As an e-resident founder, you’re probably not so familiar with the accounting rules in Estonia. First-time founders may even be unaware of the rules in the country they currently live in. You have just registered your first company, and wonder what is the best way to organize accounting.
In this article, we explain the necessities and best practices for arranging your company finances with minimal effort.
Organizing accounting and paying taxes knowledge is the responsibility of the company board. For solopreneurs, it’s you; nobody else can do it in your company. Even if you have a service provider, their scope and liability are always limited to what you have previously agreed to and provided to the accounting team.
What are the topics we cover?
In this article, we investigate the following topics:
- How to keep personal and company finances separate?
- How to pay share capital?
- How to lend money to the company?
- How to keep records?
- How to have tax-free business expenses?
- How to pay a salary?
- How to pay dividends?
- How to register for VAT?
- Where to pay taxes?
- How to pay taxes in Estonia?
- How to submit annual accounts?
- How to pick an accountant?
- How to work with an Estonian accountant?
How to keep personal and company finances separate?
The easy answer is never to do company transactions with your personal bank account or credit card. Not following this simple rule will create an extra layer of complexity, as you will be unsure which expenses are business-related and need to be reimbursed. Of course, not having a business bank account and payment card makes founders use their personal finances to bear the starting expenses. We generally recommend reimbursing these tax-free expenses as soon as possible from the first income earned by the company.
Making random payments to yourself or withdrawing cash from the ATM is the surest way of getting into trouble. It will be messy when your accountant tries to figure out how to record all these items on your bank statement for tax purposes.
How to pay share capital?
The first thing a fresh founder should do is to deposit the share capital to the company’s business bank account; until then, it is a liability, meaning the money you owe to the company or its creditors in the worst scenario. Starting from February 2023, shareholders of Estonian limited companies need to assess the amount of share capital necessary to start and run the company. As the minimum nominal value (face value) of a share is one euro cent, the share capital of an Estonian limited company can be one euro cent if it has a single founder and shareholder.
Legally speaking, company share capital should be deposited to a bank account or court deposit before you submit your application to register a company. Most e-residents do that after the company is registered, as there are very limited options to have a “starting account” before there is a legal person on the register. Currently, none of the banks operating in Estonia offer business accounts to e-resident companies without a personal visit to Estonia.
The requirement to prove that you have deposited the money into the company bank account only applies if the company’s total share capital is more than 50 000 euros. Then, the court wants to see a certificate from your business banking service provider, either signed digitally or sent on paper with an inked signature.
EEA-licensed fintechs have gained significant popularity in recent years among e-residents due to their user-friendly online dashboards and their ability to onboard Estonian companies founded and managed by e-residents. Popular options include Revolut, N26, and Paysera. The e-Residency team has identified many more fintechs as prone to accepting Estonian limited companies. We have given our best advice to founders in our article Opening a bank account in Estonia.
How to lend money to the company?
If you registered a company with a share capital of 1 cent or 1 euro, which is the default amount Unicount advises to use, your company may miss the funds to pay its first expenses. The simplest way to solve this is by giving a loan to your company. Shareholders are free to give any size of a loan to the company for business purposes. The hard part is determining market terms for interest rate, if any interest is to be paid. Interests paid to private persons for loans given to businesses are taxed with income tax in Estonia for tax residents. This is why Estonian founders normally avoid paying any interest at all. A sole shareholder company can then keep the money needed to pay interest and reinvest it or make other expenses.
There are no precise rules for interest rate setting besides the idea of it being on the market terms. It can be 0% interest without a repayment schedule and term and even without a written contract. We still suggest using a free template contract, then you have it available whenever requested. Charging 10% interest means that you need to be ready to explain how is it a market term.
How to keep records?
Everyone who hires an accountant in Estonia will soon learn that management needs to provide receipts and invoices for each outgoing amount, such as purchases made with company cards or amounts paid from the company account. These are also necessary to get reimbursed for the expenses you did with your personal funds. Everything without a source document would be considered a director’s loan. Suppose you are not registered for VAT in Estonia or do not have an accountant. In that case, you might learn after a busy year with hundreds of small business expenses that your accountant is unwilling to submit your annual accounts based on the bank balance statement.
