Estonian Business Operations- and Compliance Guide

Doing business in Estonia requires a clear understanding of local regulations, compliance requirements, and operational best practices. This guide serves as a comprehensive resource for entrepreneurs, e-residents, and business owners operating in Estonia.

From setting up your company with essential serv

ices and managing VAT obligations to understanding corporate income tax and reporting requirements, this article covers everything you need to ensure smooth business operations. Whether you’re just starting out or managing an established enterprise, this guide provides practical insights to help you stay compliant and succeed in Estonia’s business environment.

Official Data of Your Company

The official site for the Commercial Register is https://ariregister.rik.ee/eng. Visit it whenever you need to check your company details, download company documents including Articles of Association, Registry extract, Annual reports or update company information.

The nature of OÜ company is equivalent to a Private Limited Company, Limited Liability Company, SRL, SARL, BV, GmbH, etc., see more. It is not a sole proprietorship, even though you may be the only shareholder in the company.

Basic plan: Virtual Office and Contact Person, Sales- and Expense App

You have enlisted our Business Basic service plan, which includes essential services to get your business moving:

1. Virtual Office and Contact Person Service. This includes the receipt, digitization, and forwarding of your company’s mail communication to your specified e-mail address. A mandatory contact agent must be appointed by every company managed from abroad. Your Contact Person is our company Sunio OÜ which is a licensed and regulated legal body. Contact Person is not a natural person or any of our team members. We are authorized recipients of your company’s official correspondence from authorities, including but not limited to the Commercial Register, Tax Office, courts, etc. Your correspondence delivered to us is considered as delivered to your company.

When you registered a company in Estonia as a non-resident, similarly to the requirement to appoint a contact person for your company, you were also obliged to indicate the address of the location of the management board (outside of Estonia) in the Commercial Register which is publicly reported on your company registry documents. This is your company address where your company operations and management are carried out and would normally be the address of your office or home address in your country. While our address serves as the legal address of your company, necessary for official documentation and correspondence, your management address signifies the location where your company’s activities and operations are principally conducted. It is crucial to differentiate between the two as they serve distinct purposes and may have different implications for regulatory and tax purposes. More …

2. A dedicated user account in the accounting software SmartAccounts. This is your invoicing app and our accounting system. We will set up your account when you will have first sales invoice to issue. Please let us know upon this need.

3. A dedicated user account on the Document Reporting platforms – either CostPocket or Envoice. These applications have been designed to simplify the process of capturing and transmitting physical business documents to us.

For seamless accounting and compliance, we kindly request that you utilize the chosen app to scan and submit all tangible business-related documents, encompassing purchase invoices, receipts, contracts, among others.

Shortly, you will receive an email from our team with step-by-step guidance on setting up and navigating the app. We urge you to meticulously follow the provided instructions.

Furthermore, to ensure accurate and efficient accounting, please also submit your company establishment cost receipts and any invoice(s) you have received from our end through the app, as per the specified guidelines. By doing so, we can ensure these expenditures are appropriately accounted for and deducted in your company’s financial records.

Your Business Basic subscription is billed monthly at €19.00 + VAT. Failure to comply will result in the removal of our contact person from your company records, leading to non-compliance with the Commercial Code, potential penalties, and eventual unilateral deletion of the company by the Commercial Register.

We would like to respectfully remind you that in the event of any overdue fees, our services will be automatically paused the day following the due date of the fee. It is important to ensure that all payments are made promptly to avoid any disruption in services. We appreciate your attention to this matter and your continued partnership.

Bank Account

Applying for corporate bank accounts from Estonian commercial banks necessitates a verifiable business connection to Estonia. This could entail having team members permanently located in Estonia, transiting goods via Estonia, or engaging with core business parties located in Estonia. If your company provides SaaS and possesses a comprehensive business plan, you may be eligible for an account with Estonian commercial banks. Please be advised that account approval lies solely with the bank. While we can guide you through the application process, we cannot apply on your behalf. If the bank provisionally approves your application, a face-to-face identification meeting at the bank branch in Estonia is required to complete account activation. More …

Payment Service Provider (PSP) / Fintech Account

A Payment Service Provider (PSP) account is often a suitable alternative to a bank account as it provides multicurrency IBAN accounts and does not necessitate a business connection to Estonia. The application and activation processes are entirely online, requiring direct client submission due to online face recognition requirements. We can assist in evaluating different PSPs and obtaining essential governance documents, such as notary-certified Registration documents and Articles of Association. More information on bank and PSP accounts can be found here.

