#Estonia is a jurisdiction often discussed among #entrepreneurs
and #businessowners. It is especially popular
with #locationindependent entrepreneurs or #digitalnomads.
Estonia is the only country in the EU where corporate
profits are not subject to current income tax. Instead a corporate income tax
is imposed only upon the payment of a dividend to the company’s shareholders.
Unfortunately there is much misunderstanding.
Here are 7 key points to consider before
using Estonia as a jurisdiction in your corporate structure.
- If you’re US exposed, and control an Estonian
entity, you may not be able to defer taxation until profit distribution because
of Subpart F and GILTI rules. In fact, because
of Subpart F and GILTI, distributions may be taxed at ordinary rates despite
the US – Estonia Tax Treaty –https://www.mooresrowland.tax/2018/02/us-exposed-owner-of-international.html
- If you’re US exposed, and are a shareholder in
an Estonia entity (may be a minority shareholder), you may not be able to
invoke the benefits of the US – Estonia Tax Treaty because of Article 22 or the
Limitation on Benefits clauses. Here’s a
link to the treaty and please pay attention to the residency rules –https://www.irs.gov/pub/irs-trty/estonia.pdf
- Being an e-resident of Estonia is not the same
as being tax resident or resident for immigration purposes. https://learn.e-resident.gov.ee/hc/en-us/articles/360000721597-Estonian-tax-basics
- If you are a controlling person of an Estonia
entity and are tax resident elsewhere, then you may create nexus or permanent
establishment (depending on whether or not, you reside in a treaty
jurisdiction) in your country of residence and local tax rules may apply to
both yourself and the Estonia entity. If
this happens, then both the country of effective management and Estonia will
want to tax the worldwide income of the Estonia company. Be careful -https://learn.e-resident.gov.ee/hc/en-us/articles/360000721597-Estonian-tax-basics
- Should you decide to be properly tax resident in
Estonia, please note that, like most of Europe, they tax residents on 100% of their
worldwide income https://learn.e-resident.gov.ee/hc/en-us/articles/360000721597-Estonian-tax-basics
- Taxes may be due on Director’s fees (if any) https://www.emta.ee/eng/business-client/income-expenses-supply-profits/tax-rates
- If you cross the threshold, which is presently
turnover in excess of EUR40k, then VAT becomes payable – https://learn.e-resident.gov.ee/hc/en-us/articles/360000871738-VAT-registration
Now let’s get into the details of Estonia.
Estonia is not a tax haven – https://medium.com/e-residency-blog/heres-why-tax-evaders-are-disappointed-in-estonian-e-residency-2322644f5f59
Some see Estonia as the number one start-up technology country in Europe and one of the
top in the world. The most recognizable technology company with Estonian
roots is Skype, which was acquired by Microsoft in 2011 for $8.5
There are a number of reasons why a country as small as Estonia is
producing this many technology companies, including a stable economic
environment (i.e., Estonia’s economic freedom is regarded as one of the highest in
the world and the best in the Central and Eastern European (CEE)
region); the population of Estonia has the highest average level of education
in the CEE region; and the country is supported by a tech-savvy government (an
example of this is Estonia’s “e-residency” program, which allows non-residents
to establish local businesses and bank accounts, and operate them remotely
after only a single visit to Estonia).
Another significant advantage offered to companies doing business
in Estonia is its unique corporate income tax system. Estonia
is the only country in the EU where corporate profits are not subject to
current income tax. Instead a corporate income tax is imposed only upon the
payment of a dividend to the company’s shareholders (and upon payments deemed
equivalent to dividends, such as certain gifts and donations, fringe benefits
to employees, etc.) This allows companies to defer paying corporate income tax
indefinitely so long as the profits are retained or reinvested. Once a dividend
payment is made, a flat corporate income tax will be imposed at the effective
rate of 20 percent.
It is important to note that, while the corporate income tax is triggered
upon the payment of a dividend, the tax is imposed on the corporation itself,
not the shareholder. Therefore, it cannot be reduced pursuant to the EU
parent-subsidiary directive or an income tax treaty that Estonia is a party to
(although the corporate income tax can be reduced by any income tax withheld on
payments received by an Estonian entity).
Profits can, however, be repatriated without triggering corporate
income tax if the amounts are paid in the form of interest, royalties or other
types of payments, so long as they are not actual or deemed dividends. Profits
also may be loaned to third parties or within corporate groups without
triggering corporate income tax, which allows for tax efficient opportunities
for intra-group finance activities. Note
that proper Transfer Pricing policies may be advisable
Other notable tax benefits available in Estonia include the lack of
thin capitalization rules (i.e., no debt to equity requirements); no
withholding tax on interest or dividends to non-residents (or on royalties
paid to EU residents or Switzerland); and a wide network of income tax treaties
with countries around the world.
Use in U.S. Tax Planning
Income earned through a U.S.-controlled foreign corporation typically
will not be subject to U.S. federal income tax until such time as its profits
are repatriated to the United States in the form of a dividend. An important
exception to this rule exists for income classified as “subpart F” income under the controlled foreign
corporation (CFC) rules.
Talk to your adviser before making important financial decisions