There is one main concern for entrepreneurs considering becoming an e-Resident to open a company in Estonia… Taxation. Understanding Estonian taxes, how VAT works, how to pay them, when to pay them, and then there are the salaries…

 

It can all be a bit overwhelming!

Many business systems in Europe are obscure, complex, or unfair for fledgling entrepreneurs and startups. For example, in the Spanish business system, you’ll pay a fixed fee of around 350€ per month just for the privilege of having a company. Even if you don’t earn anything that month.

Or with the Greek system, you sometimes have to pay an estimation of taxes for the following year…in advance!

The Estonian tax system, on the other hand, is transparent and easy to understand. This has convinced many location-independent entrepreneurs to establish their businesses there.

BUT Estonia is no tax haven.

If avoiding taxes is your main motivation, this is not the right place for your business. If, however, you want the freedom to create and manage your business online, pay fair taxes, and get rid of bureaucratic red tape, then Estonia will be heaven.

How do you get on this easy street?

As a customer of  Companio, the path to business heaven is easy.

Upload your sales and purchase invoices into the Companio® platform, give us permission to read your bank statements (for invoice matching) and we take care of the rest.

Sound good?

But first, let’s talk about Estonian taxes and how VAT works. Let’s kick off with VAT, when to include it (or not) in your invoices, and how much exactly.

Estonia, VAT and Your Company

As a European country, Estonia is subject to VAT. So when you open your company in Estonia with us, we can register you in the VIES Register to get your VAT number. This is part of our ‘Company Registration’ pack.

Do I need a VAT number?

Your company needs an intra-community VAT number if any of these conditions apply:

  • If your company offers services such as development, design, consulting, marketing, etc., to European clients, and earns more than 40,000 euros per year.
  • If you offer digital services or products (software or digital content) to European B2C customers (final consumers) from the first sale.
  • Or if you offer digital services or products (software or digital content) to European B2B clients (company to company) and you earn more than 40,000 euros per year.

Should I register and get my VAT number right away?

If you are working with European suppliers or customers, we always recommend registering and obtaining your VAT number at the same time. While you may not need it right away, you will as soon as your company goes past 40.000€. A VAT number has no disadvantage for your business and, on the contrary, has many advantages.

For starters, invoicing between European companies with VAT numbers implies adding VAT 0% to your invoice. That greatly simplifies invoicing and you avoid VAT payments back and forth. Thus, it allows you to operate more easily in the European Union.

Finally, the VAT number adds presence and reliability to your company making you look good in front of your customers and suppliers.

So, when do I have to add VAT to my invoices? And how much?

The rule is quite simple to apply once you know it, and depends on both the type of service your company offers and the type of customer you are sending the invoice to.

Supposing you have a VAT number:

If your services require your direct intervention (such as software development, consulting, marketing, design…), then:

  • If your client is B2B (a company) in Europe, with a VAT number, you do not add VAT to the invoice (0%). Instead, add a clause to your bill like this: “The purchase is liable to Intra-Community supply 0%, Reverse charge”. Here is a link where you can check if the VAT of one of your customers is valid or not.
  • If your customer is B2C (an individual), or B2B without a VAT number, you add the Estonian VAT (20%) to the invoice.
  • Finally, if your client is outside of Europe (such as in the United States), you don’t add VAT (0%).

If your services do not require your intervention, that is, they are automated (such as a SaaS or automated application like Netflix, or an e-Book download from your e-Commerce or website), these rules apply:

  • If your customer is B2B (a company) European with a valid VAT number, you add VAT (0%) and specify the same clause as above.
  • On the other hand, if your client is a European business that does not have a VAT number or an individual, you add the VAT from the country of origin of your customer. For a Spanish customer, that would be 21%, for example.
  • Finally, if your client is outside of Europe, you do not add VAT (0%).

As an important exception, remember that your company is Estonian, so you will have to add the Estonian VAT (20%) for any invoice you make to another Estonian company (since it is a domestic tax exchange within the Estonian tax system).

To sum up Estonia VAT rules:

  • VAT registered EU companies: add VAT(0%)
  • NON-VAT registered EU companies or EU individuals:
    • The service requires your intervention (i.e. programming): add Estonian VAT(20%)
    • The service doesn’t require your intervention(i.e. video courses) or the sale occurs in the country of the customer (i.e: dropshipping): add VAT of customer’s country
  • Outside EU: never add VAT
  • Estonian business/individuals: add VAT(20%)
VAT and Taxes of a Company in Estonia

Are there any monthly fees or Estonian taxes to be paid?

As we mentioned earlier, in some European countries, you need to pay a monthly fee for the privilege of working as a professional or having a company. This can be a competitive disadvantage, especially for businesses just starting out.

There’s nothing like that in Estonia.

In fact, while your company does not distribute salaries or dividends, you won’t have to pay a single euro in taxes.

Really?

Yes, let’s see how that works.