Company Documents

When applying for a bank-, PSP- or merchant accounts, notarized company documents may be required. These can be ordered online here.

VAT: Estonian VAT Number

Your company is registered without an accompanying VAT number, which must be applied for separately, if necessary. The Estonian Tax Authority issues VAT numbers based on your trading profile. In some instances, a VAT number in another country may be required due to the location of goods or services supply, or if conducting B2C sales. We can help determine your company’s VAT requirements. Upon receiving an Estonian VAT number, monthly VAT returns, and any payable VAT must be submitted and paid by the 20th of each month. Quarterly returns are not permissible in Estonia.

VAT: Estonian VAT on EU Purchases

If your company purchases SaaS, goods, or services from other EU countries but does not qualify for Estonian VAT due to the location of services/goods or the nature of your clients, Estonian VAT must be paid on these expenses. This VAT is non-reclaimable and non-refundable and is due by the 20th date of the following month.

Your business counterparts can verify your VAT number at any time at the European VIES System here.

VAT: VAT Number in Other Countries

If your company sells goods or services in countries other than Estonia, the VAT rules of those countries typically apply, necessitating VAT registration and administration in those jurisdictions. Your trading profile and client base (B2B or B2C) may subject your company to VAT in multiple countries. This also applies to Sales Tax and GST when trading with the USA or Canada. Various support services and e-commerce solutions are available; we can guide you through the options. Read more here and here. If your business will be selling digital goods (SaaS, online content, or -media), then visit about applicable VAT here.

If VAT number and -administration in other countries are required then this is to be arranged and cost bore by the Client. For VAT support in Austria, Belgium, Czech Republic, France, Germany, Italy, Netherlands, Poland, Slovakia, Spain, Sweden, United Kingdom we recommend our affiliate partner Hellotax. Use our dedicated Affiliate Partner Link with Hellotax to receive a 10% discount on their services. For VAT, GST or Sales Tax in other countries not listed here, we recommend our partner Sovos. You can contact them at www.sovos.com. If you have an accounting service subscribed with us, then our team will connect you directly with the Sovos team.

OSS/IOSS

The European One-Stop-Shop (OSS) solution facilitates VAT administration for companies trading in multiple European countries. VAT can be administered via the Estonian VAT reporting system. See more here.

Merchant Accounts

Upon company registration, you can apply for merchant accounts with platforms such as Amazon and Shopify, as outlined in your business plan. These platforms typically require certified company documents, and in some cases, an Estonian VAT number. See more on VAT with Amazon here. Please consult us for assistance if needed.

Share Capital

The share capital amount you selected during company registration must be transferred to your company’s bank or PSP account once opened. These funds can be utilized for operational expenses, investments, and other necessary payments.

The minimum share capital for a company can be set at €1. However, it’s essential to note that the designated share capital represents the risk capital committed by the founder(s) or shareholder(s) and should ideally be no less than €2,500. If you elect to register a share capital value below €2,500, the founder(s) or shareholder(s) may be held accountable for any shortfall, ensuring the company maintains a liability coverage up to €2,500. In circumstances where the company faces financial challenges, the potential risk exposure could extend to the entirety of the committed capital, which is, at a minimum, €2,500.

Principal and Multiple Activities

Upon establishment, the activity code assigned to your company was selected based on the information you provided us. In Estonia, companies are required to register one principal activity code, which is expected to reflect the main business activity of the company. However, it is important to note that your company is permitted to engage in multiple business activities without any limitations on the number or on the registered principal activity. If necessary, adjustments to the principal activity can be made with the submission of the next annual report. This flexibility allows your company to operate dynamically while remaining compliant with Estonian regulations.

