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Company formation Estonia
Company formation Estonia has been popular among new startups especially due to its strong IT infrastructure, highly qualified yet cost friendly labor costs, EU membership and much more. Estonia is located in Eastern Europe, and has a land area of 45,000 sq km. The population is around 1.3m. The official language is Estonian Business sectors in Estonia include engineering, electronics, wood products, textiles, information technology and telecommunications.
Estonia: Types of Company
The two widely used company structures in Estonia are as follows:
Private Limited Liability Company
This type of company has its capital in the form of shares, owned by shareholders. Individual shareholders are not liable for the legal obligations of the company. A Private Limited Liability Company must have a management board that constitutes the body that gives strategic direction to the company. Members of the board must be legal residents of Estonia, though do not necessarily need to be a shareholder.
A supervisory board is required where the total share capital exceeds EEK25,000. It is a requirement of law that a Private Limited Liability Company has an auditor once the size of the company’s share capital exceeds the EEK400,000 limit.
Public Limited Liability Company
A Public Limited Liability Company’s share capital is comprised of public shares. As with a Private Limited Liability Company, shareholders have no liability for the company’s legal obligations. Details of shareholders must be recorded in the Estonian Central Register of Securities.
A Public Limited Liability Company is required by law to have a management board and a supervisory board. The former may be comprised of several members, none of which need be shareholders although 50% must be residents of the EU. The supervisory board, which is normally made up of three members, directs and organised the management board and ultimately makes the key decisions about the running of the company.
Taxation in Estonia
Company formation Estonia has a unique structure which may be highly advantageous for various type of businesses. All undistributed corporate profits are tax exempt. This exemption covers both active (e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.
The taxation of corporate profits is postponed until the profits are distributed as dividends. Or deemed to be distributed, such as in the case of transfer pricing adjustments, expenses and payments that do not have a business purpose, fringe benefits, gifts, donations, and representation expenses.
Distributed profits are generally subject to the 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.
However, the new government coalition has announced its plan to lower the CIT rate from 20% to 14% for companies who pay dividends on a regular basis. But it has be only in cases where dividends are paid to legal persons. Further details are still pending.
VAT rates in Estonia
The Estonian VAT standard rate is 20%. There is also a reduced 9% rate that applies to certain goods and services that includes books and learning materials, medicines and medical equipment, accommodation services,sanitary and toiletry products.
There are also goods and services exempted from VAT payment like transactions of securities and financial services. Insurances, postal, health and social services are also tax exempt. Property rentals, lottery, betting, gambling, education and transportation of sick people are also exempted from VAT payment in Estonia.
The biggest advantages of a Estonian limited company
- 100% foreign ownership and directorship allowed
- No withholding tax on profit distribution
- Excellent framework for business in the EU
- Low bureaucracy and clear rules
- Low startup and maintenance costs
- 0% corporate income tax on undistributed profit
The biggest mistakes when starting a business abroad
Many agencies and law firms do not advise comprehensively or wrongly. Learn what to look for.
Gravity of the situation
Often, these law firms think foreign companies are half-silk, tax evasion is favored and mailbox companies are the leaders rather than the exception. This is true, however, only in some start-up agencies that do not have the necessary expertise. Self-proclaimed law firms that do not employ tax accountants or lawyers usually set up companies that are unlikely to operate legally. We set up and look after companies that can withstand tax audits and that are legally operated.
Is physical presence required in the country where you wish to set up your company?
You can set up a company worldwide, as long as the respective country allows you as a foreigner to acquire shares in local companies or to act as a managing director. If this is not the case trustees can be used. For example, Cyprus allows every EU citizen to own and run a business. Nevertheless, trustees can be used for the purpose of identity protection. However, it is important that the management takes place locally, in the country in which the company is to be taxable. In addition, a permanent establishment must be set up. Without these, a major tax offices around the world do not recognize the company and in the worst case would require additional payment of corporate and business taxes plus late payment surcharges. We rent you a real office and set up a permanent establishment that meets all requirements beyond doubt.
Problematic Law firms: Privacy is not regarded.
Some law firms bind customers with toggle contracts and exert pressure when the customer wants to close his company. If you are a client of a law firm that has established a legally flawed company, they can be blackmailed. Because in the case of a fiscal problem, law firms without a license are not bound by a duty of secrecy.
Migrating to a different law firm
We receive many inquiries from customers who already own a foreign company and are looking for a new law firm. The process of changing law firm is made often difficult on purpose. Therefore, we have developed a principle of trust. If you are not satisfied with us and want to change, you can do that at any time. The necessary documents (resignation letter), you receive from us standardized after founding. You are therefore protected against unexpected costs and you are free at any time to visit another law firm. So far we have not lost any customer to another law firm.
Privacy / Firm Location
Your accounting documents are kept safe with us. In addition, all electronic data is stored encrypted and accessible only by us, which are bound to a professional secrecy. All accounting records are also stored locally only. Neither authorities nor hackers are able to access this data.
There are quite a few locations in the world that do not charge taxes on companies or individuals, or only estimate a very low flat rate tax. But this can rarely be used without corresponding change of residence. If you are a resident of any major country, the relevant double taxation agreement is decisive. Providers who promise otherwise lead them to tax evasion, which in the case of discovery usually punishes severely. We advise against setting up companies in countries that have already been blacklisted by the OECD. The foundation is usually very cheap, but the tax consequences in your origin country can be devastating. Since the introduction of the automatic exchange of information between almost all major countries, an anonymous private account no longer exists.
We comply with the following code:
- Legally secure foundations
- No unexpected(hidden) costs
- No false promises
- Finding the right solution by focusing on your requirements
With this strategy, we have been on the market since 2013 and have not disappointed any customer so far. And we prioritize it in keeping that way. We strive to ensure that every client is satisfied and does not take risks with the solutions we provide for them, but only exploits legal opportunities. Starting a company that involves doing real business is more costly than a letterbox company, but it is the only way to save on taxes without risking legal action.
Tax structure in comparison
Here are some examples of the tax differences between a highly taxed jurisdiction versus major tax havens.
|Belgian Limited (SPRL/BVBA)||Estonian Limited (OÜ)||Malta Limited (Ltd.)|
|Gewinn||100,000 EUR||100,000 EUR||100,000 EUR|
|Corporate tax||33% including. surcharge tax rate 3% Totally 36,000 EUR(36%)||14,000 EUR(14 - Starting from 1st of January 2018) Reduced to 0% on retained and reinvested profit||5,000* EUR (5%) Effectively reduced from 35%|
|Profit after taxes||64,000 EUR||86,000 EUR||95,000 EUR|
|Key advantages||Strong economy, highly reputed country||Tax exemption on reinvested profits, modern and technologically advanced infrastructure, ideal for start-ups||Stable and growing economy, high anonymity, low start-up capital|
|Tax burden||36,000 EUR||14,000 EUR||5,000 EUR|