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Why You Should Register a Company in Estonia

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If you are thinking about registering a company in Estonia, then you are in the right place. Within this article we will go over the benefits, the ins and the outs of creating, registering and managing of your very own EU corporation.

Estonia has been creating such a buzz all over the world because it is arguably the best location to form a future-facing organization. The nation’s e-Residency program offers an innovative way for entrepreneurs to establish and manage their digital ventures. E-Residency enables digital entrepreneurs to start and manage an EU-based company online from anywhere in the world. With e-Residency you have access to the Estonian government’s e-services, which enable you to carry out everyday operations 100% digitally and remotely.

4 major benefits of starting your own Estonian company

There are many benefits to forming your business in Estonia. Below are the four primary ones.

  • 100% online formation and management — By far, the most important advantage of forming a business in Estonia is that, once you get your e-Residency card, you can start and manage your company from anywhere in the world. As an e-resident, you can digitally sign documents and contracts, declare Estonian taxes online, and use online banking services in Estonia. You do not need to be present in Estonia to manage your enterprise.
  • 0% corporate income tax on profits kept in the company — Estonia has a unique corporate income tax (CIT) system which differs from traditional systems. In Estonia, profits earned by a company are not immediately subject to CIT. Instead, CIT is only due when you take the profits out of the business (e.g., in the form of dividend). Profits retained in company accounts or reinvested and used for business purposes are not subject to CIT. 

This taxation structure means that the shareholders of can control when they pay CIT taxes by deciding if, and when they distribute the profits.

  • Presence in the European single market — Estonia, as part of the European Union, is part of the largest international single market in the world. Member states and their citizens enjoy the economic benefits of removed trade barriers and the ability to travel freely between member countries. A shared currency and harmonized corporate laws between the member states, among other EU member privileges, and ease commerce and empower businesses to grow. 

Further, as a member state of the European Union, Estonia is a part of the Single Euro Payments Area (SEPA). Making electronic payments within the SEPA is as easy as making cash payments. Businesses formed in Estonia can make fast and secure transfers between bank accounts anywhere in the euro area. SEPA’s guidelines also mean better banking services for all: transparent pricing, valuable guarantees ensuring that you receive your payments promptly and in full, and banks assuming responsibility if something goes wrong with your payment.

  • Estonia has a great business environment — Estonia is consistently ranked as one of the world’s best business environments by various international indices. For example, in 2019, the World Bank ranked Estonia as 18th best in the Ease Doing Business category. A study published in 2019 by Tax Foundation, a US-based think tank, ranked Estonia as having the best tax code in the OECD for the sixth year in a row.

If these benefits have convinced you, launch your digital venture by forming a Estonian company, then your next step is to choose the right form for your organization.

How to open a company in Estonia

 

1. Choosing between different business types

When choosing an appropriate business form, you must first evaluate your opportunities and risks. You need to understand what type of company is best for your business, taking your goals and financial position into account. The most widely used business forms in Estonia are sole proprietors (FIE), private limited companies (OÜ), and public limited companies (AS). The forms of business differ from each other regarding the size of the required start-up capital, the number of parties in the company, the extent of proprietary liability, and type management organization.

What business form serves your needs best?

We recommend the private limited company solution for many of our clients because a sole-proprietor must annually pay income tax and a social tax on the earned profits. The owner of a sole proprietor is also personally liable for the obligations and debts incurred by the business. However, some entrepreneurs prefer a sole proprietorship because, unlike a private limited company, there is no start-up capital required to form a sole proprietorship.

Comparison of Estonian sole proprietorships and private limited companies

  • Sole-proprietors carry personal liability for all the obligations related to the activities of the sole-proprietor. With a private limited company, they limit liability up to the capital requirement (the minimum amount is EUR 2,500), until they pay the share capital in.
  • Taxation of sole-proprietors is more complicated than public and private limited companies. Sole-proprietors must annually declare their profits/losses, and their profits are subject to income tax (20%) and social tax (33%). Private limited companies may postpone their tax obligation until distribution (e.g., in the form of dividends), and such distributions are only subject to corporate income tax (not social tax).
  • The state fee to register a sole-proprietor is EUR 13. The state fee for registering a private limited company is EUR 190.
  • A sole-proprietor cannot employ himself in the company and pay a salary to himself, but may hire employees.