The Estonian Accounting Act actually requires you to keep all the documents for 7 years after the end of the financial year. That is why we recommend using good online expense management software such as Envoice. This lets you snap photos of your coffee bills while moving, and documents are immediately uploaded to a cloud for your accountant.
How to do tax-free business expenses?
Those e-resident founders who do not hire a professional accountant might miss out on the benefits and opportunities provided to them in the Estonian tax laws because they do not have sufficient knowledge.
The good news is that having tax-deductible business expenses is not related to your company having sales turnover. Some companies may be unprofitable for years while developing their products and services. The even better news is that a board member is entitled to similar Estonian income tax deductible expenses as a company employee on a monthly payroll.
Reasonable business-related expenses that are necessary for carrying out your business can be treated as company expenses in most cases and, therefore, do not trigger corporate income tax. We have explained income tax-deductible business expenses in our blog.
How to pay a salary?
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. If you are looking for a regular income from your company, you probably wonder how to make monthly payments to yourself.
It is important to know that a salary and board member’s fee are taxed differently when paid by the company. 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. We have explained your risks and options in the article Director’s Fee vs Salary from your Estonian Company.
All employees and paid board members working in Estonia must be registered with the Estonian tax office. It’s advisable to consult with an accountant to determine the most beneficial form of income for your specific situation.
How to pay dividends?
Suppose you are one of the founders who has a successful business model that generates excess cash. In that case, you may want to pay some of it to yourself, even though the Estonian tax system awards founders who reinvest or accumulate their profits, as Estonia is one of the few EU countries where you pay no annual corporate income tax on retained profit. If you want to pay dividends, there are some preconditions to distribute dividends to shareholders correctly. Shareholders must pay Company share capital up, and there should be a shareholder-approved annual report highlighting the amount of undistributed profit that can be paid to shareholders.
The distribution of dividends must not impair the company’s solvency. It is the board’s responsibility to ensure that the company can pay the monies without going bankrupt and that the equity does not fall below the permitted limit, which is half of the registered share capital.
The general meeting of shareholders can decide to distribute dividends based on the approved annual accounts If a company has only one shareholder, this is a formality that doesn’t really matter much, and you or your accountant will fill in the dividend amount before submitting the annual accounts to the public register.
Dividends paid in Estonia are not taxed on the individual level, so the corporate income tax withheld in Estonia on your paid dividends normally does not offset your personal income tax liability in your country of tax residency. You would most probably pay personal income tax on your foreign dividend income according to the local rules.
How to register for VAT?
Estonian companies do not get a VAT registration or any other tax number automatically when incorporated. Estonian company not registered for VAT only has an 8-digit registration code for tax purposes. Registering a company for VAT in Estonia can be either obligatory or voluntary. An obligation to register for VAT shall arise as of the date on which the taxable supply in Estonia exceeds 40 000 euros calculated from the beginning of a calendar year. You may also apply for a voluntary VAT registration without exceeding the 40 000 euros threshold.
When selling goods, your place of supply must be Estonia to register and add Estonian VAT to your invoices. Having a warehouse in Germany means that Estonian VAT cannot be applied to supplies made to German clients from the German warehouse. Generally, the supply of goods is in Estonia if the location of the goods sold or dispatched is in Estonia. The determination of the place of supply of services depends on the type of service. There is a special EU VAT scheme available for e-commerce and services. You can read more about it here or on our blog.
Since 1 July 2009, the value-added tax rate in Estonia has been 20%. Starting from 1 January 2024, the standard VAT rate will be 22%. We always advise using a professional accountant in Estonia to calculate your VAT and file mandatory monthly VAT reports. For Unicount virtual office clients, we recommend our monthly accounting service.
Where to pay taxes?
Having an Estonian limited company does not mean that all the money your company generates is only taxable in Estonia. The Estonian e-Residency programme does not affect international business taxation. Rules are designed to ensure that countries collect tax from substantial business activities on their soil, which is quite hard to do in the digital globalized world.
