Opening a Tax-Free Company in Estonia: Things You Need to Know
If you want to open a tax-free company in Estonia, it's not so easy. A business that is registered here is not completely tax-exempt. For example, the company should pay corporate income tax. But it is entirely exempt from income tax, as long as the income is not distributed directly (in the form of dividends) or indirectly (through material benefits to the owners or employees).
What you should know about Estonian taxes
Income tax in Estonia is calculated monthly and only after profits have been redistributed. The standard rate is 20%. If dividends are paid regularly, the company pays only 14%.
The rate for exported products that are produced in Estonia also depends on the distribution of profits. You do not have to pay tax if:
- You have not distributed income to shareholders and owners.
- Profit was not distributed even after the end of the fiscal year.
It is beneficial to have no tax on undistributed income when the money is needed to finance the company's operations and it helps it develop and thrive. It's a great option for new entrepreneurs who don't have a budget for promotion.
If your annual taxable turnover is less than €40,000, you do not need to register for VAT in Estonia, it means that you don't have to pay value-added tax or file monthly reports or pay monthly accounting fees. Accordingly, the company does not need a VAT registration number and no organization can refuse to provide services to such a business entity.
A company whose turnover is less than €40,000 can also voluntarily register as a VAT payer, but the tax office may refuse to do so if there are no transactions with clients who work in Estonia. If the threshold is exceeded, it is necessary to register as a taxpayer within 3 working days.
In this case, the VAT rate is as follows:
- Regular - 20%.
- A reduced rate of 9% applies if the company is engaged in pharmaceutics, selling medical products, or printed media.
- A 0% VAT rate applies if the company provides services to clients from other countries. To avoid the value-added tax, during the financial operations it is necessary to provide the client's registration number of the VAT payer, the reference to the reverse charge mechanism, and then the client should engage the tax authorities of their country. The algorithm may not work if you provide a service to the end user.
If the company overpaid the tax, the money will be returned to a special account and can be used to pay other fees.
Tax and employees
Whether you have to pay taxes for your employees depends directly on their citizenship. For residents of Estonia, the company has to pay 33% social tax. If the employee does not live in the country and is not an Estonian citizen, your company does not have to pay it.
Other tax advantages
- Estonia has signed double taxation treaties with many countries, so you do not have to pay twice.
- In 2016, the list of offshore jurisdictions, for which you had to pay income tax was abolished.
- Buying vehicles or real estate for the company is possible without paying VAT.
- If a company does not pay salaries to employees or does not have a VAT number, there is no need to submit reports to the tax authorities.
- Entrepreneur and their employees who pay the tax, can use free medicine. In the future, they will be eligible to claim an Estonian pension.
How to start a business in Estonia
To register a tax-free company in Estonia 2022 contact IT-OFFSHORE experts.