Setting up an Estonian one-person company using E-ID

manual-section

#1

This topic is a linked part of a larger work: “Edgeryders OÜ Company Manual

 

Useful if you are considering setting up a company and fiscal residence in Estonia. Below some Q&As. You can get this, updated and/or additional information by scheduling a call with Leapin who are offering support services for micro businesses in Estonia.

Content

1. Practical info

2. Taxes

3. Procedure


1. Practical info

  • 3 ways of paying yourself: salary as a board member; salary as an employee; through dividends (the salary =/ monthly payment, it still means you are paid based on invoice).
      Recommended: board member, based on invoice. Companies with employees are discouraged in the current setup. The employee/board member recommended payment ratio is 17%/30% and the board member salary cannot be less 250 euros.

  • Income tax 20% + social security tax 33%: if you are paying social security in your residence country, you need to get a proof so you are exempt by Estonian authorities. The proof is an A1 Form from your local tax authority.

  • The tax is withhold every time when you pay yourself.

  • Rent / office space outside of Estonia is not considered a deductible expense.

  • There is no bank commission when invoicing from an Estonian company to another.

2. Taxes

2.1. In general

In Estonia we do not have a profit tax, so if you keep all the company income in the company or reinvest it, you will enjoy a 0% CIT. You will only need to pay taxes when you take money out of the company, so when paying a salary or taking out dividends, taxes apply. Please have a look at our FAQ section on receiving funds [here]: (https://www.leapin.eu/faq/receiving-funds&source=gmail&ust=1498113596810000&usg=AFQjCNFA_i79QjmLkf9fGr2S3hg2g8OGBw" href="https://www.leapin.eu/faq/receiving-funds). I have also attached an income tax calculator to this email for you to make the necessary calculations yourself.

2.2. How do we avoid double taxation in the countries where we reside?

LeapIN currently assumes that your Estonian company will be an Estonian tax-resident and LeapIN provides you the necessary tax compliance and reporting in Estonia. Typically the tax residency of a legal entity is determined by taking into account the incorporation address, the location of actual business processes and customers and value creation and the location of its management. Thus, the final decision depends on the local tax rules in all the locations mentioned. The motivation to change the tax residency of the company could come from external parties only (your country of residence in your case). In case this issue arises, the external party has to prove their point during the negotiations with Estonian authorities, taking into account the double-taxation avoidance agreements in place. As a result, the company could also become a tax resident in both locations.To facilitate the process, in many cases countries have agreed on double taxation avoidance agreements, which specify mutually respected rules how to classify a legal entity from the tax perspective. See the list of countries with which Estonia has double tax avoidance agreements.

If during the lifetime of the company, it turns out that your company will be a tax-resident in your home country (e.g. Belgium), then the tax reporting and compliance in your home country will be your responsibility. Unfortunately, at this time, LeapIN is not able to support you with tax compliance and reporting in your home country. You need to consult a tax consultant in your country for that.

2.3. Would we have to double up in accounting support in Belgium to handle our social security here?

LeapIN would only take care of your Estonian company’s accounting and tax compliance in Estonia and you would need to consult with a local tax consultant in your country for your personal taxes.

2.4. Dividends

Distributed profits are generally subject to a flat 20% CIT at 20/80 of the net amount of profit distribution. For example, a company that has profits of 100 euros (EUR) available for distribution can distribute dividends of EUR 80, on which it must pay CIT of EUR 20.

3. Procedure

The following are step-by-step instructions for how to set up a one-person company in Estonia, as an e-resident with an E-ID card.

3.1. Sign up for services by LeapIN

LeapIN takes care of all the accounting and acts as a helpdesk. You can ask for advice – for payment gateways, tax related questions etc. They communicate with Estonian authorities, receive your mail, digitize your mail and forward it to you.

To sign up for their services:

  1. Fill in your company background and other information.

    It’s a free no-obligation sign-up, but please note that LeapIN and later our partner bank use our input in our customer review process. One business day after you have signed up and completed your planned business description, LeapIN sends back an evaluation and suggested to-dos. It will take you about 10-15 minutes to answer the questions and you can start your sign-up on the LeapIN web-page here: https://www.leapin.eu/signup/

    LeapIN currently strongly prefers single shareholder/board member companies and our feature set is not yet complete for meeting the needs of multiple shareholder companies.

  2. Log in to leapin.eu with your e-mail.

  3. Authenticate yourself with your e-Residency ID-card on our onboarding dashboard. If you need to apply and pick-up the e-Residency ID-card before, see section “Getting e-Residency” and then proceed to step 3.

  4. Enter the required data (company details) and accept LeapIN Service Agreement.

  5. Pay for the company registration state fee (190 EUR), state service fee for online registration (25 EUR) and LeapIN service fee for the first month.

After completion LeapIN will continue with the company registration. Below you will find additional details to plan your roadmap for setting up your business and moving forward with LeapIN.

Fees. Our current offer is to start with LeapIN “Starter” plan which can be used until you start receiving revenues from customers. The price for the “Starter” plan is 49 EUR/mo (+ VAT). This period can last a maximum of 6 months, then you need to upgrade. There is no group package deal for more people who set up individual companies each.

3.2. Setting up the company

For a small single ownership company and as the simplest option, LeapIN helps you set up a private limited liability company. The Estonian business registry charges a fee of 190 EUR for registration. The minimum sum for the share capital in Estonia is 2,500 EUR. It is the money that you as an individual person invest into the business, can use for running the business and you have full control over it. It is allowed to pay in the sum later, once you have the company registered and up and running. With the e-residency card, the company registration is doable online within ca. 24 hours (on business days only).