Despite the lower cost of entry, the tax and personal liabilities of a sole proprietorship make it a less attractive option for many entrepreneurs. Most of our clients choose a private limited company as their Estonian form of business.

2. Deciding upon the legal aspects of your company

Now that you have selected the form of business that serves your needs the best, proceed with deciding the crucial legal factors in your application process. No matter which form of legal entity you choose, may it me limited partnership or private limited, the need for this information is there.

Choosing the name of your company

One of the most important things that you need to decide during the company registration process is deciding your company name. The name you choose here is the legal name that your company will have on all the papers and registers, however you may still use a commercial name for your company and its business purposes.

As general advice, we recommend that you choose a name that is:

  • Easily spelled and pronounced
  • Distinctive
  • Indicative to the products and services you offer
  • Distinguishable from your competitors
  • Memorable

Legal address/virtual office

Now that you are sure about the name, the next thing you must be sure of is where your headquarters will be. The law requires a registered office with a legal address; it is how people, other companies, or the government can reach you since it will form part of the public record. If you form a legal entity that offers products or services in a physical location, all you need is to figure out where it will be, then rent the space and register it as the official address.

Alternatively, you can register your legal address at a virtual office, which offers many benefits over having a physical office space which requires day-to-day management and maintenance. Virtual offices are a great way to save money that you can put into better use within your business. These virtual offices also act as a contact person in a way that they act as a passive representative of the company and will forward all incoming post to you via post or e-mail.

Management board

In this stage, you must decide upon the people and the corresponding positions that you are starting your company with. Now, if you are starting a sole-proprietor (FIE) business, this is easy–you are the owner and the manager. In the cases of private limited (OÜ) or public limited (AS) businesses, the corporate structure, board members and the articles of associations play a significant role. This is because the board represents and manages the entire company. Members of the board may do transactions on the behalf of owners and the supervisory board.

In case you will register your business over the internet, there is a pre-made template, which you have to change to suit your business during the registration process.

3. Filing your incorporation documents and registering in the Estonian Commercial Register

To incorporate a business in Estonia, you must be physically present, make use of a proxy, or complete the transaction as an e-resident. For entrepreneurs who plan to build and operate their business remotely, the easiest method is to obtain an e-Residency card and register their business in the Company Registration Portal. Working with an experienced partner such as Incorporate in Estonia will enable you to complete this process quickly and hassle-free.

Once you have an e-Residency card, our team can assist you and establish your corporation directly in your name within just one business day.

If you choose not to become an Estonian e-resident, we can help you form your business in Estonia. Incorporate in Estonia will file the paperwork to the government and create your corporation for you in the e-Business Register, which is the national company registration portal. Then we will transfer it to you. This transfer may take place in person when you visit Estonia or by proxy, who has a power of attorney to act in your name. In either case, it requires notarization to complete the transfer. It can take up to 5 working days for all the information to be changed and reflected online.

Using an Estonian E-Residency card for your Estonian company formation process and management

Estonian e-residency makes your life a lot easier as it provides you an opportunity to administer the corporation from anywhere in the world. You can digitally sign documents and contracts, declare Estonian taxes online, and use online banking services. The average processing time to get an e-Residency card is one month, but it may vary based on demand and pickup location.

Using Smart-ID to register your Estonian company

Smart-ID is the easiest, fastest, and safest way to authenticate yourself online. It is a convenient mobile application that works as an identification solution for anyone that does not have a SIM card in their smart device but needs to securely prove their online identity. With using Smart-ID, you can log into e-services for online banking and signing documents. Using Smart-ID for personal identification is free, unlimited, and you can download the app on all of your Android and iOS smart devices.

Since the signature given by Smart-ID is equal to a signature given by an Estonian Mobile-ID and ID-card, Smart-ID users are now also able to establish an Estonian company online and remotely by using the benefits of Smart-ID. You just need to have an Estonian personal identification code from the e-residence card.

If you wish to use the benefits of Smart-ID and you are not yet an Estonian e-resident (meaning that you do not have an Estonian personal identification code), we can assist you in applying for Estonian e-Residency.