Countries generally have the right to tax income generated within their borders, both from residents and non-residents. This principle is a cornerstone of international taxation. However, the taxation depends on the nature and extent of their business activities performed in the country. If these activities are insignificant or occasional, they typically do not create a tax obligation. The challenge for countries and companies alike is determining when these activities are substantial enough to be taxed. This variable threshold is where Permanent Establishment or Dual Residence tax rules become applicable to your Estonian company.
Estonia, like many countries, has rules and tax treaties to prevent double taxation. If a Permanent Establishment pays tax in its state of establishment, that profit generally won’t be taxed again in Estonia. For Permanent Establishments outside the EEA or Switzerland, the tax paid can be credited against future Estonian corporate income tax liabilities.
Understanding these rules is crucial for e-resident companies operating across borders to ensure compliance and avoid penalties. Founders should seek professional tax advice to make sure that they do not have any uncharted tax risks. If you are not sure about your liabilities, you can check with your accountant.
How to pay taxes in Estonia?
There are two important dates for companies that have tax liabilities in Estonia. These are the deadlines for Estonian tax reports on the 10th and 20th date of each calendar month.
The 10th is the deadline for income and social tax returns (TSD), and the 20th is for VAT returns (KMD). Both tax returns are submitted for the transactions of the previous calendar month. This means that your company’s documents, such as bank statements, sale and purchase invoices, and other relevant financial information, must be forwarded to your accountant at the start of the next month.
Accountants must see your sales invoices, expense documents, and other source documents for tax accounting. Otherwise, they may be unable to submit the VAT return on time, and fines can be imposed on your company for failing to follow the official deadlines. A bank statement alone is insufficient in Estonia as the law requires source documents for all transactions. These source documents can be electronic copies, but they must be kept safely for seven years. It is best to keep those digital copies as a backup anyway, as paper documents tend to get lost.
For the income and social tax return, accountants check your business bank statement and any direct input from you about dividends and salaries paid during the previous month. Fringe benefits and share capital deposits or reductions must also be reported with the same tax return. Your accountant is not liable for collecting all the source documents and tax reporting. Legally the company management board is responsible, and your accountant is only helping you to stay compliant.
How to submit annual accounts?
Every Estonian company has to submit annual accounts (annual report) to the Estonian Business Register 6 months after the end of the financial year. The annual report includes your company’s balance sheet, Profit & Loss statement, and management report about the performed activities. The report is simpler for micro and small enterprises, with less information to disclose. Even if your company hasn’t started trading yet, submitting the annual report is the one thing you need to do to ensure your company and its board are compliant with Estonian laws and not fined.
Complying with the annual report submission requirement is something that many small companies have neglected. The bad news for Estonian e-residents having companies in Estonia with annual reports is that starting in 2022, the court has started sending fines for each overdue annual report. These fines may end up payable by the board member who did not comply with the requirement of submitting an annual report 6 months after the end of the financial year.
For dormant companies, we compiled a manual you can access from our blog post How to submit your Estonian company’s annual report.
How to pick an accountant?
Accounting service isn’t just about keeping your books in order. It’s about providing expert insights and ensuring compliance with the latest regulations. When picking a service provider, you can analyze the following aspects:
- How many people are on the team? If it is a solo accountant, you would suffer whenever the person is unavailable or quits.
- Are there accounting professionals who understand the nuances of Estonian and EU tax regulations?
- Do the accountants understand e-residency and potential international tax aspects?
- Are you capable of communicating with accountants in an effortless way in your language?
- Is there software designed for efficiency and ease of use for accounting clients?
- Is there a desktop and mobile app for expense management?
- Is there sales software for invoicing, or do you need to find your own tax-compliant solution?
- Is the accounting firm having transparent pricing? Even if they are not the cheapest, do they offer premium value and a level of assurance you may miss when going for the lowest bidder?
How to work with an Estonian accountant?
The first thing you may experience is that Estonian accountants have very little training in professional business English. Their communication style may seem rude and very laconic. They do their paid job and ask you bluntly to submit everything that they have detected to be missing based on your bank statement.
Native English speakers expecting some niceties and pleasant emails with greetings may be disappointed. Still, for everybody accustomed to this style, it is nothing personal, as this is how many business people communicate in Estonia. No extra words are wasted if counterparts manage to understand each other.
Thanks for reading
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