Anyone here have experience with have a Estonian company?

tax
europe
estonia
incorporation

(Nyla) #1

Hi,

I’m looking to network with some people who have businesses based out of Estonia. I’ve read a few articles but I’m still unclear on a few things.

  1. Can you expense all the cost of running your business, with your company bank account/credit card? I’m presuming, yes??

  2. You can pay yourself a salary of less than €1200 without paying taxes, what’s the process to doing this?

  3. Bookkeeping, how does this work? How do you send your receipts to their bookkeeping services?

If you got a business based out of Estonia, I’d love to hear from your experience with basing your business out of there.


(Thomas Lidforss) #2

I would recommend, take a look at the Estonian company LeapIN . They offer
the following services; “LeapIN is a turn-key solution to set up a location independent company with a bank account. We handle incorporation, accounting, taxes and compliance.” You can do all the steps yourself but for the startup cost of €49/month I think this is a good starting step. Later you can quit service and take of all of it yourself with a tax/accounting services company you choose.


(Thomas K. Running) #3

I’ll try to come back and write a longer response in a bit, but briefly:

  1. Yes, as long as it’s a justified business expense
  2. & 3. If you’re using a company like LeapIN, then they take care of all of this for you. If you’re interested in their service I’ve negotiated a discount for Nomad Gate members. Use the code “NOMAD” when signing up to get €100 off.

(Nyla) #4

Yes, I’m definitely going to consider LeapIn when I’m ready to form the company.

Technically, I can expense where I live as operating cost as it is a home based business. Does this mean the leasing agreement has to be under the business name? It shouldn’t have to be right?

It’s like me traveling to a hotel and stay there, the hotel is consider a business expense. But my place of residence where I operate the business should also be too as well?

This gets kinda confusing with a location independent country.

I appreciate you taking the time to read and replying.


(Nyla) #5

Great, thanks for the coupon code.


(Thomas K. Running) #6

No, I don’t think you can deduct rent for your personal apartment, even if you work from there.

This is a list of costs that are not allowed to be claimed as business expenses (from this LeapIN FAQ):

  • Purchase of food and drinks for personal use
  • Purchase of clothes
  • Purchase of fuel for your personal car for everyday use
  • Rent of your house or apartment
  • Costs of holidays
  • Costs of your family/friends
  • Costs of personal healthcare, insurance etc

Check out that LeapIN FAQ, it’s quite useful :slight_smile:


(Nyla) #7

I was going to join LeapIN, but I read that you can’t do cash transactions. That’s kind of crazy, since most places you want to live and spend your time, won’t all have machines to accept cards. I was on a tropical island for 1 month with 2mb of internet. Or what happens if they are malfunctioning. You need to be able to withdraw cash to pay for your things.

The rules outline doesn’t make sense. You run your business out of your hotel, or wherever you are staying. So technically, it is a business expense but you can’t expense it. But you can expense your internet and phone bill?


(Nyla) #8

Are there other companies besides LeapIN?


(Thomas K. Running) #9

1office is also good from what I hear.

However, it’s my understanding that you can still pay for stuff in cash (using your own money) then reimbursing yourself from the company account using bank transfer. Just keep the invoices/receipts. What you cannot do is withdrawing cash directly from the company account. But I’d recommend verifying this with LeapIN just in case.


(Nyla) #10

Ok, thanks for the info. That’s good to know.

Do you have an Estonian based company? How are you finding it so far, if you do have one?


(Nyla) #11

Do you have a email or a point of contact from LeapIn so I can make all my questions to them.

The same to 1Office too?

I will need to set up a company soon, so I need to be clear on all these processes before I can start.

Thanks for taking the time to answer all my questions. I really appreciate it by the way.