Estonia Company Tax

Let’s start with the good news: you will not pay any taxes for the money your Estonian company earns or re-invests. This means that all the money that goes into the bank account of your company, or is spent in justified business expenses, is virtually free of taxes.

Woohoo!

Therefore, while your company is just generating income, growing a customer base and invoicing them, and paying providers and suppliers, you will not have to pay anything. In comparison, in most other business systems -especially in Europe- you will be paying from minute one, PLUS that monthly fee in some cases.

It’s clear that the Estonian corporate tax system is designed to help new businesses and startups, and encourage entrepreneurship and the growth of your business.

Okay, so now the question is… When do I pay taxes?

You will pay taxes when you distribute dividends or salaries — when you send money from your company to your employees, shareholders, or to yourself.

That’s it.

It is important here to be clear about the difference between you and your company.

Even if you are the only member of your company, you and your company are independent entities. The money of the company belongs to the company, not to you, and vice-versa.

There are two main ways to distribute benefits from your company: salary and dividends.

Let’s talk about them:

Annual dividends

At the beginning of each fiscal year, you can pay dividends to the shareholders of your company. These dividends are subject to a 25% tax (20% of gross, which means 20/80 = 25%).

These taxes are paid by your company the following month, not by you. If you were a tax resident in Estonia, you would not have to pay any extra personal tax for those dividends you receive, in Estonia.

Unfortunately, in many other European countries, receiving dividends is subject to personal taxes.

That means you will have to pay taxes later on your annual tax report if you are a tax resident in France, Germany, or Greece, for example. If you are a digital nomad and don’t have any tax residence, you won’t have to pay personal taxes for these dividends.

As an example, if your company pays 10.000€ in dividends in January, it will pay an additional 2500 euros in taxes (10.000 x 20/80) in February.

Monthly salary

To explain your salaries, it is important to understand that as a board member of your company, it is considered that you perform two different types of tasks:

First, you are a member of the board of directors of your company. You are supposed to take charge of the administrative and bureaucratic tasks of the company, schedule and take part in the board members’ meetings, etc.

In addition to that, you are an employee of your company, so you perform some technical tasks that add value to your company (consulting, software development, design, whatever).

Therefore, generally speaking, your salary is divided into two parts: your board member salary (salary manager) and your employee salary ( employee salary).

How is the division made?

As a general rule, 20% for the board member’s salary, and 80% for your employee salary.

That means that if you want to get a salary of 1000 euros a month, 200€ will go to your board member’s salary and 800€ will go to your employee’s salary.

If you are a highly qualified professional whose time is devoted mostly to your job (eg: a web developer, a designer, a video editor), you could distribute 20% to your board member’s salary and 80% to your employee’s salary.

Why is this distribution important?

If you live outside Estonia, your employee salary is not subject to taxes there. Only the board member’s salary. Therefore, the less board member salary, the fewer taxes you will pay in Estonia.

How much does my board member’s salary pay then?

Your board member salary pays 25% income tax, plus 33% social tax (applied to the salary plus the income tax).

Important to note, if you can certify that you contribute social security taxes in another European country (form A1), then your board member salary does not need to pay social tax.

So is the employee salary tax-free?

Not quite. You will not pay taxes in Estonia.

This salary pays taxes in the country where you are a tax resident (if any). In that case, your salary will be added to your tax base, and when doing your personal annual tax report, you will pay taxes based on your overall salary, like any normal employee.

Thanks to European double-taxation agreements, you will not have to pay double taxes for your board member’s salary. 

Obviously, if you don’t have a tax residence, i.e: you are a digital nomad and you spend less than 183 days in any given country per year, you won’t have to pay personal taxes on your employee salary.

Let’s see how it works with a concrete example:

Salary example

Let’s say that Ana has a company called “Ana Designs OÜ” with Companio, and generates about 3000 € in revenue per month. To start, Ana decides to allocate 1000 euros as her monthly salary for now.

For simplicity, Ana applies the standard salary distribution, 20/80. So 200 euros of her salary are from their board member salary, and 800 are for her employee job since she is the one doing the design work.

As Ana lives outside of Estonia, her employee salary is not taxed there. So of those 200 euros, Ana’s company will pay the following taxes:

  • Income tax: 25% of 200€ = €50
  • Social tax (Social tax): 33% of the board member’s salary + previous income tax (i.e: 33% of (200 + 50) = €82,50)
  • Total: income tax + social tax (i.e: 50+82,50=€132,50)

So in total, for her 1000€ salary, Ana’s company will pay €132,50 (13,25% in taxes). 

Easy, right?

taxes in Estonia

When hiring employees in other countries outside of Estonia, including the shareholders or members of the board of the company, you must be careful to observe certain legal aspects

Sometimes, such as when hiring employees in Europe (and other countries), your Estonian company may need to pay social security or some kind of social taxes for those employees. 

If that happens, you have options:

  • ask the employees to become professionals or freelancers (in that situation, you do not pay them salaries, but they invoice your company every month); 
  • or the company registers as a taxpayer in their countries and pays social taxes in the employee’s country.

