Estonia

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Estonia can offer a progressive business environment with an efficient and compatible infrastructure. Our e-services, mobile communications and internet applications are among the most progressive in the world. Estonians are adaptable towards new technologies, and use them willingly.

The attractiveness of Estonia is demonstrated by the large number of foreign investors doing business here and the dominance of world-renowned foreign companies in several of Estonia’s economic sectors. Foreign impact is also revident from the fact that exports represents more than 100% of Estonian GDP.

In Estonia, foreign investors are treated the same as domestic ones, and European Union subsidies, for instance, are equally available for both foreign and domestic companies.

Estonia’s advantageous and user-friendly business environment has attracted a great number of foreign investors and large companies of international renown to the country – Ericsson, ABB, Kuehne + Nagel, Stora Enso, Symantec, Stoneridge, Vopak EOS, Deutsche Post DHL and many others. The fact that Estonian banks are mostly owned by well-known Nordic banks, such as Swedbank and SEB, also speaks in favour of the reliability of Estonia’s business environment.

Population: 1.31 million
Form of government: Republic
Official & spoken languages: Estonia (spoken Russia 25% from population)
Currency: EURO €
Time zone: UTC +2
GDP (PPP): $ 38.754 billion
GDP (PPP)/per capita: $ 29,543
Public debt: 11% of GDP
Average salary: 903€/month
Unemployment: 6.3% (Jan 31. 2016)
Major trading partners: Sweden (19%), Finland 16%, Latvia 10%

 

Advantages of doing business in Estonia

Starting new business – Registration of a company in Estonia can be completed with only one shareholder and one director who both can be foreigners and reside elsewhere than Estonia. The minimum paid-up capital is €2,500 and with Novasigma the incorporation procedures can be completed remotely.

Tax system – Profits realized by an Estonian company are not subject to any income tax in Estonia provided the income is re-invested int the same company or kept in the company’s corporate bank account. This tax system allows entrepreneurs and investors to re-invest all their income into the development of their businesses without any deduction by the government. Corporate income tax in Estonia can be deferred without any time limitations until such a time company wishes to distribute it’s profits abroad

Low costs – Labor costs of only 10€/h (10th lowest among all European countries) and Tallinn is the second cheapest capital in the EU for the cost of renting an office from 13€ per square metre. Cost to import and export products are much lower than the rest of European Union (average €765 per container)

No debt crisis – The country’s public debt is only recorded at 11% of its GDP, one of the lowest rates in the European Union and in the world.

Disadvantages of doing business in Estonia

Domestic market – While companies registered in Estonia have access to the whole European Union market without any custom duties (exemption in Finland), the country’s domestic market offers limited opportunities, due to a population only 1.3 million and annual purchasing power of less than $20,000 per person

Corporate tax – Estonian’s taxes are higher than one would expect from an Eastern European country: corporate income tax and VAT rates are both fixed at 20%. Employers must also remit social contributions averaging 33% of their employees’ gross salaries.

VAT –  Value added tax 20% (VAT) is charged on the value of supplies of taxable goods and services made in Estonia, including some exports to European Union countries.

Business Friendliness Environment Index (EUROPE) by Novasigma – 2017

Novasigma has published an annual BFE-E (Business Friendliness Environment – Europe) -index for 2017. European economies are ranked from  1-51 based on their business friendliness. The rankings are determined by sorting the aggregate distance to frontier scores on 20 topics each consisting of several indicators, giving equal weight to each topic. The rankings for all countries and economies are bench-marked to January 2017.

ESTONIA – OVERALL RANK 2017: 8th (Europe) 58/100 points
1. Ease of incorporation process (bureaucracy, costs, time frame) 3/5 points
2. Privacy level of shareholders and investors 2/5 points
3. Privacy level of company directors and signatories 1/5 points
4. Availability of the private equity funding 2/5 points
5. Availability of the public and / or bank sector financing instruments 2/5 points
6. Reputation of the country (trading across borders with a company registered in this country) 3/5 points
7. Easiness of recruiting professional staff (professionalism, average pay, protection against dismissal) 5/5 points
8. Easiness of getting business premises (price, availability) 3/5 points
9. Suitability for production of physical products 3/5 points
10. Suitability for producing services 4/5 points
11. Size of the home market B2C (population and purchasing power) 1/5 points
12. Size of the home market B2B and public sector purchasing services from local businesses 2/5 points
13. Exporting physical products (markets nearby, logistics and toll) 3/5 points
14. Exporting services 5/5 points
15. Immaterial rights (compared to other countries) 4/5 points
16. The level bureaucracy or corruption during business operations 4/5 points
17. Company taxation 4/5 points
18. Dividend taxation, withholding taxes and tax treaties 3/5 points
19. Easiness of selling a business 2/5 points
20. Easiness of closing down a company 2/5 points

