Frequently Asked Questions
The most common forms of business
The most common form of business is companies with limited liabilities. Limited Liability Company (Osaühing) and Joint Stock Company (Aktsiaselts) are some of them.
The differences between the two are in the fact that the activities of a Limited Liability Company are less regulated than the Joint Stock Company’s activities.
Limited Liability Company (Osaühing)
A llimited Liability Company (further LLC) is an enterprise with limited liability where owners are liable for obligations to the amount of the invested capital. It is suggested that it should be established for the purposes of enterprise with small demands in capital and a relatively small number of shareholders.
In cases with a small amount of participants it’s preferable to establish LLC. It is the case when an enterprise management is much easier and there is an opportunity to manage it with fewer people. However, when choosing a form of enterprise it is vital to consider the long-term strategy and prospects of progress.
The minimum sum of share capital is 2500 euros; the maximum amount is unlimited. Each shareholder can possess one share of LLC with the minimal cost per share of 1euro. When making a decision each shareholder has a number of votes commensurable to the size of their share.
Establishment
A limited liability company can be established by one or more persons (individuals or legal entities), including residents of foreign countries. For the establishment of LLC founders make a shareholder’s agreement certified by a notary. As an appendix to the shareholder’s agreement, founders adopt Articles of Association of LLC.
Payment for shares
Shares may be paid by monetary contribution to the bank account of an LLC or by non-monetary contribution, which can be in the form of any item, assessed monetarily, and passed to the PLC. If the amount of the capital is less than 25000 euros and the value of a non-monetary asset exceeds 1/10 of capital, or if all non-monetary assets, in total, make up more than half of share capital, the evaluation of non-monetary payment must be certified by an auditor. In other cases the evaluation of non-monetary assets by the contributor and management board is sufficient.
As of the 1st of January 2011, it is possible to establish an LLC by resident individuals with postponed capital payments.
Management of a Limited Liability Company
The supreme body of LLC management is a shareholder’s meeting that determines common areas of LLC development.
The activities of LLC are organized by the management board. Each member of the board has a right to represent LLC solely if only his rights are not limited by Articles of Association. This limitation is valid for third parties only if there is a relevant notice in the Companies Registry.
Liability
A member of the management board must fulfill his obligations with sufficient effort. Members of the board as well as members of the supervisory board, (if such is established) are liable for damages caused to the company if they carry out their duties with negligence or deliberately cause damage to the company.
Alienation of shares
A share can be easily alienated. A transaction of a share alienation and encumbrance (for instance mortgage, encumbrance of right of enjoyment) must be asserted by a notary. The preemption right for other shareholders could be prescribed by the statute.
Joint-stock company (Aktsiaselts)
Joint-stock company (further JSC) is a commercial entity with limited liability the capital of which is divided into shares. It is recommended that JSC be established for commercial projects with a big demand for capital as well as with a big number of shareholders.
For some certain types of activities establishing JSC is obligatory. For instance – banking, insurance, etc.
The minimal amount of JSC capital is 25000 euros. The maximum amount of JSC capital is unlimited. The minimum value of a share is 0.1 euro. Each share gives one vote at a general meeting.
There is a possibility to issue different types of shares with different rights.
Establishment
JSC can be established by one or several persons (legal entities and individuals) both residents of Estonia and residents of foreign countries.
There are two ways to establish a JSC:
1) Establishment without a subscription to shares (the most commonly used form of establishment.)
2) Establishment by share subscription(rarely used)
The difference between these two forms is in the fact that the establishment with a share subscription already presupposes the creation of a public company with many owners. At the same time, the establishment of such a JSC requires much time and is more costly.
When establishing a JSC shareholders make a notarized Foundation Agreement.
While establishing a JSC with share subscription it is important that the date and the place of founding meeting and the date and the place of subscription for shares be marked in the articles of incorporation.
As an appendix to articles of incorporation shareholders ratify Articles of Association of JSC.
As of 01.02.2001 shareholders’ book of each JSC is kept by the Central depository of shares, so each JSC established must first register its shares in the Central securities depository.
Payment for shares
Shares can be paid by a monetary contribution to a company bank account or by a non-monetary contribution, in the form of an item or right, which could be monetarily evaluated and passed to JCS. Evaluation of a non-monetary deposit must, by all means, be certified by an auditor.
JSC management
As JSC may have a big number of owners and higher capital than other forms of companies, its managerial structure is also more complicated. Apart from stockholders meeting and the management board, a supervisory board with at least three members must be appointed. A supervisory board is elected by stockholders at general meetings and controls the management board.
Alienation of Shares
Shares can be freely alienated, and in addition, they can be encumbered by the right of use. The preemption right for other shareholders could be prescribed by the JSC Articles of Association. Moreover, the restriction and prohibition on the encumbrance of shares can be provided for in the JSC Articles of Association. In the process of alienation, shares must be transferred from the seller’s security account to the buyer’s securities account. The transfer of ownership is also registered in the Central Securities Depository.