In this article, we talk about these legal aspects when hiring employees in detail. It is important that you read it if you are hiring employees who live outside of Estonia.

So how do I do it?

If you are our customer, that’s super easy. All you need to do is to make two different transfers from the bank account of your company to your personal account. 

So for example, if you use a 20/80 distribution, and want to assign yourself 1000€ in salary this month, you will do two separate transfers from your company’s account:

  • One transfer for 200€ with a description of “Board member salary”.
  • Another transfer for 800€ with the description “Employee salary”.

And that’s all. 

Our accountants will identify both by the description and calculate the appropriate taxes. 

It’s that simple.

Just remember to warn us before assigning yourself the first salaries, so we can register you as a board member employee for your company.

Distributing employee salaries only

In 2019, Estonia approved new legislation that allows solopreneurs and freelancers to assign themselves an employee salary only, without the need of appointing a board member salary. 

This is suitable for one-member companies only. 

In this scenario, you only pay yourself an employee salary, as it’s considered that your administrative duties are negligible, which they will be as a customer of Companio!

This has tremendous advantages if you are a digital nomad, without a personal tax residence as you won’t need to pay taxes for the salaries of your Estonian company.

As a caveat, if you opt for an employee-only salary, you won’t be able to enjoy the Daily Allowance (see below).

Smart expenditure management

Not paying Estonian taxes for the money of your company that’s reinvested, or not distributed, is quite an innovative concept, and is one of the main appeals of the Estonian business system. 

Let’s see how you can benefit from its advantages.

Tax-free business expenses

Yes, that’s right, all justified business expenses of your company are free of taxes. What is a justified business expense?

Basically, any expense that is relative to your activity, and does not constitute a permanent establishment to another country, to prevent that country from considering your company as a tax resident there. 

Let’s see some examples:

  • Website expenses: hosting, domains, web design, storage fees, and any other web service that your business needs.
  • Administrative tools and online or offline management software, accounting, and so on.
  • Web tools, subscriptions, and software that you need to develop your activity.
  • Office fungible stuff.
  • Public transportation for work reasons, including flights, trains, services such as Uber or Taxify, and accommodation, such as Airbnb. This includes trips to Estonia (to open your bank account).
  • Payment and banking expenses, such as payment gateways for your online store, banking fees, or similar charges.
  • Business meals of your customers, but only the meal of your client(s), not yours.

Examples of expenses that can not be deducted include:

  • Your own car or gas used to travel inside the same country. Traveling between countries to visit customers is a justified business expense, but not your own car, or gas. Public transport inside the same country is, however, a justified expense.
  • Holidays and pleasure trips, obviously. You have to be careful if you decide to “visit a client” from the 24th to the 31st of December. Better get written proof of the meeting signed by your customer.
  • Permanent offices, facilities, or premises outside of Estonia. It is actually not allowed to have an office or facilities outside of Estonia for more than 6 months a year unless you want to run into trouble with the local tax authorities.
VAT and Taxes of a Company in Estonia

The Daily Allowance

The Daily Allowance is an amount that you are allowed to take out of your business account, tax-free, when you do business trips. It is supposed to cover your expenses when traveling for work (such as meals, WiFi access, etc).

For example, if Ana travels to a Design Summit in San Francisco, USA, for a week, she could benefit from the Daily Allowance.

In order to do this, she needs to declare (let us know about) the trip, including dates, in advance, and add the appropriate documentation (flight tickets, Airbnb receipts, tickets to the summit). Then, she can get up to 50€ for the first 15 days of the month plus 32€ for the rest of the month, free of taxes.

In our example, if Ana provides the documents that justify this one-week trip, she could get 7×50 = 350€ from her company’s account, without having to pay taxes for it. The concept for the transfer should ideally be “Daily Allowance – Trip XXXX”.

This only works for trips with a specific duration and a specific purpose. You can not travel to Thailand, be there for a year, then travel to another country, and claim the Daily Allowance every month of that year. That would indeed be a fraud!

Out of pocket expenses

The Estonian business system is very flexible and offers many advantages for entrepreneurs. Imagine that Ana forgets her business card on her trip to San Francisco, and needs to pay a business expense with it. What can she do?

No problem.

Ana can pay that expense with her personal credit card, or even in cash, but ask for an invoice for her company, and then tell us that she paid that with her personal money. We will declare that expense as “out of pocket expenses”, and Ana can refund that money back into her personal bank account without paying taxes for it.

Interesting, right?


So we hoped you enjoyed this thorough explanation of how taxes and VAT work for Estonian companies. Still, have doubts? Let us help! Companio provides thousands of clients with high-quality accountancy services and trustworthy advice regarding your company in Estonia.

Our online consulting service will help you dissipate all your doubts regarding VAT and taxes for an Estonian company. You just have to schedule an appointment with one of our tax advisors.