Paying Yourself from an e-resident Company: A Guide for Entrepreneurs in Estonia
Let’s face it: your living expenses, bills, and food aren’t going to pay for themselves.
So, you’re running a business in Estonia or planning to start one. In that case, one of your first questions might be how to transfer the profits from your company to your account, or in other words, how to assign yourself a salary as an e-resident.
Paying yourself from an e-resident company can be done in three ways: through salaries, invoicing as a contractor, or dividends.
Unless you have a hefty savings account and can distribute dividends annually, you’ll likely need to withdraw money from your company regularly to cover your expenses.
Want to know how to pay yourself from an e-resident company? Has someone tried to explain it to you and left you more lost than a tourist without Google Maps? Well, keep calm and read on because we’re about to make things crystal clear.
Table of contents
First Things First
You and Your Company Are Separate Entities
Before we jump into e-resident self-payment strategies and extracting those sweet profits from your company, let’s get one thing straight: you as an individual and your company as a legal entity are different.
This distinction is critical to paying yourself from an e-resident company.
It’s a different ball game compared to other countries, like Spain, where freelancers can mix personal and business finances with less fuss.
In Estonia, whether you’re a solo freelancer or the head of a burgeoning empire, you and your company are separate from day one. This means you’ll need to open a different corporate bank account, and you can only transfer money to your personal account with a valid reason.
Every transaction must be justified, a cornerstone of paying yourself from an e-resident company.
The Principle of Residence-Based Taxation
Most European Union countries follow the principle of residence-based taxation, meaning if you live in a country for more than 183 days, that country considers you a resident.
What does this have to do with pay yourself from an e-resident company? More than you might think because it implies that you can only receive a regular income under two circumstances:
- You’re a freelancer or contractor who invoices the company for your products or services.
- You’re an employee hired by a company that pays social taxes, unemployment, and pension on your behalf.
Let’s delve into these scenarios in more detail.
Salary as an Employee or Invoicing as a Freelancer
So, we’ve already established that in Estonia, you and your company are about as separate as socks in a laundry cycle—they don’t end up together.
That’s why it’s super important to open a corporate bank account.
In some countries, like Spain, you can mix and match your personal and business finances like a paella, but in Estonia, that’s a big no-no.
Now, when it comes to liberating some cash from your company, you’ve got two paths to choose from:
🧑🏻💻 If you’re a freelancer or contractor, you’ll be invoicing your company for your products or services. It’s pretty straightforward: whip up an invoice, send it over, and voilá! You include it in the monthly business expenses, and you don’t pay any taxes because it’s considered reinvestment into the company.
👩🏻🔧 Or, you can opt to be an employee and get yourself on the payroll. This can happen in two scenarios:
- Your company sets up a legal entity in that country. Unless you have a specific reason, we don’t recommend this option. It’s like deciding to build a house when all you needed was a tent—it’s a lot of time and money, and let’s be honest, it’s complicated.
- Through third parties. Luckily, in today’s world, there are services like Companio Work that let you hire employees (or yourself) without the hassle of creating a legal entity. We handle the hiring through one of our local companies or partners in the country you’re looking to hire (or be hired) in. It’s above board, saves you from extra expenses and bureaucratic gymnastics, and ensures you’re ticking all the legal boxes.
Which Option Should I Choose?
Both routes have their pros and cons, so you’ll need to weigh up which one suits your business or personal needs best at this moment.
If you’re dipping your toes into the business world, we suggest invoicing as a freelancer or contractor.
However, if your company’s swimming in enough resources to hire you as an employee, that’s an option worth considering.
You’ve got more benefits, like contributing to the social security system, which opens the door to healthcare, unemployment, and retirement goodies.
Plus, having a solid payroll makes you look more trustworthy to banks—it’s easier to get loans and mortgages when you have a steady income.
Then, there’s the option of dividends. You can distribute them once a year after the annual report if your company has profits.
It doesn’t affect your salary or invoicing as a freelancer or contractor. After you’ve handed out dividends, the company pays 20% of the gross amount, like, say, 25% of the net.
Here’s an example: the company dishes out 5,000 euros in dividends and then pays 1,250€ in taxes the following month.
That 1,250€ is 25% of the net (do the math: 5000×25/100) or 20% of the gross (the gross being the net plus the taxes, which adds up to 6,250€—20% of that is the 1,250€ in taxes).
This money should be split evenly among shareholders (not board members). Say your company is a pie, and you have two friends, Juan and Ana. Juan has a 20% slice, and Ana has an 80% slice. If the company serves up 5,000 euros in dividends, Juan gets a 1,000€ slice, and Ana gets a 4,000€ slice.
And remember, you’ve got to serve these slices directly from the corporate bank account to an account the shareholder owns (not through another company or person).
Keys to Legal and Efficient Remuneration in Estonia
Understanding how to navigate salaries for e-residents is crucial for your business’s legal health.
At Companio, we’re committed to helping you stay on top of your legal obligations while employing the best e-resident self-payment strategies.
Remember, paying yourself from your e-resident company is your call. However, it’s vital to stay within the legal framework to avoid any potential pitfalls.
If you want to hire yourself, Companio can assist you through Companio Work, making it easy and saving you time, money, and headaches.
With Companio Work, you can have peace of mind knowing that your payroll complies with all regulations.