Although this is a modern solution for business management, e-Residency itself does not mean exemption from tax liability elsewhere, nor does it grant tax residency in Estonia.
Once an e-resident establishes a private limited company in Estonia, the company automatically becomes a tax resident there. To avoid any doubt – any legal person registered in Estonia is also a tax resident of Estonia. The fact that the e-resident is based outside of Estonia, with their place of management being elsewhere, does not nullify Estonian tax residency for the company.
However, as with any company managed from abroad, advice should also be sought in the country from which the Estonian company will be managed. This will help to establish whether a local Tax Authority may consider the Estonian company liable for income tax there, on the grounds that the company is to be managed from that location.
For example, a private individual from Sweden has decided to incorporate a company in Estonia to manage his international block-chain consulting business.
Sven is an ordinary tax resident in Sweden and manages his Estonian company from his home in Gammelstad. It is possible that tax authorities in Sweden may claim that the permanent place of business is Sweden and thus Swedish income tax shall be charged on the profit of the Estonian company. Once income tax has been already paid in Sweden, dividends from Estonian company can be distributed tax free in accordance with the amount of income tax, which had already been paid in Sweden.
Several different scenarios for Sven:
- Sven decides to distribute dividends. In this case it does not matter where the management of the company is located, as 20% income tax becomes payable upon the amount of dividends distributed on a company level. On a personal level however, Sven declares his personal income in Sweden and pays the tax accordingly.
- If Sven decides to pay himself a management fee, then he has to obtain a Form A, which confirms that he has social insurance in Sweden. Form A is available here https://www.emta.ee/sites/default/files/eraklient/tulu-deklareerimine/deklaratsioonide-vormid/2017/vorm_a_2017_eng_taidetav.pdf
If Sven obtains Form A, then from any management fee he pays to himself, 20% shall be deducted as the income tax in Estonia and social security tax is to be payable in Sweden.
If Sven does not obtain Form A, then from any management fee he pays to himself 20% shall be deducted as the income tax in Estonia and 33% social insurance shall also be paid to Estonia.
- Sven has decided to relocate from Sweden to Estonia, both being EU countries, and continues to conduct his business from Estonia, to which he is liable to pay 20% income tax, 33% social insurance tax, and 0.8% tax against unemployment.
- As a member of the Board, Sven can opt not to pay any salary or managerial compensations to himself and thus his company does not have to pay income tax and social security tax in Estonia and/or Sweden.
For more information about taxation in Estonia please visit the official website of the Tax Administration in Estonia: https://www.emta.ee/eng/business-client/registration-business/e-residents
As e-residents are subject to different tax regimes in their home countries and in Estonia, diligent and careful tax planning is essential in order to avoid unforeseen tax liabilities.
We strongly recommend our customers seek professional tax advice from a tax attorney or chartered accountant in their home country to understand the regulations associated with management and ownership of a company in Estonia.
Please note that this article was prepared for informational purposes only and does not constitute any tax advice whatsoever.