Understanding your tax obligations in Estonia, including taxes payable on director’s fee or salary, is crucial for e-resident founders looking to receive a regular income from their Estonian company. This guide offers insights into the taxation of director’s fees and salaries.
In Estonia, a board member of a limited company doesn’t need to receive a director’s fee or a salary. However, if a director’s fee is paid, it’s subject to personal income tax and social tax in Estonia.
Payments to Board Members are not Mandatory
In Estonia, a board member of a limited company doesn’t need to receive a director’s fee or a salary. This flexibility allows companies to make remuneration decisions that fit their finances.
While neither a salary nor a board member’s fee is obligatory, they are taxed differently when paid. It’s advisable to consult with an accountant to determine the most beneficial form of income for your specific situation.
All employees and paid board members working in Estonia must be registered with the Estonian tax office. This ensures compliance with local tax laws and regulations. Most e-residents do not work in Estonia so this is not affecting you working in your country of residence.
For non-resident individuals working outside Estonia, taxes on salaries are not declared or paid in Estonia but in the country where the work is performed. However, if a non-resident board member receives a director’s fee from an Estonian company, income and social taxes are payable in Estonia.
An A1 certificate, issued by EU countries, can be used to prove that social taxes are paid in your country of residence.
Potential Tax Risks
E-resident solopreneurs who do not pay personal taxes in Estonia but receive a salary from their Estonian company face a potential tax risk. Understanding the distinction between salary and director’s fee is important to avoid unexpected tax liabilities.
While paying a director’s fee is not legally required, it is softly recommended by the Estonian tax authority, especially when the board member is actively involved in managing the company. Therefore you should consider if you receive only a salary with taxes declared and paid in your country of residence or some amount of director’s fee also with taxes payable in Estonia. Depending on the tax treaties your income as a director may be subject to additional taxation in your country of tax residence.
Estonian Personal Income Tax
Estonia has a flat personal income tax rate of 20%, set to increase to 22% in 2025. This flat rate simplifies individual tax returns, which are mostly filed online.
Estonia offers a non-taxable income exemption to reduce the tax burden on lower-income earners. In 2023, this exemption can reach up to 7,848 euros annually.
Estonia taxes companies only when profits are distributed to shareholders. The rate is 20/80, which translates to 25% of the amount paid out as dividends. This system incentivizes reinvestment and growth. Read more about the Estonian income tax.
For resident founders, it is generally not advisable to distribute only dividends to receive regular income from your Estonian company, especially if they are actively engaged in working for the company with no employees on the payroll. Legal cases won by the tax authority support their claim that for work you need to get another form of compensation, i.e. salary or director’s fee. These payments are often compared to average industry wages to see if the company is trying to optimize its tax obligations. Trading in a high-wage field of activity such as finance or IT may mean that tax authority expects resident companies to pay high wages even if the specific business is not so well comparable due to a different and possibly less lucrative business model.
National insurance, Unemployment Insurance and Funded Pension Contributions
Estonia’s social tax, covering health insurance and pensions, is 33% of the gross wage. This tax is crucial for the country’s residents’ well-being but may have no immediate benefit for non-resident directors who do not use medical cover in Estonia. The national insurance cover is only available when the minimum threshold of 239,25 euros is paid monthly. This means paying a director’s fee of 725 euros at least per month.
Resident employees receiving salaries also need to contribute to unemployment insurance and funded pension schemes, providing a safety net and future financial security. The director’s fee is not taxed with unemployment insurance payments, but funded pension payments may be mandatory for Estonian residents born on or after 1984.
In a nutshell
Understanding two different types of income available for company directors and tax nuances is essential for e-resident founders getting a regular income from Estonia. With its unique corporate tax structure and supportive policies for small businesses, Estonia offers a conducive environment for business growth and innovation. For further assistance and detailed guidance, consider Unicount accounting services.
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