Activity Licences

Although most business activities do not necessitate a license in Estonia, requirements may differ in countries where your customers reside or where you conduct activities. We advise you to verify this and consult relevant authorities before commencing any activity. Activities commonly requiring a license include training, education, medicine, investment, transport-related services, and handling food and health/dietary products, among others. This list is extensive and, on numerous occasions, licenses must also be obtained from Estonian authorities. For example, if your company sells food- or dietary products online, provides online training, transport services, etc. then an activity license must be obtained from Estonian authorities.  We are available to assist you in this regard.

Tax Reporting and Accounting Monthly Requirement

Under certain circumstances, Estonian companies must submit monthly reports, including VAT reports and reports on specific expenses and payments made by the company. If your company has an Estonian VAT number, your accountant must file a monthly VAT report, and any VAT dues must be remitted to the tax authority by the 20th date. If your company incurs expenses unrelated to the business, such as food/catering/restaurant expenses, or disburses salaries, director fees, or dividends, your accountant must submit a monthly income and social tax report. The resulting income and/or social tax are due by the 10th of the subsequent month. Monthly accounting services are essential to comply with tax reporting requirements as soon as you conduct any purchases or sales. Visit our accounting service plans here.

Tax Reporting Annual Requirement

Every company is obligated to submit an annual report (also referred to as the annual tax return) following the conclusion of the financial year. This requirement applies even if the company did not conduct any transactions or receive any income during the financial year. The annual report must be submitted within six months from the end of the financial year. Please be aware that delayed reports will incur penalties for the company, director, and shareholder until the report is submitted. We strongly recommend the timely submission of annual reports. If you have subscribed to any of our monthly accounting service plans, then the annual report service is already included there.

Financial Year

By default, your company’s financial year commences in the month it was incorporated and lasts for 12 months. For example, if your company was registered in May, the financial year is from May 1st until April 30th, and the annual report is due by October 30th at the latest. Please note that this is a sample and you should consult your company registry extract to determine the correct financial year.

Corporate Income Tax (CIT) in Estonia

It is crucial to understand that Estonia is not a tax haven, and your company will be liable for taxes similar to any other company worldwide. Estonia has a unique tax system where corporate income tax (CIT) is not levied on reinvested profits. As long as you reinvest the profits generated by your company and can justify the business-related expenses, your company will not be subject to CIT in Estonia. However, taxes owed to Estonia become payable when you distribute dividends or profits to shareholders. In 2024 and 2025, distributing dividends triggers a 22% CIT on the gross distribution, equivalent to 28,2% of the net distribution. Estonia’s CIT tax rate in 2024 is formally expressed as 22/78.

The Estonian corporate income tax (CIT)  system operates somewhat inversely compared to traditional CIT systems. Typically, in countries with classical CIT systems, the taxable base of the company must be calculated annually to determine the tax due. To do this, the company is allowed to deduct expenses related to the company’s business activities as per local law, which reduces the tax base and tax cost. In Estonia, instead of deducting such expenses annually, making business-related expenses does not have an immediate tax impact. This unique system provides an advantage for companies to reinvest their profits and grow their business without the immediate tax burden that is common in other jurisdictions.Top of Form

Starting in 2026, a 2% corporate income tax will apply to all businesses except non-profit organizations and foreign companies’ permanent establishments. Here’s a summary of the key details:

1. Implementation Period: The tax will be in effect for three years, with its continuation subject to the next government coalition’s decision.

2. Advance Collection: Taxes will be collected in advance, calculated based on the profit report from the latest or the preceding reporting period, depending on which is submitted earlier.

3. Avoiding Double Taxation: Taxes paid in another country will be credited (credit method) to prevent double taxation.

4. Equity Method Exemptions: Profits consolidated using the equity method will not be taxed.

5. Dividend Taxation: The principles for taxing dividends from subsidiaries remain unchanged. In most cases, dividends will continue to be exempt from taxation (exemption method).