3.3. Setting up banking without visiting Estonia

LeapIN’s partner bank LHV just postponed launching remotely opening a bank account to Q3 2017.

But just recently there were some news from Transferwise Borderless and Holvi and now it is possible to open up business bank accounts remotely using the services of these payment services providers. Please have a look at the different banking options and their differences. For a payment providers business bank account (IBAN) which enables receiving and sending money, we recommend using Transferwise Borderless or Holvi (only available for EU or EEA e-residents).

LeapIN supports you doing business with Transferwise Borderless and Holvi and if your business needs change, you can migrate to a standard business bank account (or use two business bank accounts with LeapIN in parallel). Please note: in order to receive a bank card or pay dividends or pay in the share capital, you still need to open a business bank account with an Estonian bank. The issue of paying dividends we expect to be solved by the end of 2017.

3.4. Setting up banking by visiting Estonia

The following will provide a standard business bank account and bank card.

For a standard business bank account with a bank card, LeapIN recommends opening a LHV bank account via LeapIN. For now, the LeapIN partner bank LHV requires a physical face-to-face meeting with a bank representative (due to anti-money laundering and counter-terrorism reasons). With LHV, first customers can start remotely onboarding a LHV bank account presumably in Q3 2017. Your company bank account application can be initiated after you have successfully registered your company. It takes ca 10-14 working days to receive acceptance from the bank. In Tallinn, you will need about 30 minutes on-site for the meeting with bank representatives.

Before opening a standard business bank account with LHV or similar, you can start with Transferwise or Holvi as a temporary workaround (see above).

For the banking fees with LHV, see their price list.


:green_book: Edgeryders OÜ Company Manual
#2

Social security?

How would social security work?

Here are some explanation concerning Belgium (this is the Caisse I am affiliated to). It’s not clear whether all this applies to sole traders (one-man companies) incorporated in a different country. I think not: when you apply, in the form you have to add as compulsory data your Belgian company number.

The other possibility is: the sole trader incorporated in Estonia pays social security in Estonia. Both income and social security contributions are then reported in the Belgian tax return. Belgium charges income tax (because we are using public infrastructure here), but not social security (because we get our pension from wherever we are incorporated).


#3

At this point we can choose I think

I keep reading and can’t figure out the best option. We need to talk about it, but here it is:

There are two type of salaries: (1) board member salary & (2) employee salary. The tax rates on the two type of salaries are:

  1. Tax rates of board member salary:

The board member salary is taxed with personal income tax (20%) in Estonia, independent on whether the actual duties were performed in Estonia or abroad. Double taxation here can be avoided by the relevant agreements between Estonia and your country of residence (see the list of countries here…). Such salary is also taxed with social tax (33%) in Estonia unless you can provide evidence that you are already paying social contributions in another EU country (A1 form, formerly E101). In the latter case, no social tax applies in Estonia.

To sum it up, if you receive 100 EUR net, almost 65 EUR are paid in taxes in Estonia, unless you have an A1 form (in the latter case taxes are ca 25 EUR).

  1. Tax rates on employee salary:

If you perform all the work outside Estonia (and thus, are treated as a non-resident in Estonia), no personal income tax nor social tax are paid on employee salary in Estonia. In that case, you are responsible for paying taxes in the country where you are a tax resident as an individual person. In case of interest, you need to be able to prove to Estonian authorities that the real work was performed outside of Estonia. However, your tax arrangements abroad are not their concern here.

By default, all salary payments you receive from your own company are considered as a board member salary. If you have a sufficient ground and can decide to register some of the salary as an employee salary, you can do it.

// Also, rent pay is not deductible! (adding it to the wiki now…)


#4

Ah, but this is “office” rent

We deduct everything on the Reef, because we treat it as an office + accommodation facilities for staff and guest… which it is. I checked it with both NJA and E-advisors. I think it’s defensible.

Also:

  • All income is declared in the country of residence, not in Estonia.
  • Income as director is easier to treat than income as employee – no "corporate interest".
  • The question is: "Can I, as a sole trader incorporated in Estonia under the e-residency scheme, join an Estonian pension scheme? If so, what are my options? If not, what should I tell to the pension schemes in my country of residence?" Example: in Belgium, the system is based on semi-public bodies derived from the 19th century mutualist system (http://www.xerius.be/en/about-xerius). This is obviously not designed for e-residents, digital nomads or whatever. It runs smoothly if you incorporate as a sole trader in Belgium. What is the Leapin experience in this? (BTW: at yesterday's seminar, the Leapin guy said that they have some expertise about Germany, because many of their clients are German.

#5

Also: setting up as a sole trader in Belgium

The one-time fees are actually cheaper than Estonia:

http://www.xerius.be/en/self-employed/set-up-sole-trader/


#6

and why

do you want to do this?  What is the benefit of it?


#7

Paying people

… while minimizing bureaucracy. Not a problem for incorporated sole traders like you or Matt or me. But Noemi and Nadia need to be in some kind of social/health insurance system. World is designed around employees, but that’s still a stretch for our limited admin capacity.

(also, being an incorporated sole trader is expensive and a pain in the ass. If we can find a better way to do it through Estonia, I am happy to shut down my incorporation in Belgium.)