Power of Attorney: An alternative to E-Residency company registration process

Power of Attorney (PofA) enables the holder of the PofA to carry out transactions, such as incorporating a business and acting legally on your behalf.  PofAs are often used to conduct business or complete legal transactions through a representative when the natural person or the legal representative of the legal person wishing to conclude the transaction cannot take part in the transaction personally. For transactions requiring a notarized form, a PoA issued in a foreign country may be used if it is certified or certified by a competent official of the foreign country.

Our team is available to assist you in preparing the PoA. Once you notarize and legalize (if applicable) the PoA in your country and send the document via post to us, we can then conclude your company formation at an Estonian notary.

We also offer tailor-made solutions for more complex incorporation matters, such as setting up a public limited company or a company with licenses and authorizations. In addition, we offer and have companies that are ready-made which we can transfer to clients using PoA.

How quickly can you incorporate a company in Estonia using Power of Attorney?

Incorporate in Estonia can register your company as soon as we receive all the necessary documents. During the process, we will provide you detailed instructions on how to formalize the required documents. Because of our expertise and network of resources, we can establish an Estonian private limited company within one working day. The timing and necessary steps to transfer control of that company to you depend on many circumstances such as where you are located, how quickly we can receive an appropriate certified power of attorney, among other factors.

4. Share capital requirements

Usually, the minimum share capital of a private limited liability company is EUR 2,500. When you begin the formation process, you’ll decide whether to establish your company with distributed share capital or wait to input capital. You must make the contribution of the share capital before or at the time you distribute dividends or change the share capital amount at the latest.

Importantly, until the complete payment of the contribution by all the shareholders, the private limited company cannot increase nor decrease the share capital or make any disbursements to the shareholders. Estonia’s private limited company rules also provide that until the share capital is distributed, the founder of a company carries personal liability for all the obligations that are related to the activities of a private limited company. The law limits this liability up to the capital requirement (minimum amount is EUR 2,500).

5. Establishing and maintaining your payment and taxation accounts

To operate your business, you will need to have a business bank account and get a tax identification number.

Things you should know about opening your bank account

Requirements arising from different regulations have made the process of opening a bank account more complicated and expensive than they were in the past. To assist our clients and new entrepreneurs seeking support for Estonian business formation, Incorporate in Estonia cooperates with LHV bank, the biggest Estonian-based financial group in Estonia. We put forth our best efforts and previous experience to achieve your aims. Nonetheless, the bank makes the final decision, and it depends on circumstances that we cannot influence.

Because of their strengthened client acceptance rules, the bank will seek information enabling it to verify the background, origin of assets, and previous transactions of non-residential customers. As a prerequisite, the applicant’s business must have direct ties with Estonia, and the applicant must explain in detail how the business activity, owner, or management of the company is connected to Estonia. An Estonian company may also choose to have a bank account in a foreign bank.

Payment service providers as an alternative for traditional banks

As an alternative to traditional banks, it is also possible to apply for an account at a payment service provider (PsP) or virtual bank. The fees for opening this type of account can differ quite a bit between service payment service providers.

To open a PsP account, we will send you the application form and questionnaire to complete. We then forward these documents to the PsP’s compliance department for review. If the PsP accepts your application, we will contact and invoice you directly in regards of opening an account or/and to ask for additional documents. Until they open your account, we will mediate the communication and assist you with the documentation. In general, they make the account opening decision within 1-2 weeks following the receipt of all necessary documents.

Tax considerations for Estonian company formation

Once you form a company in Estonia, it will be liable under Estonia’s corporate tax rules. In addition, the corporation may be responsible for collecting or paying value-added taxes. The timing and rate of payment of these taxes vary.

Estonian corporate tax rates

As we previously mentioned, one benefit of company formation in Estonia is that corporate profits are not subject to CIT immediately. Instead, taxation usually occurs when you distribute the profits, such as when a dividend is issued.

Since 2019, the dividend payment tax rate has been 14% on the average regular dividend payments of the last 3 years if the recipient of the dividends is a legal person. If the legal person who received these lower rate dividends is paying out the received payments to its owners, who are physical persons in Estonia, there is an additional 7% income tax withheld. If the legal person who received these lower rate dividends is a non-Estonian company, the income tax rate is 14%. There is no additional tax upon forwarding those dividends as this transfer takes place outside Estonian jurisdiction.