The World Banks “Ease of doing business ranking”: Estonia

Overall rank 2016: rank 16th (change in rank: 0)
– Starting a business: rank 15 (average processing time 3.5 days)
– Dealing with construction permits: rank 16 (average processing time 102 days)
– Getting electricity: rank 34 (average installation time 91 days)
– Registering property: rank 4 (average processing time 17.5 days)
– Getting credit: rank 28
– Protecting minority investors: rank 81
– Paying taxes: rank 30 (average company tax from profits 49.4%, average time used for taxation 81 hours per year)
– Trading across borders rank 24
– Enforcing contract: rank 11 (average 425 days, average cost from standing amount 21.9%)
– Resolving Insolvency: rank 40 (Average time processing bankruptcy: 3.0 years)

New businesses registered in 2015: 13,867 new limited liability companies

Setting up a new business in Estonia

Who can start a new business in Estonia:

Any person or legal entity who can provide documentation required by the law for incorporation

Who can own property or shares of the company:

Any legal entity (Companies, private individuals, trust or fund)

Who can act as a director or member of the board:

Any person who can provide documentation required by the law for incorporation

Business entities in Estonia

  • LLC / Osaühing or OÜ
  • PLC / Aktsiaselts or AS
  • Branch office / Filiaal
  • Rep. office: Esindaja

Opening a bank account for an Estonia company:

  • Incorporation documents and articles of association
  • Registration certificate
  • Board of directors meeting minutes
  • Proof of identity, address and skills of signatories
  • List of shareholders and directors
  • Certificate of Good Standing (if company is older than 1 year)

Public register of shareholders, directors or signatories:

  • Directors: Yes
  • Owners: Yes
  • Signatories: Yes

Accounting and reporting regulations in Estonia:

  • companies must file all records
  • companies must file separate tax returns
  • audit requirements for large companies

How funds can be withdrawn from company

  • Company may transfer money to another company based on sales of services and goods.
  • Company can lend money to another company and / or person given that loan agreement with minimum interest and payment terms have been made. Owners cannot owe money for the company in the end of the book year.
  • Company can pay dividends from it´s own capital to shareholders after end of the book year
  • Company can pay salary to it´s employees given it has registered in the Tax Administration´s employer register. Employer is obliged to pay tax withheld at source from all wages paid to employees, along with making employer´s social security contributions.
  • Company can pay tax free allowance, such as kilometer allowance for using they own car, per diem and meal money, to owners in order to cover their temporary business travel expenses as defined in the official Decision of the Tax Administration on Allowances for Travel Expenses
  • Company can pay meeting allowances for its directors, members of the board and owners
  • Profits may be transferred (if certain requirements are met) between group companies through group contribution system
  • Company can invest in shares, funds or real property.

Can you transfer Estonia company to another jurisdiction?

No

How to terminate business in Estonia?

  • Company may be sold
  • Filing bankruptcy
  • Company liquidation

Freedom Index: Estonia

Overall rank 2016: 7th (71/100 points)
– Property rights: 90/100 points
– Freedom from taxes: 80/100 points
– Freedom of speech/religion: 100/100 points
– Limited government: 56/100 points
– Gun rights: 48/100 points
– Drug rights: 40/100 points
– Freedom from corruption: 68/100 points
– Freedom from inflation: 77/100 points
– Business freedom: 78/100 points

 

Corporate taxation in Estonia 2016

Residence – A legal person is resident if it establish pursuant to Estonian law. European public limited companies and European associations with their registered seat in Estonia also are deemed to be resident.

Basis – Resident companies are taxed on worldwide income. Nonresidents are taxed only on income derived from Estonian sources. This rule applies both to Estonian resident companies and to permanent established (PE) companies.

Taxable income – Estonia levies a corporate income tax on a company’s distributed profits (in lieu of an annual corporate tax). Retained earnings are not taxed until profit distributions are made. Profit distribution may be specific (i.e. dividends, share buybacks or profit distributions via capital reductions) or deemed (which include expenditure and payments unrelated to business activities, as well as gifts and donations).

Taxation of dividends – The corporate income tax applies to dividends and is paid by the resident legal person making the distribution. A similar regime applies to an Estonian PE of a nonresident. There is no separate dividend withholding tax.

Losses – Not applicable (as corporate income tax applies only to distributed profits)

Foreign tax credit – A foreign tax credit is available for all types of foreign-source income unless the Estonian participation exemption applies.

Participation exemption – The corporate income tax will not be charged on a redistribution of dividends if the underlying dividends are received from a subsidiary that is tax resident in an EEA member state or Switzerland and the Estonian parent holds at least 10% of the shares or votes of the payer company. The participation exemption also applies to dividends received from other countries if the Estonian company holds at least 10% of the shares or votes, or income tax on the dividends has been withheld in a foreign jurisdiction.

