A person liable for VAT is obliged to submit a VAT return on a monthly basis. In case there is no turnover in the reporting month and no acquisitions subject to reverse taxation, a declaration with zero amounts is submitted. A declaration of intra-Community supply is submitted only if there has been any intra-Community sales in the reporting month. An entrepreneur with employees must submit a declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension (form TSD) on a monthly basis.

If a company has no contractual employees, it has to submit the form TSD only for the months in which profit has been distributed as dividends or other profit distributions, fringe benefits have been given to employees or other expenses not directly related to the company’s business activity have been made (presents given, fines paid, etc).

A company is obliged to submit an annual report to the Commercial Register within 6 months after the end of the financial year.

General residency, also known as citizenship, applies to private persons and is determined by that person’s passport, whereas tax residency is determined by taxation laws in different countries. Simply put, tax residency is where you pay your taxes as a private person. A private person is considered a resident if he or she stays in the country for at least 183 days over the course of a period of 12 consecutive calendar months.  From a company’s point of view, tax residency is basically in the country where it is established.

Neither tax residency nor e-residency are citizenships.

A company is a tax resident in the country where it has been established and registered, under the law of that country.

In case a company is set up in one country but operates in another, the possibility of establishing a permanent establishment in the other country arises. A permanent establishment is an economic entity through which the company carries out permanent business activities in another country. Thus, the company is not only taxed in its state of establishment, but the activities of its permanent establishment are taxable in accordance with the legislation of that other state. So, when starting your business, it is important to assess whether the risks of permanent establishment may apply to your company.

A permanent establishment arises as a result of the company’s business activities through its branch, office, factory, activities of mobile nature or as a result of its activities through a representative authorized to enter into agreements on behalf of the non-resident company.

A company that starts business through its permanent establishment in a foreign state has to register with the tax authorities of the state before starting operating.

So, the establishment of a company in Estonia does not automatically exempt from paying income tax in a foreign country if the actual activities take place there or other taxable income is received from a foreign country (dividend, interest, license fee). Thus, when establishing a company abroad and doing business across borders, the national laws of all the countries must be taken into account.

Bilateral conventions for avoidance of double taxation (tax treaties) have been concluded between states, by which the states agree to what extent the residents of the participating states may be taxed.

It is important to know in which country you are tax resident so that the taxes will be paid in that country. If you live and work in Estonia, then you are the tax resident here.

There are two options for paying salary to the board members:

• First, there is an option to register you as an employee with an employment contract. In this case there is a monthly minimum salary that needs to be paid in Estonia. This does not mean that you cannot still receive the dividends or board member fees. This should be paid in case the employee works in Estonia. Regular taxes applicable are 20% personal income tax, 33% social taxes, 1,6% + 0,8% unemployment insurance tax and 2% for mandatory funded pension contributions
• The second option is the management board member agreement. In this case there is no official minimum salary, also no unemployment security tax and therefore no protection against unemployment. The board member can have Estonian social security only if the salary is at least the official minimum salary in Estonia and paid here (tax resident of Estonia). It´s particularly important to understand that dividends cannot be an alternative to an official salary, as dividends are not taxed with the labour taxes.
  
  

If individuals to whom an Estonian company pays salary under an employment contract are not Estonian residents and live and work in a foreign country, taxes on their salary are not declared or paid in Estonia. Declaration and taxation occur in the country where the work is performed. These individuals must present a certificate of non-residence, meaning they must prove that they are not Estonian residents.

If a member of the board of an Estonian company, who resides and works in a foreign country, receives board member’s salary, income tax and social taxes are paid in Estonia on that salary. If the individual presents an A1 certificate, social taxes are paid in the country from which the certificate is issued. A1 certificates are issued by other EU countries.

There may be a tax risk in Estonia: a non-resident working and living in a foreign country under an employment contract is not required to pay taxes in Estonia, but when receiving salary based on a board member’s contract, taxes must be paid to Estonia. If there is only one person in the board of the company, and that person is also involved in managing the company, it is logical (although not legally required) to receive salary for these duties. However, if the salary is received solely under an employment contract, there is a risk that the Tax and Customs Board may treat (part of) the salary as board member’s salary and demand taxes on it. There is no obligation to pay salary to a board member; this is not required by any valid law but is a recommendation from the Tax Authority. There is a risk in the air, which may materialize with some probability, and our intention is to inform you about this risk.

You can find more information on calculations of salary in here.

Before paying any dividends, share capital of €2500 must be paid in and registered with Estonian Business Register. Dividends are taxed with 20% of Income Tax. There is also lower rate of 14% which is available on the fourth year after the company has started paying dividends. The amount of dividends at the lower tax rate of 14/86 is based on the average taxed dividend and equity distribution for the previous three years. If the lower rate dividends are distributed to a private person then additional 7% of personal income tax applies.

Also, dividends can only be paid from retained earnings (previous year’s profits) based on the Annual Report submitted for the previous year. It is not allowed to pay dividends on current year’s profits.

Tax reporting for dividends is submitted with wages and social tax declaration for 10^th date of the  following month after the payment. The due date is also the term for the income tax payment.

Firstly, you need to make a payment from personal account to company’s account with description “share capital payment.” For this payment, you need your bank to provide digitally signed confirmation. Bank will send you the document on the request.

Secondly, application to Estonian Business Register needs to be submitted to change company’s details along with proof of payment from bank.

Thirdly, application to Estonian Business Register to change statutes (includes shareholder’s decision) needs to be submitted.

Grow Finance can process the second and third step for you for service fee of €100 plus VAT.

Estonian Commercial Code Act § 159 and 281 set out that Private Limited Companies and Limited Companies are not allowed to lend money to their shareholders whose share is bigger than 5% of share capital in Private Limited Company or bigger than 1% in Limited Company. Similar restriction for loan applies company’s parent company’s shareholder or other members. Also, it is not allowed to give a loan to company’s member of the board or procurator.

There is exception where subsidiary is allowed to give loan to parent company or parent company’s shareholder or board member if this does not damage financial position of the company or interests of the creditor.

The labour taxes on salary are paid in the country where the work is done.

The income tax for the board member fees is paid to the country, where the company has been registered, but the labour taxes to the country, where the person´s social insurance lies (usually it´s the person´s country of residence and it´s the same in all of the EU countries). If the person moves to Estonia, the labour tax is also paid to Estonia (also called social tax in Estonia).

The system of corporate earnings taxation in force currently in Estonia shifts the moment of corporate taxation from the moment of earning the profits to the moment of their distribution. Annual profit earned by companies is not taxed in Estonia. Income tax is paid on dividends and costs not directly related to a company’s business activity, such as fringe benefits, gifts, donations and other non-business related disbursements and also adjustments of the transfer price. So, profit earned and reinvested in a company’s business activity is not taxed. Hence, there is no obligation to submit a tax return annually, regardless of profits or losses. Income tax is assessed monthly, thus taxable amount is declared monthly.