I hear a lot of fuzz going on about the Estonian e-Business so decided to dedicate an article to it.
What is the Estonian e-Business?
Estonia provides you with the opportunity to set up an Estonian company fully online without the need to set a foot in the country.
We should applaud this digital way of working. Definitely for digital nomads, this is an easy way to get your company registered from distance without the need to visit Estonia. You can also file all follow up documents and compliance (e.g. annual reports) online.
You should know that an e-Business isn’t a particular type of company or legal structure. It just refers to the fact that you incorporated the company fully online. Just like any other country, Estonia has various types of companies available, something for everybody’s needs.
Other Estonian digital initiatives
Apart from the e-Business, Estonia also advertises its other digital applications in a proficient way.
There is for example the e-Residency you can obtain. This residency is open to every person, irrespective your nationality. Again, I welcome the digital way of working of the Estonian Government and they seem to be way ahead of a lot of other administrations. However, the e-Residency is often mistaken for a proper residency permit. This isn’t the case at all. The e-Residency just provides you with the possibility to communicate with the Estonian administrations in a digital way. You will for example need the e-Residency to set up your Estonian e-Business.
Furthermore, Estonia encourages their people to handle all their other arrangements with the government electronically (e.g. income taxes). Yet, this can’t be seen as a special regime or something alike that is completely different from what other countries (try to) do.
Nonetheless, when you set up your business, a local advisor should be involved. Most of the time, they can take care of any arrangements that need be made locally. In this way it remains a fully digital process for you in any case. That’s also what I do when I help digital nomads with setting up their tax structures.
Why the Estonian e-Business is worthless?
Although Estonia makes it easy for digital nomads to set up a business in the country, I am not necessarily a fan of setting up an Estonian e-Business. Below I’ll describe why this is the case.
Estonian corporate tax
The corporate tax rate in Estonia amounts to 20%. This is definitely not a terrible rate, but it isn’t great either. There are many other countries, for example Georgia or Bulgaria, where you can find a lower corporate tax rate. Furthermore, as from 2025 the corporate tax rate will rise to 22%.
The good thing about Estonian corporate tax is that it will only become due if you take money out of the company. As long as you reinvest the proceeds within the company, you don’t need to pay the corporate tax.
Estonian personal income tax
If you plan to pay yourself a remuneration as the director of the Estonian e-Business, you will pay personal income tax on the remuneration. As you receive this remuneration as a director of an Estonian company, you will in principle have to pay Estonian personal income tax on it. The personal income tax rate is also a flat 20% tax rate.
Having a company in Estonia and receiving (most of) your income from a local company could have further impact. Estonia could deem you to be a tax resident in the country. This would make you liable to taxes on your worldwide income in Estonia.
Apart from personal income taxes, you also need to take social contributions into account. You will need to pay social contributions on the wage you take out as a director of your company. The rate of the social contributions is 33%.
Other corporate tax
So far, not so bad. We established that if you work via an Estonian e-Business you are liable to income taxes in Estonia. However, most people opening an Estonian e-Business barely spend time in Estonia. Furthermore, they will a lot of times not declare themselves as a tax resident in Estonia. The only reason they are using an Estonian e-Business is that it can be easily set up online.
This also means that if your company is a one-man show, you probably don’t actually manage your business from Estonia. And this might cause you problems.
If you are a tax resident in another country than Estonia, they might have some rules in place in order to tax the companies profits although it wasn’t set up in this country. The reason is again that they will find it hard to believe you are actually managing your company from Estonia. Even more because the Estonian e-Business is promoted for the fact that it can be managed fully online.
Even if you’re not (yet) a tax resident somewhere but you spend a lot of time in a certain country they might deem that you are running your business from their country. From a tax point of view, they will call this a permanent establishment. And if you have a permanent establishment in the country, it has the right to tax (part of) your companies profit. If you are lucky, there is a tax treaty between the concerned country and Estonia and you will only pay in one of both countries. If you are unlucky and there is no tax treaty, you might end up paying in both countries.
Conclusion: Estonian e-Business
Estonia did a good job in putting their Estonian e-Business in the market. Therefore, it attracts a lot of people. However, if we look at it from a taxation point of view, the Estonian e-Business is probably only suitable for you if you are actually an Estonian tax resident yourself. And even in that case, it is not so tax efficient if you take into account all income taxes and social contributions. If you don’t plan to become a tax resident in Estonia yourself, you might just cause yourself more problems by incorporating there. You could even end up paying taxes in multiple countries on the same profit.
If you want to make sure, your corporate setup is tax proof, reach out to me to have a discussion about your personal situation.