A holding company is a business entity that is typically created to hold and control stocks of other companies. A holding company usually is incorporated as a limited liability entity, and its business operations do not consist of manufacturing or selling products or services to businesses or private individuals.
When deciding upon a jurisdiction about where to incorporate your holding company, there are many aspects, not just tax advantages, that need to be taken into consideration before making the final decision. Here are 10 reasons establishing a holding company in Estonia might be the right option for you.
1. You have the option to defer the taxation of your profits if you retain and reinvest them – this means a rate of 0% corporate income tax applies to such funds. The ability to do this somewhat compensates for the relatively high taxation percentage of 20/80. However, you can bring dividend taxation down to 14% if you make regular pay-outs.
2. The absence of legislation for under-capitalisation. This means that the people involved can finance the entity’s activities with loans.
3. The ability to apply the 62 Double Tax Avoidance Treaties that help shareholders get reduced tax rates. The number of agreements may not be huge, but many major Estonian trade partners are covered and are definitely important to take into consideration.
4. The ability to avoid double taxation of dividends in case the company has a 10% stake in another establishment that is a resident establishment in the EEA and distributes dividends to Estonia, per the Estonian Income Tax Act §50. However, this pass-through benefit does not apply to every cross-corporation re-distribution of profits as there are a few other criteria that must be met, which our accountants can evaluate for you.
5. Can request binding preliminary rulings per the Estonian Taxation Act §911.This enables you to get a response on your future plans and the taxation that will apply prior to setting your plan in motion.
6. Moody’s, an international rating agency, gave Estonia a score of A1 (stable) outlook in the annual credit analysis in 2021. Also, Estonia’s GDP has been on a steady rise ever since Estonia regained its independence in 1991. According to Statistics Estonia, in 2021, the national GDP at current prices per capita reached €23,642.
7. In 2021, Estonia ranked as the 13th on the Corruptions Perception Index, which provides a basis for a relatively stable political outlook and a trustworthy system. As Estonia is part of the EU, trading between other EU nations is simplified. Estonia is also part of many major worldwide organisations like the UN, OECD, and NATO.
8. The ability to conduct business completely online has been the standard since 2014 when Estonia launched the Estonian e-Residency programme. The e-Residency card gives the ability to sign and authenticate yourself over the internet and makes dealing with the government, public and private sector services very painless. In Estonia, you can have access to the internet basically everywhere.
9. Being part of the forward-thinking ecosystem where the local community and the government focus on developing innovative and impactful solutions. A prime example is the e-Residency itself and the number of unicorn companies that have risen from there. Also, Estonia is determined to become carbon-neutral by 2050 per the EU’s Climate Law, which demands and will most likely foster innovation.
10. Geographical location and the local infrastructure give Estonia an enormous advantage in local and regional trade. Being a neighbour to Russia, next to Scandinavia and having good access to rest of Europe - Estonia lies in the middle of many important freight routes and provides excellent support with its marine ports and roads. A perfect location if this aspect matters to you.
For a holding company in general, there are not a lot of requirements other than the ones that apply for the common private and public entities.
Before I get into the differences between them, I will shortly go over the similarities that are relevant in both cases to give you an overview.
· At least one founder;
· A business bank account in the European Economic Area to make the share capital contribution;
· Must have a local contact person if you will control and manage the business from outside of Estonia.
The fundamental difference between of using one or the other is that the management opportunities are a little looser for a private limited corporation. This is because an LLC does not need a supervisory board. A public limited entity needs one. However, a public limited business can be beneficial if you plan to take your establishment to a stock exchange, and because of this, all public company’s accounts must be audited. Neither one of these statements can be said for the OÜ. An OÜ needs to operate with high amounts of human resources or capital for it to have the necessity to be audited per the Estonian law.
When deciding about which entity to use, take into consideration the amount of minimum share capital that is needed. You can establish an OÜ with €2,500, which you also can defer until dividend pay-outs or until you change the share capital amount. Whereas you must establish an AS with at least €25,000 and must immediately make the payment and register the shares at a depository.
Finally, an AS must have an Estonian resident shareholder, and all shareholders must have an Estonian private bank account, which is not a requirement for the private limited corporation.
The way you go about registering a holding company again totally depends on which entity you incorporate. Registration of an OÜ can be quite simple if you and your fellow shareholders are e-residents and have e-Residency cards. You can do everything online and remotely using a trusted service provider like Incorporate or the e-Business Register.
The similarity in registering a public or a private establishment is that you can establish them using a Power of Attorney as well. This means that you and your fellow shareholders must sign a document that enables us to represent you at a local notary. Or you and your co-founders can visit an Estonian notary personally to form your holding company.
In case you wish to get more information about establishing a holding company in Estonia, please feel free to reach out to our team via our contact form. We would be happy to help you!
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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 counselling.