2019 was the first year of this tax rate. One-third of 2018 of average distributed profits, taxed with income tax, can be taxed with this lower rate. In 2020, 1/3 of 2018 and 2019 average distributed profits can be taxed with a lower rate. And, in 2021 and beyond, it will be the last 3 years’ average distributed profits which have been taxed with income tax. The rest (2/3) of profits will be taxed with a regular 20% rate.

Estonian company formation and tax registration

In Estonia, a value-added tax (VAT) number is not immediately given to the organization. Until the company is not VAT liable, it acts based on a registration number that is also a tax number. Companies are free to choose whether they will voluntarily register for an Estonian VAT or do it later when they exceed the corresponding threshold. The difference is that a VAT registered company must include VAT on the invoice and declare it on the corresponding declaration. However, if a corporation is not taxable, the tax is not added to the invoice, and thus the total price of the service or goods for the customer is lower.

EU trade and VAT registration

If an Estonian company sells products or provides services that are not brought to or taken out of Estonia, the products and services are taxed according to the rules of the country where the turnover has arisen. However, if you register your Estonian company for VAT purposes, it may issue invoices for EU VAT registered companies with 0% VAT. Many of our clients register their companies for VAT purposes because their business partners throughout the EU prefer to cooperate with companies that have a VAT number.

The general VAT registration threshold is EUR 40,000 per calendar year. The company may voluntarily register itself for VAT purposes before they exceed the above-mentioned EUR 40,000 threshold. To register the corporation for VAT purposes, your company will need to apply to the appropriate tax authorities. Applications are usually processed within 5 working days. The process may take longer if the authorities require additional documents or information. Generally, requests for additional information are related to the analysis of whether the organization is engaged, or is planning to be engaged, in actual business activities.

Incorporate in Estonia provides VAT registration services for our clients. We also support you throughout the process, including providing legal advice about VAT registration possibilities.

We also provide EORI registration and LEI code registration services. If a company is registered for VAT purposes, then there is a need to compile and submit two (VAT and corporate income tax) declarations every month.

6. Ongoing accounting services and support for your business from Incorporate in Estonia

Businesses formed in Estonia should be familiar with Estonian laws and be prepared to communicate with tax and other authorities in the Estonian language. For these reasons, many of our clients engage in our ongoing assistance to fulfill their tax and accounting obligations after their Estonian business formation. To this end, we offer subscription-based and single-need services.

Our subscription-based packages include a license fee for the use of an accounting program and monthly monitoring of your accounting documents (e.g. reminders, etc.). Our services also include access to our accountant for consultations so that you can get instructions before making transactions or payments. In addition, our accountant will tell you which of your corporate costs can be covered by your corporation with no tax consequences and which costs cannot.

To use our accounting services, you will need to provide us with all the relevant documents such as invoices and bank statements that are needed to create your financial statements and annual reports.

Fees for these services will depend on the complexity of work and volume of transactions carried out through the Estonian company per annum.

At present, we unfortunately do not provide English online accounting. However, some of our English-speaking clients have found that they can provide most of the necessary information using an accounting program such as Quickbooks. Our accountant can then review the data. Such review services are charged based on an hourly rate. The exact budget depends on the input which is provided by the client and the work-load that will be required to complete the reviews.

Incorporate In Estonia is open for business during the pandemic. You can be, too.

Despite the declared state of emergency due to the COVID-19 virus outbreak, we continue to provide services for both our current and new clients. However, you may not travel to Estonia if you are not a citizen or hold a residence permit of Estonia. If you do not have an e-Residency card or do not wish to apply for one, we can establish the company under our name and transfer the shares to you remotely based on a Power of Attorney using the e-Notary system.

Estonia’s entrepreneur-friendly business environment makes it the ideal place to incorporate your company. If you are interested in registering your company in Estonia, let us help you sail smoothly through the process. Just give us a call, and we’ll get you started.

Disclaimer: This article provides general information, which may or may not be correct, complete or current at the time of reading. No recipients of content from this site should act on the basis of content of the article without seeking appropriate legal advice or other professional counseling.