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 Estonia’s personal income and social tax. Social tax can be paid in your country of residence if your country has an agreement for social security with Estonia or you live in the EU, European Economic Area or Switzerland.
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 does not affect you until you get paid.
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.
To prove that social taxes on director’s fees are paid in your country of residence in the EU, EEA (Iceland, Liechtenstein and Norway) or Switzerland, you need an A1 certificate issued by the tax authority in your country to avoid paying social tax in Estonia.
Some non-EU/EEA countries have concluded an Agreement on Social Security with Estonia. Persons who live and are insured for social security in Canada, Ukraine, or Australia can get a certificate from the tax authority to prove that their social security is paid in the country of residence and can, therefore, avoid paying social tax in Estonia.
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, the Estonian tax authority softly recommends it, especially when the board member is actively involved in managing the company. Therefore, you should consider whether you receive only a salary with all taxes declared and paid in your country of residence or some amount of director’s fee with income tax payable in Estonia. Depending on the national tax laws and international 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. 2025, this exemption can reach up to 7,848 euros annually or 654 euros monthly.
Estonia taxes companies only when profits are distributed to shareholders. The rate for 2024 is 20/80, which translates to 25% of tax on the net amount paid out as dividends. This system incentivizes reinvestment and growth. The rate for 2025 is 22/78, which translates to 28.2% tax of tax on the net amount paid out as dividends. You can see all the latest tax rates in our up-to-date blog post covering Estonian taxes.
For resident founders, it is generally not advisable to distribute only dividends to receive regular income from your Estonian company if you are actively working for the company with no employees on the payroll. Legal cases won by the tax authority against resident entrepreneurs 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 of social tax is paid monthly in 2024, increasing to 270.60 euros in 2025. This means paying a director’s fee of 820 euros at least per month with social tax withheld in Estonia.
Resident employees receiving salaries must also 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 the two different types of income available for company directors and tax nuances is essential for e-resident founders who want to earn 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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