Corporate Income Tax (CIT) in Estonia – Expenses Subject to Taxation

If a company incurs an expense not related to its business, it incurs an immediate CIT charge. Under the Estonian CIT system, all non-business-related payments trigger a 22/78 CIT on the net amount of the payment, payable in the following month. Compared to traditional corporate income tax systems, such payments are essentially “non-deductible” expenses.

Corporate Income Tax (CIT) in Estonia – Dividends Subject to Taxation

When distributing dividends, it is essential to adhere to the following requirements:

1. Ensure that the share capital has been paid and registered.

2. The most recent annual report must be approved with a digitally signed resolution by the shareholders.

3. When determining the dividend amount, ensure it does not exceed the retained earnings or undistributed earnings according to the company’s annual report.

4. The net assets of the company cannot fall below half of the share capital or the minimum share capital requirement of the company because of the dividend payment, whichever is greater.

5. As the shareholder(s), draft and sign the dividend distribution decision.

6. The respective accounting entries must be made.

7. Dividend payments must be declared on the tax report, and the tax due on dividend distribution must be remitted before the 10th day of the month following the actual payment.

Corporate Income Tax (CIT) in Your Country – Permanent Establishment

The term “Permanent Establishment” (PE) is formally defined by the OECD Model Tax Convention as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” Each element of this definition is essential for a PE to exist. Most countries have modelled their domestic definition of a PE in line with the OECD Model Tax Convention, and this is followed by a majority of effective tax treaties.

Another way of creating a PE is through individuals acting on behalf of the company, creating a “dependent agent” or “agency PE.” According to international practice, such a dependent agent is described as “a person acting on behalf of an enterprise who has, and habitually exercises, an authority to conclude contracts in the name of the enterprise in the other state.” Unlike a “classical PE,” this does not require a specific fixed location to be triggered but instead relates to the nature of the agent’s activities.

However, it is important to note that each country has a slightly different approach to PEs, and the specific domestic definition should always be checked. After looking into domestic law, be sure to also check the tax treaty between Estonia and the PE state. Tax treaties usually limit the existence of a PE compared to rules in domestic law. Understanding the nuances of PE is crucial for ensuring compliance with international tax obligations and avoiding double taxation.

Avoidance of Double Taxation – CIT and PIT

Estonia has entered tax treaties with over 60 countries to regulate the avoidance of double taxation on both Corporate and Personal Income Taxes. Essentially, the purpose of these treaties is to prevent the same income of a company or individual from being taxed by multiple countries. However, to benefit from the avoidance of double taxation, certain documentation must be organized from both countries involved. Our accounting team is here to assist you with this as part of your accounting service. Copies of all bilateral treaties are available here.

Taxes for Digital Nomads

Where digital nomads will owe tax typically depends on which country they are from and which citizenship they hold, how often they travel, how much they earn, and whether or not they have a permanent residence, where they have social- or economic interests, etc. There are also different requirements for paying personal tax as a digital nomad and paying corporate taxes.

As a general guideline, Digital Nomads are indeed subject to income tax. However, what needs to be determined is the jurisdiction(s) in which the tax is payable and the amount owed.

Salary for Employee and for Entrepreneur

Generally, an Estonian company must withhold 22% personal income tax (PIT) and apply a 33% social tax on salary payments for work physically performed in Estonia. Additionally, an unemployment contribution of 1.6% is withheld, and 0.8% is applied to the gross salary. However, if the work is not physically performed in Estonia, Estonian PIT, social tax, and unemployment contributions do not apply to salary payments as they are not considered to be sourced in Estonia. The income is taxable in the employee’s state of residence. If you have a non-resident employee who does not work physically in Estonia, you are not required to report anything to the employee register. However, payments made to non-residents must be declared on the monthly tax return. It is the responsibility of the employee to report any foreign income to the tax authorities in their country of residency. This is a crucial obligation as it ensures compliance with the tax regulations of the respective jurisdiction. Failure to report foreign income may result in penalties or legal actions by the tax authorities.