Liability
A member of the board of directors must fulfill his obligations with sufficient effort. Members of the board as well as members of a supervisory board are liable for damage caused to the company if they carry out their duties with negligence or deliberately cause damage to the company.
How long does it take to register a company?
If you are an e-Resident of Estonia and have an e-Residency card then we will be able to register a company for you within one business day. If you are not an e-Resident of Estonia, then we will register a company for you via a Power of Attorney which takes up to 5 business days.
Can I open a bank account in other country for my Estonian company?
Having an account in Estonia is not mandatory
Since 2019 is allowed to use any European bank or optionally, payment institutions (Wise, Paysera and etc) for your company in Estonia, and that includes being able to pay the share capital.
In the case that you have a specific reason to opt for this alternative, you will need some documents, including registration and company bylaws, which must be notarised, translated by a sworn translator, and apostilled with the Apostille.
We can help you with this, as we offer a pack that includes registration, payment of the share capital, a sworn translation of the bank statement into Estonian, or any other language with an apostille, and support in the registration process of the share capital contribution.
Taxation
The Estonian taxation system became famous since 2000 when the taxation of Estonian residents – legal entities by the corporate tax was abolished. It is simple and liberal. Income tax has only one flat rate. The system of taxation is established by tax law.
Existing state taxes:
– Income Tax (from the income of non-resident legal entities and resident individuals)- 20%
– Value Added Tax(VAT): 20% as of the 1st of July 2009
– Social tax:33%(20%- social insurance and 13%-medical insurance)
– Unemployment insurance Tax (as of 0.1.01.2013): 0,8% from an employer +1,6% from an employee
– The funded pension deposit- 2%
– Excises(tobacco, alcoholic beverages, fuel, transport, packaging );
– Gambling Tax;
– Land Tax
– Heavy Vehicle Tax
Taxpayers
Taxpayers are residents and non-residents, both legal entities and individuals. The term legal entity includes a company, a public entity, a non-commercial organization or a fund, a permanent establishment.
A legal entity is the resident of Estonia if it is established in accordance with the Estonian legislation and registered in Estonia. The branch of a foreign company is considered as a permanent establishment.
An individual is the resident of Estonia if it has a permanent place of residence in Estonia or stays in the country for more than 183 days during any of the consecutive 12 calendar months.
The registration requirements
Taxpayers registered in the Commercial Register (a company, a branch and etc.) will automatically be included in the taxpayer’s list. Non-residents may be registered by tax and customs authorities under certain circumstances (for instance, a company acting as an employer or having permanent establishment.)
In order to obtain a VAT number a separate registration is needed from the tax and customs department of the Republic of Estonia. To this end, a company must have (or it must arise in the near future) turnover in the meaning of the value added tax act and a place of business in Estonia. A tax supervisor has the right to ask for confirmation of it.
A company, non-EU resident, in order to have VAT registration, must either register permanent establishment or appoint a tax representative.
From 1 July 2014 the amendment of the Taxation Act establishing the employment register, where all the natural and legal persons providing the work are required to register the persons employed by them with the Estonian Tax and Customs Board will enter into force. Since that moment the employers will not be required to submit the data on the employed persons to the Estonian Health Insurance Fund.
Taxation of the permanent establishment
A permanent establishment is a place of business by means of which a non-resident entirely or partly carries out an economic activity in Estonia. It also arises when there is a representative of a non-resident who is entitled to carry out and repeatedly carries out business transactions in Estonia.
All expenses and other payments made by the permanent establishment not related to its business activities, made through or on account of the income, are subject to income tax. Special benefits, gifts, and donations are also subjects to taxation.
Avoiding double taxation
Estonia has signed an agreement for the avoidance of double taxation with Belorussia, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Kazakhstan, Latvia, Lithuania, Moldova, Netherlands, Norway, Poland, Sweden, Ukraine, USA, UK, and other countries (total of 51). The number of agreements is on the increase.
Income tax (residents)
Is there an income tax in Estonia?
There is no tax in Estonia on income received by legal entities – tax residents of Estonia.
A company’s profit is subjected to taxation only when the profit is distributed among owners. It also occurs in case of company’s capital reduction (if it was increased by fund emission), during the allocation of property after liquidation (in the part that exceeds capital payment). Expenses and other payments not related to business activities, special benefits, gifts, and donations are also subject to income tax.
An income tax is charged on amount paid out.
If Estonian taxpayer receives an income in a foreign country during the taxation period then the income received in that foreign country is added to the taxable income, and an income tax paid or withheld from this income in a foreign country is credited from tax amount payable in Estonia. Tax credit could not be applied in case if it is imposed in foreign country on income which is not subject to tax in Estonia.