(Thomas K. Running) #12

1office: tallinn@1office.co
LeapIN: info@leapin.eu

I do have one, but I mostly opened it for testing purposes. For now it’s only used for passive investment of a few thousand euros in index funds, so I don’t actually have any experience running an active Estonian company. Opening one is super easy, and compliance is definitely easy if you use LeapIN, 1office, or similar providers. For an active company paying salaries, VAT, etc, I’d say the monthly reporting requirement would be slightly annoying if you did your own accounting and reporting, hence why I recommend outsourcing that bit for an active business.


(Nyla) #13

Thanks for all this info. I’m going to check in with these guys.

Where did you pick to start a company, if it’s not with Estonia?


(Nyla) #14

Here’s an update on my Estonian Company research formation:

  • they have a very high tax scheme 53% in total for paying taxes there
  • 20% tax for paying board of director salary (which you have to pay when you have to pay yourself a salary)
  • 33% for social services that you are not entitled to collect because you’re not really a resident there.

So, their marketing is a big scam, to make it very easy and cheap to start a company in Estonia. But then they hit you with a 53% tax bill.

Do NOT form a company there if you are digital nomad. Their e-residency program is just a scam to get people to form a company easily in their jurisdiction and overtax the entrepreneurs that’s actually bringing money into that country.


(Thomas K. Running) #15

@Effortless.Success you have misunderstood how the board member salary works. You are not required to pay yourself all your salary as board member salary, it can be quite small (just the proportion of your time you spend actually managing the company, compared to how much time you’re actually working on growing your business).

You can pay yourself mostly in dividends and regular “employee” salary, depending on what’s best for your personal tax residency situation.

Let’s look at two examples. Say you’re making a profit of €5000 in a month.

Example one: Your personal tax situation makes dividends cheaper than salary

  • You assign yourself a total salary of €1000 (assuming you’re working 160 hours per month, that’s €6.25 per hour).
  • In a month, you spend 8 hours on tasks relating to managing the company. Keeping the same hourly rate, you can justify paying €50 out of the €1000 as a board member salary.
  • The €950 is only taxed where you’re personally resident, and the €50 is taxed 33% on the company side (€16.5) and 20%/€10 personally (meaning you receive €40). Note that the €16.5 tax only applies if you’re not resident in the EU or Canada and can not produce an A1 form proving you pay social taxes there.
  • Worst case, the company now has a remaining profit of €3986.50.
  • You either pay the rest as dividends or keep it in the company to grow with no immediate taxation. Assume the former, and you’ll pay €797.3 in corporate tax (20%) to Estonia. Dividends might also be taxed elsewhere depending on your personal tax residency of course. But say you’re utilizing e.g. the NHR scheme in Portugal (or any other scheme resulting in 0% tax on dividends), that’s not the case.

In the end you ended up paying €823.8 in tax to Estonia on €5000 profit (before paying salary), i.e. 16.48%. You’ve paid yourself €4176.2, which will probably be taxed some more depending on your personal residency.

Example two: Your personal tax situation makes salary cheaper than dividends

  • Although there’s no specific rules for how much you need to pay yourself as a board member salary, it’s probably smart to pay at least a little. But at a certain point, it doesn’t necessarily need to be proportional to your other salary, since the management tasks are fairly static. I’ve seen €250 mentioned as a ceiling for what’s needed, but you could probably get away with even less than that. €100 is probably fine.
  • So you want to pay yourself all your profits as salary. Let’s be generous with the Estonian tax authorities, and pay €250 as a board member salary. That will result in €82.5 in employer side social tax (again assuming you’re not living in the EU), €50 in income tax, and €200 is paid out as a salary.
  • You can now pay the remaining €4667.5 profits as regular employee salary, with no tax in Estonia. You might still pay tax where you a personally tax resident, of course.

In the end you ended up paying €132.5 in taxes to Estonia on the €5000 (2.65%).


(Nyla) #16

Hi,

Thanks for taking the time to explain this…but that’s not what the folks at Leapin said to me.

You have to pay board member salary. You can’t not pay an employee salary without paying a board member salary as well.