Taxable income: 20/80 (20% of the gross amount) of the profit distribution
Taxation of dividends:
VAT registration: Registration is mandatory for all taxpayers that carry out transactions in the Estonian VAT territory (or turnover exceeds 16.000€)
– VAT Rates: 20% (reduced rate 9% on items such as books, newspapers, medicines and accommodation.)
Surtax: No
Alternative minimum tax: No
Withholding tax (general): 0% / 10%
– From Dividends
– From Royalties 10% withholding tax applies to royalties paid to nonresidents (EU or Swiss-resident companies may be exempt)
– From Interests 0% (exemption for nonresidents)
– Technical services 10% if technical services are rendered in Estonia. Withholding tax is not applicable if the services are performed outside Estonia and the service provider’s country of tax residence that provides for an exemption.
Transfer tax: No
Capital gains tax: Treated as ordinary business income taxable by rate 20% (only taxed where there is a profit distribution)
Real property tax: 0.1%-2.5% an annual land tax is imposed on the assessed value of the land and is paid by owner of the land
Social security: The combined social and health insurance rate paid by the employer on cash and in kind (fringe benefits) employee remuneration is 33%
Payroll tax: No, but unemployment insurance contributions must be paid by the employer and the employee on the employee’s monetary employment income. The employers’s contribution is levied at a rate of 0.8%
Stamp duty: Stamp duty in insignificant amounts may apply
Capital duty: No
Tax treaties: 56 tax treaties in force
CFC (Controlled Foreign Company) rule: Given the nature of the corporate income tax, the CFC regime applies only to individuals.
Other: A general anti-avoidance rule allows the tax authorities to apply what is, in effect, an economic substance rule and special scrutiny is given to payments and fees to low-tax jurisdictions.

Anti-avoidance rules:

Transfer pricing – If the value of a transaction conducted between a resident legal person and a person associated with that person differs from the value of similar transactions conducted between non-associated persons, the tax authorities may, upon determining the income (i.e distribution) tax, use the value of transactions applied by unrelated independent persons under similar conditions. Income tax is charged either on the income the taxpayer would have derived or the expense the taxpayer would not have incurred had the transaction been conducted with unrelated persons under similar conditions.

Thin capitalization rule – No

Disclosure requirements – No

Compliance for corporations:

Tax year – Given the nature of the corporate income tax, relevant taxable period is the calendar month.

Consolidated returns – Consolidated returns are not permitted; each company must file a separate return.

Filling requirements – Filling and payment must be made monthly basis by the 10th day of the calendar month following the month of taxation. For non-VAT registered taxpayers, filling is required only if taxes on profit distribution and payroll are due for the period.

Penalties – A penalty is levied on late tax payments at a rate of 0.06% per day.

Rulings – Advance rulings are available and are binding the tax authorities for non-transfer pricing issues

Tax authorities: Tax and Customs Board, Ministry of Finance

Personal taxation in Estonia 2016

Personal taxation basis:

Residents are taxed on their worldwide income

Nonresidents are taxed only on income received from Estonian sources

Tax Residence:

An individual is resident if his/her place of residence is in Estonia or if he/she stays in Estonia for at least 183 days over 12 consecutive calendar months (and will be deemed to be resident as of the date of his/her arrival in Estonia.

Estonian state public servants who are in the foreign service also are resident.

Filling status:

Joint filling is permitted if both spouses are residents or, subject certain conditions, if at least one spouse is a resident of another EU member state.

Income tax rates in Estonia

A flat 20% rate applies (The first 2040€ annually is exempt)

Social security payments in Estonia:

Social security is an employer-borne cost, except for the self-employed. The combined social and health insurance rate paid by the employer on cash and in kind (fringe benefits) employee remuneration is 33%. Employees, however, must make unemployment insurance contributions at 1.6% of taxable remuneration (i.e. monetary employment income)

Inheritance/estate tax in Estonia:

No

Net wealth/net worth tax in Estonia:

No

Compliance for individuals in Estonia:

Tax year – calendar year

Tax on employment income is withheld by the employer and remitted to the tax authorities.

The tax return must be submitted by 31 March and paid by 1 July of the following year.

If a person has declared capital gains, the deadline for any additional income tax payable is 1 October instead of 1 July.

Services for corporations interested in Estonia

  • Consultation and advisory (business, tax, legal) services before incorporation / during your business operations in Estonia
  • Assistance in incorporation process: Tailor made company formation or shelf companies available
  • Administration services available for new companies incorporated through Novasigma

For corporations operating in Estonia

  • Banking and financial solutions for an Estonian company
  • Accounting and Audit services for an Estonian company
  • Legal services for an Estonian company

For individuals and families interested in Estonia

  • Consultation and advisory (tax, legal) services before re-located to Estonia
  • Assistance in immigration process when moving to Estonia (residency permanent, work permit, tax residency)
  • Incorporation and administration services for your privately held Estonian holding company

For individuals and families who hold the Estonian residency

  • Banking services in Estonia for private persons
  • Local and international accounting services for Estonian tax residents
  • Local and international legal services for Estonian residents

Interested in Estonia? Please leave us a message and we will come back to you shortly.

In cases KYC or/and Due Diligence process required Novasigma requires a personal meeting with all its new clients before proceeding any assignment

Other jurisdictions:

  • Bulgaria
  • Estonia
  • Finland
  • Georgia
  • Germany
  • Gibraltar
  • Latvia
  • Mauritius Novasigma
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  • Russia
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Available services

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  • How to register a company in United Kingdom
    Incorporation & Administration Services
  • International Accounting & Audit services
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