If an income tax rate in a foreign country is higher than it is in Estonia the sum of an overpaid income tax is not compensated.
Estonia as a holding jurisdiction
A special clause in the Income Tax Law makes Estonia attractive as a holding jurisdiction.
In accordance with this clause, both corporate tax and withholding taxes are not the payable case if the income is received in form of dividends from a tax resident company of a Contracting State or the Swiss Confederation (except for companies located within a low tax rate territory) and at least 10 percent of such company’s shares or votes belonged to the company at the time of deriving the dividend;
Exemption condition also exists for income received from permanent establishments of Estonian companies in foreign jurisdictions in case the income tax has been charged on such profit in a foreign jurisdiction.
Income tax is also not payable by the natural persons – tax residents in Estonia if income tax has been paid on the share of profit on the basis of which the dividends are paid or if income tax on the dividends has been withheld in a foreign state.
The above condition makes Estonia attractive as a place for tax residency for natural persons in certain cases.
Income tax (non-residents)
So-called the principle of the income source comes into effect in relation to nonresidents. Nonresidents pay taxes only on income derived from Estonian sources.
Dividends – no withholding tax;
Interest – no withholding tax in case if interest rate does not exceed the market rate. In case the rate is higher than the market rate, the tax is payable from the difference between the market rate and the interest rate paid.
Royalty – the tax rate is 10 %, however, it may be less according to double tax treaty conditions or may be nil according to the EU directive (Interest and Royalty Payment Directive).
The capital gains – the tax rate is 21% for resident individuals, and 0% for resident legal entities and non-residents.
Income tax is charged in case of alienation of shares in a company, contractual investment fund or other pool of assets of whose property, at the time of the transfer or during a period within two years before the transfer, more than 50 percent was directly or indirectly made up of immovables or structures as movables located in Estonia and in which the non-resident had a holding of at least 10 percent at the time of transfer.
Salary – the tax is payable if the place of employment is Estonia or in case of payments to members of governing bodies.
Value Added Tax (VAT)
The standard VAT rate is 20 % of the taxable value.
The taxable persons are entrepreneurs including legal entities of public law, state, rural, and city organizations.
Persons whose turnover exceeded 16000 euros as calculated from the beginning of the calendar year must register for VAT purposes in the Tax and Customs Board. The taxation period is one calendar month. VAT returns must be submitted to the Tax and Customs Board by the 20th day of the month following the review month.
The reduced rate is for: books, medical equipment, pharmaceutical products, periodicals, excluding erotic, pornographic and commercial, and accommodation services.
The land tax
The land tax is determined on the grounds of the land assessed value. The tax on land is paid by a land owner or in some cases by a land user. The land tax rate is 0.1-2.5% on the assessed land value annually. The tax rate is set by the local self-government not later than the 31st of January of each taxation period (calendar year).
Local Taxes
Local taxes are imposed by standard legal acts on the part of municipal foundations, rural or city councils in accordance with Local Tax Act.
The following local taxes may be imposed: sales tax, boat tax, advertisement tax, road and street closure tax, motor vehicle tax, a tax on keeping animals, and entertainment tax.
Social Tax
Social Tax is a financial liability imposed on a taxpayer for the purpose of obtaining income necessary for the payment of state pensions and medical insurance.
Social Tax is paid by legal entities and individuals, non-residents with the permanent establishment in Estonia, State and local authorities and other persons working in Estonia who execute payments designated in the Social Tax Act such as salaries, payments to the members of the board of directors, special benefits, entrepreneurial income of sole traders, remuneration, paid to individuals on the grounds of an agreement of service.
The social tax rate is 33% on the taxable amount.
Customs duties
A customs duty is a charge formed on the grounds of a customs tariff. Customs duties are charged form the product’s cost imported to the customs territory of Estonia. A payer of customs duties is an importer. Customs duties are paid according to the procedure and within the time frame set by the customs policy.
Alcohol, tobacco, fuel, and electricity excise
Excise is levied on alcohol, tobacco, fuel, and electricity in conformity with the Alcohol, tobacco, fuel, and Electricity Excise Duty Act
Alcohol excise rates are set in the Act and are different for various types of alcohol.
Tobacco excise is levied on tobacco products, and revenue stamps on tobacco products. The excise rate for cigarettes consists of a fixed rate for a thousand cigarettes and a commensurate rate calculated on the grounds of a maximal retail price of a cigarette.
Fuel excise is levied on motor fuel, motor oil, and fuel oil produced in Estonia or imported to Estonia. Excise rates are given in the Act appendix.
Gambling Tax
The tax is imposed on amounts received as bets from a totalizator or bets; gambling tables, gambling machines, that are used to organize gambling activities; amounts received as bets from gambling not held at gambling tables and gambling machines; amounts received from selling lottery tickets in lotteries carried out in conformity with law. The gambling tax is paid by organizers of gambling games. Rates are given in the Gambling Act.