Work is typically classified as employee work when it involves operational duties, such as providing services to clients, organizing the sale and delivery of goods, developing software, etc. If you as an entrepreneur, provide these duties in the company by yourself and you wish to pay yourself a salary for the job, then you may also appoint yourself as an employee. To appoint an employee, you should draft an employment agreement, complete with a job description that includes all terms and conditions of the work and the specific duties of the employee. We can provide you with the necessary templates and guide you through the process. This is a crucial step in establishing a clear and professional relationship with your employees and ensuring compliance with legal requirements.

Directors’ Fee

A director is a member of the management board of the Company. Estonian law mandates a 22% personal income tax on directors’ fees paid by an Estonian company to a non-resident director. This aligns with tax treaties, which typically assign taxing rights to the country where the company is domiciled. Consequently, all directors’ fees are taxed in Estonia, with no exceptions. The application of social tax is contingent upon your place of residence, social security coverage, and whether your country has a social security agreement with Estonia or is part of the EU, EEA, or Switzerland. These considerations are essential to potentially avoid double contributions.

• Residency in EU Member State, Norway, Iceland, Liechtenstein, or Switzerland: To exempt the company from the 33% Estonian social tax, you must secure an A1 certificate from your local authorities and submit it to the Estonian tax authorities. Your home country likely has more specific information.

• Residency in Canada, Ukraine, or Australia: These countries have social security agreements with Estonia. A certificate from your local authorities, showing your social security coverage, will exempt the company from Estonian social tax on directors’ fees.

• Residency in Third Countries: Residents of third countries or individuals not covered by social security schemes in the EU or treaty countries are not eligible for an exemption from Estonian social tax.

Payments made to non-residents must be declared on the tax report and remitted by the 10th day of the following month.

Work is typically classified as Director’s work when it involves managerial duties, such as negotiating, hiring staff, business development, organizing financing, banking, etc. If you as an entrepreneur, provide these duties in the company by yourself and you wish to pay yourself a salary for these duties, then you should draft an Director’s agreement, that includes all terms and conditions of the service and the general management duties of the Director. We can provide you with the necessary templates and guide you through the process. This is a crucial step in establishing a clear and professional relationship between you and your company and ensuring compliance with legal requirements.

Members of your company

Your company has three levels of members:1. Level: Director, formally called a Member of the Management Board, or a board member. This is a signatory person who officially represents the company before all bodies and in the contracts. The company can have multiple Directors.2. Level: Shareholder. This is either a natural- or legal person, who owns either all or some of the shares of the company. The shareholder is the receiver of dividends when distributed.3. Level: Ultimate Beneficial Owner (UBO). This is a natural person, who ultimately controls the company with direct or indirect voting power of at least 25%. Typically with micro-companies, the same person serves as a Director, a Shareholder, and a UBO. But with more sophisticated structures or in irregular cases, these can all be different persons. For example, when a shareholder is another company, then a UBO is someone who owns that holding company.

Entertaining Business Guests and Partners

A portion of the expenses incurred while entertaining or hosting business and cooperation partners may be tax-exempt. This includes costs associated with catering, accommodation, transportation, and entertainment of guests and business partners, which are partially related to business activities. Legally, a fixed sum of 32 euros per month, plus 2% of payments subject to social tax (i.e., the company’s salary fund) in the relevant month, are exempt. Any amount exceeding this threshold, which varies for each company, is subject to Corporate Income Tax (CIT). If employees or management board members attend these events, the associated costs are non-deductible and should be taxed as fringe benefits.

Gifts and Donations

Gifts must possess a monetary value, signifying a clear consumable value for the recipient. Advertising printouts, product samples, or presents valued at less than 10 euros (net of VAT) are not considered gifts for tax purposes, as they hold minimal consumable value. Any value exceeding 10 euros is subject to a 22/78 CIT, applied to the entire amount.

Negative Equity

If a company’s expenses surpass its earnings during a financial year, it results in negative equity. This situation is common, particularly during the start-up phase. However, commercial law mandates shareholders to take action to restore the equity to at least half of the company’s share capital. This can be achieved by booking sufficient profits in the subsequent financial year or by injecting additional monetary reserves into the company.

