Wondering how does VAT and taxes work in Estonia? This blog will help you find out!
If you have landed on this blog post, there is a high chance that you already know what the e-Residency program of Estonia is and you are interested in opening a company in Estonia.
IS ESTONIA A TAX HAVEN?
Let’s be clear from the very beginning: Estonia is not a tax haven.
The Estonian tax system is just easier to understand in comparison to the others in Europe. Some of those, indeed, could appear complex and sometimes not so fair.
In any case, the fact that the Estonian system seems more transparent and gives you more opportunities, that doesn’t mean that Estonia is a tax haven.
If you are looking for a country that allows you to create and manage your company online, to pay the right and fair amount of taxes, to do your job without any bureaucracy-related hassle, Estonia is the country you are looking for!
VAT IN ESTONIA
Like all the other EU countries, Estonia is also subject to VAT. This means that your Estonian company must have a VAT number and in order to get a VAT number, you need to be registered in the VIES register. If you want some help, we can help you with the process!
The following points are the cases in which your company needs a VAT number for operating in the EU:
- Your company offers services such as development, design, consulting, marketing, etc., to European clients, and earns more than 40,000 euros per year.
- Your company offers digital services or products (software or digital content) to European B2C customers (final customers) from the first sale.
- Your company offers digital services or products to European B2B clients and you earn more than 40,000 euros per year.
Having a VAT number is recommended in case you have European suppliers or customers. Also, it has no disadvantage for your business, but just advantages: indeed, your company will need one as long as it will reach an income higher than 40.000€.
For beginners, accounting between companies in Europe that own a VAT number, implies adding VAT 0% to your bill.
MODALITIES FOR APPLYING VAT TO MY INVOICES
Both the type of service your company offers and the type of customer you are sending the invoice to, determine when you have to add VAT to your invoices and how much.
One thing that makes a huge difference is if your services require a direct or an indirect intervention. For direct intervention, we mean marting, design, consulting, software development; for “indirect”, we are referring to those services that are automated: SaaS, Netflix-like sites, downloads from e-Commerce websites, …
If your service requires a direct intervention, those are the use cases:
- If your client is B2B in Europe, with a VAT number, you do not add VAT to the invoice (VAT 0%) but add “The purchase is liable to Intra-Community supply 0%, Reverse charge”. You can check if one of your customers has a valid VAT number or not here.
- If your customer is B2C or B2B without a VAT number, you will need to add the Estonian VAT (at the moment, 20%) to the invoice.
- If your client is outside of Europe, you don’t add VAT (0%) to the bill.
If your services are automated and so they can be accessible with an indirect intervention then:
- If your customer is B2B (a company) European with a valid VAT number, you add VAT (0%) and specify “The purchase is liable to Intra-Community supply 0%, Reverse charge”.
- On the other hand, if your client is a European business that does not have a VAT number or an individual, you add the VAT from the country of origin of your customer. For an Italian customer, that would be 22% for example.
- Finally, if your client is outside of Europe, you will not add VAT (0%) to the invoice.
Finally, of course, whatever the case may be, you will always need to add the Estonian VAT percentage (20%) for any invoice you make to another Estonian company.
Your Estonian company does not have to add VAT (0%) to a VAT registered company in the EU.
For non-VAT registered EU companies or EU individuals, if you offer a direct service you will apply the Estonian VAT (20%); if you offer an indirect service, you will apply the VAT of your customer country.
Your Estonian company does not have to add VAT to the invoice if your customer is outside the EU.
If your customer is an Estonian business or individual, you have to add Estonian VAT to the bill (20%).
NO TAXES FOR MY ESTONIAN COMPANY?
As you may know already, in most European states you need to pay a monthly fee just because of the fact that you own a company. In Estonia, you have the possibility to pay not a single cent in taxes, and this happens when your company doesn’t distribute money in salaries or dividends.
The revenue of your company and the re-investments are not subject to taxation in Estonia. This is a huge advantage for new businesses and startups and for this reason, this country in the last years became very attractive.
So, when do you pay taxes in Estonia?
When you move money from your company to employees, shareholders, or yourself, you must pay taxes.
The two main ways you usually distribute benefits from your company are in the form of salaries and/or dividends.
You need to pay dividends to the shareholders of your business at the beginning of every fiscal year.
The taxation of these dividends is equal to 25% (20% gross). These taxes are not personal ones, but they are paid by your company during the succeeding month. Indeed:
- In Estonia, if you are a tax resident, you do not need to pay extra personal taxes for the dividends you receive.
- If you are a tax resident in other European countries, you may be subject to additional personal taxes (this happens for example in France or in Germany);
- If you don’t have a tax residence anywhere because you are a digital nomad, you don’t have to pay additional personal taxes.
MONTHLY SALARY IN ESTONIA
To understand the taxation of your monthly salary in Estonia, you have to firstly understand that as a board member of your company, your salary is divided into two parts. This subdivision happens because you are both a board member, who takes charge of bureaucratic tasks of the company, and an employee of your company, who performs tasks and adds value to it. The subdivision of the salary of a board member is usually this:
- The 30% of your monthly salary coincide with the board member’s salary;
- The 70%, with your employee’s salary.
If you are a graphic designer, a web developer, or any other profession that requires more time to deliver work. The subdivision of your salary will be:
- The 20% as a board member;
- The 80% as an employee.
Your employee salary in Estonia is not subject to taxes, only the board member’s one.
So, what taxes do you have to pay from your board member’s salary?
From your board member’s salary, you have to pay 25% of income tax and 33% of social tax, unless you already pay social security taxes in another EU country (from A1). The social tax is calculated on a basis that coincides with your salary + the income tax.
So, let’s suppose that your board member’s salary is equal to 100€:
- 25€ will be the income tax (25% of 100);
- 41,25€ will be the social tax (33% of 100+25)
- 66,25€ will be the total of the taxes you have to pay from your board member’s salary if that is equal to 100€.
Instead, in the case of your employee salary:
- As we said, if you are a tax resident in Estonia you don’t need to pay any taxes from it;
- If you are a tax resident in another European country, commonly you will pay taxes based on your annual tax report.
- If you are a digital nomad and so you don’t have any tax residence, you won’t pay personal taxes.
TAX-FREE BUSINESS EXPENSES IN ESTONIA
In Estonia, all the business expenses, with a valid justification, are exempt from taxation.Everything related to your activity that does not represent a constant establishment to another country, is tax-free in Estonia. We’re talking about:
- Web services for your business;
- Furnishing and equipment of your office;
- Transports and meals for work reason;
- Administrative tools;
- Software, subscriptions and other services related to the development of your business;
- payments and banking fees.
Of course, the expenses for holiday trips, gas for your own car and related to permanent offices abroad are not considered as tax-free services.
DAILY ALLOWANCE IN ESTONIA
If you are going to embark on a business journey, you could benefit from the Daily Allowance.
First of all, you need to collect all the needed information about your trip expenses: tickets, hotel receipts, …). If everything is alright, you can get a reimbursement of maximum 50€/day for the first 15 days and then 32€/day.
We hope that this blog has been useful and you understand Estonian taxation system better. In case you require more information, please do not hesitate to contact us. Also, in the Eresidents team we have experienced accountants that are ready to help your company!