Personal tax residency
First of all, regardless of your e-Residency status, you must always pay personal tax in the country in which you are a tax resident. It is very important to understand the difference between e-Residenct and residency – the first one is a digital status, the second one a physical residency with residential benefits and obligations. E-Residency does not necessarily mean you are an Estonian tax resident as an individual.
An individual is a tax resident in Estonia if
- his or her place of residence is in Estonia or
- he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months.
Generally, residents are taxed on their worldwide income in their state of residence. This means that the country where you submit your annual personal income tax returns requires you to tax income you have earned from everywhere else in the world. Generally, there are also both domestic as well as international measures in place to avoid double taxation if this income has already been subject to tax in the country where you received it from.
For that reason, you should have proof of taxes paid or taxes that have been withheld in Estonia always available to be presented to your local tax authorities. Local tax treatment could be different for each type of income (dividend, salary, directors’ fee) and it could also be affected by what has been agreed in the tax treaty your country has concluded with Estonia.
If you are location-independent, you should understand the tax system of your home country and any country in which you work for an extended period of time. Everyone’s personal tax situation is unique, so we strongly recommend you seek professional tax advice – from your home country or from your service provider´s tax specialist. In case tax advisors in your home country are not yet familiar with the term of e-Residency, please provide them with this explanation from the Estonian Tax and Customs Board.
Corporate tax residency
Estonia has a simple rule which says that a company is a tax resident in Estonia if it is incorporated under Estonian laws. If you have registered your Estonian OÜ, then this means your company is an Estonian tax resident and subject to tax in Estonia.
However, some countries have different rules for deciding if a company is tax resident. It is common that in addition to the place of incorporation, the place of effective management triggers (tax residence) (parem on öelda, et tekib püsiv tegevuskoht – Permanent establishment). If you run your company from a country with such rules, then the company might end up having (justkui) dual tax residence – this happens when two states believe that the company is tax resident in their jurisdiction and will want to tax the company’s profits. Nad usuvad, et neile õigus ärikasumit maksustada enda riigis.
In case business activities of this company are carried out elsewhere or the company is managed from outside of Estonia, the income received in a foreign state will be taxed (parem oleks: võib olla püsiva tegevuskoha korral maksustatud) in this foreign state and Estonia will ensure avoidance of double taxation. Estonian Tax and Customs Board has a list of all Conventions for the avoidance of double taxation.
Estonian tax system
In Estonia, income tax is not assessed on the profit earned every year. Income tax is assessed on a monthly basis and only when profits have been distributed (when you pay out dividends for example). The corporate tax rate is generally a flat 20%, calculated as 20/80 from taxable net payment. Since 2019, if regular dividends are paid out, a reduced rate of 14/86 may apply.
Estonia’s taxation system does have favorable features for investors — including a unique corporate income tax system that has worked well for almost 20 years — but a company can only benefit from it on its profit attributable to Estonia.
Besides corporate income tax, e-residents with businesses in Estonia will also need to consider the following Estonian taxes:
- 20% income tax from the director’s or member of the board management fee;
- 33% social tax from the director’s fee.
Find an overview of tax rates at the Estonian Tax and Customs Board website.
If your annual taxable turnover is below €40,000, VAT registration in Estonia is not obligatory. Learn more about VAT registration.
- NB! Please note that the information presented above is a generalization of a complex set of rules depending entirely on laws applicable in your state of residence and the treaty it has concluded with Estonia and is therefore only for illustrative purposes.
- Never rely on general advise, however, when it comes to taxation. International taxation rules may be complex and are dependent on the specifics of your business activities and location.
- Although international taxation is complex, having e-Residency can make the tax paying process more transparent and easy through e-services available in Estonia. For example, if you do owe corporate taxes in Estonia, you can declare all taxes entirely online.
- Silva Hunt has its own tax and legal consultant on the team who can help you figure out your tax situation – please contact us and book a consultation.
Tax residency basis on the EMTA website
Further information about corporate taxation on the EMTA website.
Further information by the Head of the Tax Department at the Estonian Tax and Customs Board (ETCB) on How do e-residents pay taxes?Why tax avoiders are disappointed in Estonian e-Residency