Time of establishment of the company
Estonia, former Soviet Republic, has been a member of the European Union since 2004. Estonia has one of the most liberal economies of Central and Eastern Europe. This, combined with low taxes and payroll social contributions, make this country very attractive for foreign investors.
Estonia is a fully digital country. What does this mean in practice? This means that almost all official, registration, licensing and administrative matters will be handled without leaving home. It is worth considering the consequences of such a system – it the end of contacts with offices in the office. Everything is done online.
Types of companies
There are several types of businesses for foreign investors:
- Limited liability company (Osaühing, OÜ)
The minimum share capital required to establish a limited liability company is EUR 2,500. The establishment of an Estonian OU presupposes the existence of one or more shareholders. There are no special nationality or residence requirements for the shareholders. The shareholders are not liable with their personal assets for the company’s obligations. A limited liability company must have a management board. The board is the body of the company which represents and manages the limited liability company. The board may have one or more members. A board member does not need to be a shareholder. A natural person with legal capacity may be a member of the Management Board. In Estonia, there are no special requirements for setting up bank accounts, it is sufficient to submit an identity document and fill in the relevant forms.
- Joint Stock Company (Aktsiaselts, AS)
The minimum share capital required to establish a joint stock company is EUR 25,500. At least half of the members of the management board must reside in Estonia. A joint-stock company should have its physical seat in Estonia. There is also a requirement to prepare audited financial statements.
- Limited partnership (UÜ)
It may be established by at least two partners. One of the partners must be a general partner, i.e. it is liable to creditors without limitation, and the other must be a limited partner, i.e. it is obliged to respond with all its assets up to the amount of the limited partnership sum.
- Civil partnership (TU/UU)
In TU shareholders are at least two or more partners, operating under a civil-law agreement. When a company withdraws or ceases to operate, the shareholders of the company are financially liable for all obligations of the company that arose before the date of cessation of operations.
Company registration procedure
Registration of the company:
- The registration of the company is preceded by the acquisition of an e-resident card of Estonia;
- The card is collected at the Embassy of Estonia in Warsaw;
- Thanks to the card, we can configure and register the company which is composed of:
- Preparation of the memorandum of association of the company;
- Preparation of the Company’s articles of association;
- Appointment of a contact person residing in Estonia and the address of the company;
- Registration of the company in the register of entrepreneurs;
- Opening of a payment operator for the company, possibly an account after a visit to Estonia.
The registration of the company can also be done with a notary public.
There are no restrictions on the number of shareholders, however, a minimum of one shareholder is required to establish the company. Foreign shareholders and nominees, who may be natural or legal persons, are allowed.
The board may have one or more members, they may be shareholders.
The supervisory board is only required if provided for in the company’s articles of association.
The company must have a registration address, which is guaranteed by the so-called virtual beet. If necessary, we can help you find a physical office.
Time to set up a company:
The time to set up a company is about 4 weeks together with arranging the e-presidency.
Taxes and finances
Tax residence of the company
A company is resident if it is registered under Estonian law and European Companies and Associations which have their registered office in Estonia. Residents pay tax on income from both domestic and non-domestic activities. Non-residents pay tax only on income earned in Estonia. CIT is not paid until the profits are distributed (e.g. as dividends).
From 2019 onwards, a rate of 14% will be introduced. Normal operating expenses may be deducted. Capital gains are treated as ordinary income and are accounted for in the same way.
Counteracting tax avoidance
Estonia has introduced a transfer pricing system – compliance with OECD standards. Related companies have to prepare transfer pricing documentation when exceeding a certain income threshold and transaction value.
The settlement period of the companies is the calendar year. Filing of the tax return and payment of the tax (unless it is deferred) takes place every month, by the 10th day of the following month. The time limitation is 3 years; in the case of intentional tax avoidance, it is 5 years.
- Dividends are not exempt from withholding tax under the Parent Subsidiary Directive due to the specific nature of the tax system (no CIT settlement in case of retention of income in the company).
- Interest is exempt from taxation, with the exception of those from the Estonian contractual fund or other pools of assets from non-residents.
- Royalties paid to non-residents – 10% rate, unless tax agreements or EU regulations reduce it.
- Fees for technical services – 10% rate if provided in Estonia.
The standard rate is 20% (reduced by 9% and 0% respectively). Entrepreneurs with an annual turnover in excess of €40000 are obliged to register. Non-residents supplying taxable products and services are also required to register. The tax return is submitted and paid monthly by the 20th day of the following month.
- Real estate tax – the owner or user is subject to an annual tax of 0.1% – 2.5% of the estimated value.
- Stamp duty – some transactions may be subject to insignificant stamp duty.
- Customs duty is levied on products originating outside the EU. Excise is levied on tobacco, alcohol, electricity and fuel.
Local labor law
Estonia is used by our clients for various economic purposes. The fact that taxes are settled only at the moment of distribution of profits to shareholders’ property makes Estonia one of the most interesting jurisdictions in Europe.
Remember to contact your tax advisor before setting up a company to discuss aspects of taxation of dividends paid, as these can be relatively highly taxed.
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