Part 2. ABC: e-Residency and founding an Estonian company.
Updated: Mar 27, 2021
What's the e-Residency, how to apply for the e-Residency, what's the tax rate and how to set up a company were covered in the previous article. In this article we're going to write about the management of the company - VAT, accounting and reporting and paying for yourself.
5. If and when do I need a VAT number?
If the taxable annual turnover of your company exceeds 40 000 euros (in Estonia), you are required to register the company with the Tax and Customs Board as a VAT payer. If the turnover is below that limit (in Estonia), registration is not obligatory.
The general VAT rate is 20% of the taxable value of a good or service.
A 0% VAT rate is in effect for a number of goods, including exported goods, and consultation services provided to VAT payers in another EU member state. A 0% VAT rate also applies to services provided outside Estonia. For a full list of the VAT exemptions, consult the VAT Act.
6. How do I pay for myself?
As a (tax) resident of any other country than Estonia, you are able to receive funds from your company in 3 ways:
receive management board member salary
receive employee salary
According to the existing law in Estonia, there is however no obligation to pay yourself or any other member of the board dividends, management board member salary or employee salary, at the same time you have the chance to combine them all.
7. What is the tax rate on salary?
Dividends are taxed with 20%
Board member salary is taxed with 20% personal income tax and 35% social tax (unless you are already paying social tax in any of the EU countries)
Employee salary. If you are a non-resident of Estonia and do not work in Estonia, no personal income tax nor social tax are paid on employee salary in Estonia. In that case, you are responsible for paying taxes in the country where you are a tax resident as an individual person. In case of interest, you need to be able to prove to Estonian authorities that the real work was performed outside of Estonia. However, your tax arrangements abroad are not their concern here.
8. Accounting and reporting
All companies and branches of foreign companies operating in Estonia are subject to accounting requirements. Every company’s accounting must conform to the standards set forth by the state, so that the results would be comparable and comprehensible.
1. Accounting must be a true, objective and comparable view of the company’s financial situation, operating results and cash flows. The information presented must be salient.
2. All economic transactions must be documented.
3. All economic transactions must be entered into accounting ledgers and journals.
4. Every company must prepare and file an annual report to the Commercial Register.
5. All accounting documents must be kept on file.
9. Annual Report
Each year, you will have to prepare and submit to the Commercial Register an annual report which gives a comprehensive overview of the company’s results in the previous financial year.
In addition to the above, you will also have to file other reports and declarations, depending on your form of business, structure and area of activity.
10. What other reports shall I file and when?
As a legal entity, your company is a taxable person. You have the obligation to handle tax reporting and file tax returns to the Estonian Tax and Customs Board, including the following returns filed on a regular basis:
Income and social tax, contributions to mandatory funded pension and unemployment insurance premium tax return (Form TSD) which must be filed each month if a company has contracted employees or the company has made taxable distributions. A company registered as a VAT payer must file Form TSD each month even if the company has no contracted employees or the company made no taxable distributions. In the latter case, the company will submit a tax return that contains all zeros;
Fringe benefits return (Form TSD Annex 4) if, for instance, you have provided a car to an employee to use for free or at a discounted price or you cover an employee’s expenses for recreation or entertainment, etc.;
Disclosure of gifts, donations and entertainment expenses (Form TSD Annex 5) if you have covered the catering and accommodation expenses of business partners, for example, etc;
Value added tax return if your company is registered as a VAT payer.
In addition, dividends and distributions from equity must be disclosed, as well as excise duties on goods and packaging, etc. The deadlines for submitting the reports are available in the tax calendar on the website of the Estonian Tax and Customs Board.
11. Can I open bank account for my company outside of Estonia?
Estonian company can have a bank account in any bank it fits it's needs, also outside of Estonia. Opening a bank account for the Estonian company in an Estonian bank requires currently a personal visit and opening of the account depends on the bank. Due to the strict Anti Money Laundering rules and regulations a bank might decline from opening one. This happens if the sources of income are not clear or derive from high risk countries, but also, if the authorities of the countries the founders are from are known for lack of cooperation, motivation or language skills.
A suitable option for small- and starting companies can be Wise (ex TransferWise) and Paysera.