Advice for e-Residents – Taxes Made Simple

Estonia ranks first in the International Tax Competitiveness Index 2024. In addition to using a unique corporate income tax model that promotes reinvestments, entrepreneurs can pay all Estonian taxes fully online with minimal effort. This competitive tax system, combined with the e-Residency Programme, has attracted many foreign entrepreneurs to start a business in Estonia.

Although the e-Residency Programme allows foreigners to establish and manage a company entirely online from anywhere in the world, running a remote business also means navigating the complex world of international taxation. E-residents must comply with Estonian tax laws, the tax laws of their country of residence, and those of any other countries where they operate. They must also consider double taxation agreements and regional tax treaties. Careless or uninformed actions can lead to double taxation or, in the worst-case scenario, penalties.

The following provides a short overview for e-residents managing a company in Estonia. Please note that this is for general information only. If you require specific advice, our tax experts are here to assist you.

The Four Horsemen of Taxes

E-residents managing a company in Estonia should consider four main tax categories:

1. Personal income tax

2. Corporate income tax

3. Value added tax (VAT)

4. Social taxes

Personal Income Tax

Rule of thumb: Declared in the person’s main country of tax residence.

Personal income tax is paid on individual earnings (such as salary, board member fees, rental income, or interest income). As a general rule, personal income tax is declared and paid in the country where the person is a tax resident.

Most e-residents live outside of Estonia and are therefore not considered Estonian tax residents. In such cases, they do not need to declare personal income tax in Estonia.

Example: An e-resident from Germany pays themselves a salary as an employee of their Estonian company. The salary must be declared, and personal income tax must be paid in Germany, where the person is a tax resident.

There is, however, one exception – if an e-resident pays themselves a management board member’s fee from their Estonian company, that income must be declared and personal income tax paid in Estonia.

An e-resident may also become an Estonian tax resident if they decide to settle in Estonia for a longer period. A person is considered an Estonian tax resident if:

• their place of residence is in Estonia; or

• they stay in Estonia for at least 183 days within 12 consecutive months.

Example: An e-resident from Finland pays themselves a salary from their Estonian company and moves to Estonia. After living in Estonia for at least 183 days in a year, they become an Estonian tax resident and must therefore declare and pay personal income tax in Estonia.

Because the conditions for tax residency are similar across many countries, a person might occasionally be considered a tax resident in more than one country. Fortunately, Estonia has double taxation agreements with over 60 countries, protecting taxpayers from being taxed twice.

Estonia applies a flat personal income tax rate of 22%.

Corporate Income Tax

Rule of thumb: Declared where the company is a tax resident and/or managed and/or has a permanent establishment (can be multiple countries).

There are three key principles:

• An Estonian company is automatically an Estonian tax resident, meaning it must pay corporate income tax in Estonia (unless a double taxation treaty states otherwise).

• E-Residency ≠ Tax residency – e-Residency does not exempt companies from foreign tax obligations.

• Corporate income tax is paid only upon profit distribution (e.g. dividends, fringe benefits, gifts, donations). If profits are reinvested rather than distributed, no corporate income tax is due.

Even though an Estonian company is automatically a tax resident of Estonia, it may also be considered a tax resident elsewhere – for example, if it is effectively managed from another country or has a permanent establishment there.

Example: An e-resident based in Portugal operates an Estonian IT-services company from their home office and mainly serves Portuguese clients. The Portuguese tax authority may determine that the company is effectively managed from Portugal and/or has a permanent establishment there, creating tax obligations in both Estonia and Portugal.

Having dual tax residency does not necessarily mean double taxation. Estonia has signed tax treaties with over 60 countries to prevent this.

Companies that are tax residents of Estonia pay a 22% tax on distributed profits (calculated as 22/78 of the net distribution).

Value Added Tax (VAT)

Rule of thumb: Declared in the country where the company is registered as a VAT-liable person (can be multiple countries).

Unlike corporate income tax, Estonian companies are not automatically VAT-liable. A company must register for VAT in Estonia only if its annual taxable turnover in Estonia exceeds 40,000 euros. If the company operates entirely outside of Estonia and remains below this threshold, there is no obligation to register or pay VAT in Estonia. Voluntary registration is, however, possible.

Example: An e-resident from Norway runs an Estonian company that earns 35,000 euros in Estonia per year. The company does not need to register for VAT, but if turnover exceeds 40,000 euros, VAT registration becomes mandatory.

Estonia applies a standard VAT rate of 24%, with reduced rates of 13%, 9%, and 0% for specific goods and services, and some exemptions.

Social Taxes

Rule of thumb: Declared where employees are located or registered (can be multiple countries).

Generally, social taxes are declared in the country where employees reside or are tax residents. If your Estonian company employs staff based in Estonia, you must register and pay Estonian social taxes – 33% social tax and 0.8% unemployment insurance premium on gross salary. The same applies if you are employed by your own company.

If employees are located abroad, the company may also have to register and pay social taxes in that country – local rules apply.

Example: An e-resident from Hungary works for their Estonian company alongside one Estonian employee earning a gross salary of €1,000. The company must pay €330 in social tax and €8 in unemployment insurance premium for the Estonian employee, and pay social taxes in Hungary for the e-resident according to Hungarian law.

Conclusion

Although Estonia’s tax system is transparent and simple, tax obligations may arise in different countries depending on specific circumstances. Ultimately, it is the entrepreneur’s responsibility to determine where and how to pay taxes. Given the complexity of international tax rules, this can be challenging. If you need help assessing your tax obligations or would like advice on how to structure your business efficiently, our tax experts are here to help.