Here is their explanation:
Thank you for your reply! These are not restrictions made by LeapIN. These are how it works in Estonia. Each company registered in Estonia has to have at least 1 management board member. And if you establish your company without business partners and do not hire any external person to run the company on your behalf, you will be the management board member (apart from being the single owner of the company). If you start the company with a business partner, then at least one of you needs to take that role.

Since you perform the duties related to company management, usually the company pays ‘board member salary’ to you as the compensation. And as a rule, such salary is taxed both with personal income tax (20%) and social tax in Estonia (33%), independent on where you are actually based. Technically speaking, you receive the net sum, and the company pays both income tax and social tax on your behalf to Estonian tax authorities i.e. you (as a person, the board member) do not have to do anything else here. Thanks to double taxation avoidance agreements between Estonia and many other countries (e.g. Germany, Canada), there is no double taxation i.e. your board member salary is not taxed anymore in Germany or Canada.

As mentioned in my earlier email- "If you need to start paying out some salary, you are required to pay some board member salary as well to keep it fair enough. Usually people split board member vs employee salary as 20/80 or 30/70, arguing that majority of the work will be done as professionals (employees), but still, some company admin functions exist as well. "

  • receive dividends (you would need to pay 20% corporate income tax when you take the dividends out of your company, if you keep them in the company and e.g. reinvest them, then no taxes apply)

  • receive management board member salary (you would need to pay 20% personal income tax+ 33% Estonian social tax)

  • receive employee salary (not taxed in Estonia, you would need to pay social taxes in your country of residence)

So, as you can see.

  1. you have to be paid a board member salary, if you are a one-person show. They won’t allow you to receive employee salary, without paying a board member salary. They don’t consider it fair.

(Nyla) #17

But I see what you’re trying to say… pay yourself a low salary as a board member…so you pay lower taxes… And pay the remaining as profit for an employee…

Smart…hmm…I didn’t think of it this way…now I will have to re-consider.

Thanks.


(Thomas K. Running) #18

Just to add some extra details here. I wrote to the Estonian tax board with a few clarifying questions. This is my initial email:

And their response:

I’ve sent an email to the Social Insurance Board to follow up on number 1.

A few thoughts though:

  • Due to how most double tax treaties are set up, if you are tax resident in a EU country with low/no social security contributions but high tax on salaries (e.g. Denmark), you can lower your tax bill by effectively paying income tax in Estonia (20%) and whatever rate social tax is where you’re resident.
  • As long as you’re actually tax resident in a country where Estonia has a DTA, you generally shouldn’t pay tax on the board member salary where you’re resident (except perhaps social taxes, if applicable).
  • You have a lot of control over how much of which type of salary you pay yourself.
  • This, and many other aspects of the Estonia’s suitability as an effective corporate jurisdiction (as a solopreneur) depends in large part on your personal tax residency. It can be a good match for many “micro multinationals” but definitely not for all.

Also see https://www.emta.ee/eng/private-client/taxation-tax-system/e-residency


(Amadeusz Annissimo) #19

Hey Thomas, did Social Insurance Board ever get back to you on issue 1? I’ve been wondering the same thing.

From my research, I saw that you probably won’t get the health insurance coverage (unless you actually live in Estonia):

You become eligible for the national health insurance when your place of residence is registered in Estonia and…

Source: https://www.workinestonia.com/coming-to-estonia/health-insurance/

But maybe it counts to pensions at least?


(Lukas) #20

Wish I’d have seen an example like that before.

So for example two:
Assuming you live on Malta as a self-sufficient resident and spend 4 month per year on the island.
You’d pay yourself €4667.5 each month. (4x €4667.5 = €18670)
So your taxable income on Malta would be €18670, resulting in €1980.63 income tax.

The other 8 month of the year you could spend traveling around, still paying you €4667.5 a month without any income tax at all. Meaning you’d pay €1980.63 income tax on a €56010 yearly income.

Am I missing something here or is that what you could do with an Estonian company and a Maltese residency?