In businesses everything is structured. Weather forming a new company or combining already active companies need of creating a business structure and placement of shares may arise.
To arrange this we use term of holding structure – association that holds shares in subsidiaries or is defined as parent company. According to the Estonian Commercial Code, the criteria of being a parent company is majority in votes or controlling influence in another company.
Holding companies can be classified by function as following:
- Holding company with independent economic activity. The parent company is actively engaged in economic activities and its subsidiaries operate as agencies and branches in other countries.
- Administrative holding company. The parent company determines the principles and procedures for making and managing decisions in all subsidiaries, including strategic and capital flow management.
- Financial holding company. Such a parent company is mainly intended for asset management, it does not perform any control or management function. Holds and supplies capital to subsidiaries or new business lines and expansions.
- Organizational holding company. The parent company regulates the internal organization and allocates activities and responsibilities across business areas.
- Holding company as shareholder. The parent company acts as a shareholder and the economic activities are carried out in its subsidiaries.
Holding companies with all these functionalities can be established in Estonia. As an example headquarters providing centralised functions (marketing, human resources, financial and corporate governance) or holding companies with the aim of holding shares of subsidiaries.
The advantages of setting up the holding structure in Estonia are easy tax system, good economic environment, skilled workforce and good access to e-services.
7 reasons why Holding Company as a shareholder in Estonia is a good idea:
Business friendly tax system
The Estonian corporate tax system is unique in Europe as the profit for the financial year is not subject to income tax. This allows the taxation of profits to be deferred indefinitely and reinvest the earned profits. The income tax liability arises from the distribution of profits, which is usually the payment of a dividend. The tax burden on dividends is 20% and the tax amount is calculated on the net basis – on the amount of the dividends paid out.
A lower tax rate of 14% can be applied to regular dividends. In addition, there is a 7% withholding tax, which applies if the dividend is paid to a natural person. In the case of a non-resident individual, the withholding tax rate may be reduced by means of tax conventions. However, in the case of dividends paid to resident and non-resident legal entity, the final tax is 14%.
The business registry is an e-service. Establishing companies and making changes to the register is done online. Shareholders and board members can apply for e-Resident status and receive a smart card with a chip that allows access to all e-services, including the digital business register and documents. Further information on applying for e-residency can be found here: https://e-resident.gov.ee/eesti/
The holding company is 100% owned by its owner
A shareholder of a holding company can be both a shareholder and a member of the management board. The business register is public and changes to the register can only be made by a shareholder or board member. All changes will be notified immediately.
A shareholder may transfer his shares to another person in public notary with regular contract or on the basis of a simple written agreement if the shares are registered in the securities register.
The transfer of shares in a holding company is tax free
If a shareholder of the holding company decides to transfer his shares it is considered tax free in Estonian income tax law. The tax issue may arise if the property of the holding company is real estate located in Estonia.
The holding company shall not pay income tax on the purchase or sale of the shares in the subsidiary
If the holding company decides to sell its shares in a subsidiary located in Estonia or in other countries, the holding company will not be liable to tax on the profits arising from the sale of the shares. An income tax is only applied when the profit is paid out as a dividend. Thus, it is possible to sell shareholdings and use the capital tax-free for investments or to lend.
Acquisitions of shares in other companies no tax liability arises. Often, natural persons who own shares transfer them to their holding company. Participation in other companies can also be used to increase the share capital of the holding company.
Existence of professional service providers
There are a number of professional service providers in Estonia that provide the services required by e-residents to meet the requirements of Estonian law. Such requirements are usually the contact address, the contact person and the organization of accounting, the submission of the annual report and the tax report. The list of service providers is out in government page https://e-resident.gov.ee/marketplace/service-providers/. More information about us can be found here: https://www.silvahunt.ee
Professional tax advice
The main objective of holding companies is to improve tax efficiency. That is why it is important to get professional tax advice in order to find better and more cost-effective solutions for managing your capital, dividend flows and therefore reducing tax risks. Our aim is to help holding companies take full advantage of the tax system without adding extra costs or bureaucracy. If you find holding structure interesting and useful contact us right now.
This article was written by Silva Hunt Tax Expert Meelis Krautmann.
Meelis is a tax expert with 18 years of experience. He has led the legal department of Estonia’s tax and customs board and worked as a tax attorney.
Silva Hunt is a e-Residency service provider who offers a safe haven to active companies while being experienced in structuring holding companies.
If you are ready to open a Holding Company in Estonia or have questions about Holding Companies, write to Silva Hunt team firstname.lastname@example.org and we will get back to you.