

As you can see, there is no free ride in Estonia and you will be expected to keep accurate records and pay your taxes accordingly. Although Estonia does have the benefit of not taxing retained earnings, any divided distributed to shareholders will immediately be hit with a 20% tax rate.

Subsequently, if you are also going to have to pay and lodge taxes in your home nation then you could be in for a quite large bill.

Estonia E Residency Company Taxes – Economic Substance

economic substance estonia office
To Reap the Tax Benefits You May Need to Setup a Physical Office

The way around this is to develop economic substance which is the test most tax authorities apply when looking at controlled foreign companies. In short, what it means is that you would need to setup an office, hire local staff, and have the company managed in Estonia. This is neither cheap or easy and you would need to demonstrate that your ownership is undertaken at “arm’s length”.

Developing economic substance defeats the purpose of using an Estonian entity for digital nomads and solo entrepreneurs. Unless you are earning significant multiples, and there was a very good tax reason, you would probably not be looking at Estonian as your primary jurisdiction.

Banking in Estonia

estonia offshore company banking is hard
Banking Can Be Hard to Secure

Probably the biggest hurdle you are likely to face is around the accessing of banking services. Unfortunately, the E Residency program gives you no right to access local banking services and this has proved particularly hard for those that have successfully taken up the residency program.

In fact, even if you walk into an Estonian bank you are likely to find it difficult to get a bank account setup unless you have a specific connection to the country. Having an Estonian shell company setup is likely to not be a good enough reason unless you also reside in the country or have Estonian relatives/blood.

Subsequently, many E Resident holders have found it nearly impossible to get local banking services and have, instead, resorted to using EMI’s and offshore banks. To be fair to Estonia, this is the same around the world but it certainly reduces the reasons that you may choose to setup an Estonian company.

The only locally chartered banks that seemingly will even entertain the e residency application are the following:

  • SEB (Sweden)
  • Swedbank (Sweden)
  • LHV (Estonia)

Estonia E Residency Company Taxes – My Conclusions

The program was received by the offshore world with great interest at the time of its release. However, it has failed to live up to its potential usefulness for a variety of reasons. In particular, the ease of access to banking and the lack of any potential personal tax residency has severely limited its use.

Additionally, most digital nomads and solo entrepreneurs are seeking simplified operations and not complex, cross border, tax arrangements. These bring with it increases in compliance and accounting costs with not a lot of general upside.

Finally, the taxation arrangements for the company are completely abysmal given that many of us will face the additional cost of also paying tax at home on the company revenues. Estonia fails to grasp, or care, that most western nations will simply deem that offshore entity as a local tax resident and tax you accordingly. Without a double tax agreement (many countries do not have one with Estonia) you are simply going to get stung twice for the same revenues.

Ultimately, there are more convenient and advantageous places for entrepreneurs to consider for domiciling their company offshore. Estonia had a great concept with the E Residency but the execution and complexity of it mean that it misses the mark for most nomads.

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