Financing Your Company

The start-up phase usually necessitates funding. The most straightforward option is a shareholder loan, where shareholders can lend money to the company without restrictions, provided a formal loan agreement with repayment terms and interest is duly signed and accounted for. Alternatively, loans from friends, family, or other corporations are viable options. Future repayment of the principal amount of the loan is free from any tax while loan interests trigger income tax for loan provider. Onboarding new shareholders or investors committed to investing in your company is another route. Proper documentation with third parties is essential to safeguard and document relationships.

A comprehensive overview of external funding opportunities and grants can be found here.

Public Information

Please note, that in the interests of maximum trustworthiness and transparency of the Estonian e-residency ecosystem and business environment, all company and personal information of its management members, shareholders, and UBO-s is publicly accessible in Estonia and online. This includes company details, e-mail address, sales and returns, annual returns, names, and date of birth, and/or social security numbers of board members, shareholders, and UBOs.

Changes in Board Members, Shareholders, and UBOs

Should there be any changes in the board members, shareholders, or UBOs, please notify us, and we will provide the necessary assistance.

Non-Profit Organisation (NPO) Differences

Most of the aforementioned information applies to NPOs, except for matters related to shareholders and dividends. If an NPO sells goods or services, the same VAT framework applies as with OÜ. The same holds for salaries, expenses, taxes, and payouts. The key distinction between an OÜ (Ltd. company) and an MTÜ (NPO) lies in profit distribution; OÜ can distribute profits to shareholders, whereas NPO members are not entitled to any entity earnings. NPOs are expected to direct earnings towards support, donations, or expenses incurred while fulfilling principal goals and performing supporting activities. NPOs can pay salaries to contributors, but all payouts are subject to taxation, either by the NPO or the receiver. As an NPO, you may receive donations and grants from donors, other organizations, fans, and supporters. In light of regulatory requirements, it is imperative for the director(s) of the NPO to conduct comprehensive due diligence. It is mandatory to identify all depositors, including their full name, tax ID, address, and contact information, to ensure compliance with Anti-Money Laundering protocols. For larger donations, a check for the source of funds is required to ensure their legitimacy.

Know Your Customer (KYC) Updates

It is important to have your most accurate information on our file, as required by law. Periodically, we will request updates to your KYC information, which you must submit to us in compliance with Anti-Money-Laundering (AML) laws. We may also request additional documents about your transactions, source of funds, business counterparts, etc. This is part of our obligation to ensure compliance and your commitment to providing the necessary information.

SmartID

While the e-residency card with its card reader and PIN codes is the safest identification and digital signature tool, we recommend setting up SmartID concurrently. SmartID is a smartphone app that functions similarly to an e-residency card but is more convenient as it does not require a card and card reader. Set up SmartID here.

SmartAccounts User Account

As soon as you are ready to issue sales invoices to your customers, we will set up a SmartAccounts app for you, at our expense. This is a convenient invoicing and accounting tool. Just let us know when you are ready to set up your invoicing.

Summary

In conclusion, we encourage you to thoroughly review the information outlined above and ensure that your business operations align with the necessary requirements. We are fully committed to providing you with the support you need and are available for any inquiries or clarifications you may have. Your cooperation and due diligence are paramount in maintaining compliance and ensuring the success of your business.

The information provided is accurate as of the date of publication; however, it may be subject to changes over time. For the most current information, please consult with us.

We are committed to supporting you in navigating these essential aspects of your business operations. Please do not hesitate to reach out for assistance or clarification.

Sunio

support@sunio.ee

Sunio OÜ is the member of Sunio Group. Licence # FIU000124 for Financial services, Service of trust funds and companies.

DISCLAIMER:

The information provided in this blog article is for general informational purposes only and is believed to be accurate at the time of publication (December 2024). However, errors or omissions may occur, and we do not guarantee the accuracy, completeness, or timeliness of the information.

This article does not constitute professional advice, and readers are encouraged to consult with a qualified professional for advice specific to their situation. We disclaim all liability for any actions taken or not taken based on the content of this article.

The content is subject to change without notice, and we are not obligated to update or correct it after publication. By using this information, you acknowledge that you do so at your own risk.