May 5, 2022Remote taxes9 min read
How to set up your taxes in Estonia
Table of Contents
I.How to set up your taxes and residency in Estonia?
1. 1.How it works
1. 1. 1.How much will I be paying for taxes?
1. 1. 2.Will this count as an eligible tax residency?
1. 1. 3.Will this allow me to stay in Estonia?
1. 1. 4.Pros & Cons
1. 2.How to apply for E-Residency?
1. 3.What do nomads say?
1. 4.How does Estonia benefit from this system?
Who will this be the most beneficial for? Fully nomadic and location-independent workers.
Difficulty of applying from 1-5: 1 - Easiest
What % of the process can be done online? 100%
Are there any citizens of specific countries that can’t apply? Currently, Russian and Belarussian applicants will not be accepted.
While we previously covered the topic of the Estonian E-residency, the interest from remote workers and digital nomads to set up their financial base, business or taxes in Estonia hasn't stopped. So we're diving into it again, with more information on what this visa and tax system offer.
How to set up your taxes and residency in Estonia?
In a nutshell, the Estonian E-Residency gives non-Estonian residents the right to create a company in Estonia without any expiration date, an important step for those wanting to take advantage of the country's favorable tax rates. On top of being one of Europe's most dynamic start-up environments, Estonia is also one of its least bureaucratic. These combining factors help make Estonia one of the easiest options for tax residency by creating a simple application process that is open to all countries and can be done completely online.
How it works
How much will I be paying for taxes?
To become an Estonian E-Resident, you will first need to set up an Estonian-based company. Once this has been implemented, the company becomes the tax resident, not the individual who set it up.
This company would then be eligible for 0% tax on corporate profits generated both inside and outside of the country. Any income withdrawn from the company for personal use (dividends) will be taxed at 20%. If dividends are drawn on a recurring basis, then a 14% tax will be applied instead, with an additional 7% of income tax on top of that for non-residents, bringing the total amount of tax to around 20%.
Will this count as an eligible tax residency?
The 20% and 14% tax on profits taken from dividends is a Corporate Income Tax (CIT) that only takes effect at the time of withdrawal. This CIT is only liable to the company and not the individual. If you are a tax resident of another country that taxes foreign income, you cannot claim tax deductions for the dividends you have received, as these have not been taxed as Personal Income Tax (PIT). However, when dividends are withdrawn recurrently, and the 14% Corporate Income Tax is applied, the 7% income tax becomes Personal Income Tax meaning you can claim tax deductions. Let’s break this down - if you are from a country that has a 15% PIT tax for foreign dividend income and also has a Double Taxation Agreement (DTA) with Estonia, you can claim a tax credit on the payment of 7% PIT you made within Estonia and only pay an extra 8% tax within your country of residence instead of 15%. Why is this important? Because although in either of these cases, you are eligible to pay 20% tax in Estonia, if you are a tax resident of another country that taxes foreign income and has a DTA with Estonia, you might end up paying fewer taxes overall by being able to claim tax credits giving you an extremely favorable rate altogether.
Will this allow me to stay in Estonia?
Yes, you also have an option to apply for a Digital Nomad visa. This visa is temporary and valid for 1 year at a time. You can reapply at the end of the year if you wish to stay in the country longer.
The Digital Nomad Visa gives you the right to reside, work and be a temporary tax resident of Estonia. Still, it does not act as a path towards citizenship or permanent residence. Digital nomads who have not established E-Residency will be taxed at 20% for the entirety of their income. Generally, it makes sense for holders of this Visa to apply for E-Residency as well, for both liability purposes and to take advantage of the more favorable rates discussed above.
Pros & Cons
- Estonia has a burgeoning start-up environment
- Low levels of bureaucracy
- Simple application process
- No minimum stay requirements to maintain the residency
- 0% tax on corporate profits generated both inside and outside of Estonia
- One of the lowest tax rates on dividends in Europe.
- Although the E-residency does allow you to set up a company and pay taxes within the country, it does not guarantee tax residency if a candidate stays for less than 6 months
- Requires you to set up a company
- Although E-Residency gives you access to Estonian taxes and services, it does not give you any special right to enter the country
- E-Residency does not grant you the right to reside and be a tax resident as an individual within the country unless you’re already an EU citizen
- Although a company registered through the E-residency will be subject to a low tax rate, they may still be liable to extra foreign dividend tax withholdings in their country of residence.
How to apply for E-Residency?
The application process takes around 30 minutes online as long as you have all your documents prepared. Once an account has been created on the Estonian E-Residency portal, you will have two months to complete your application before your user account expires.
Who is eligible? - Remote workers who can do their jobs independently of location - Individuals who either have an active employment contract with a company registered outside of Estonia, conduct business through their own company registered abroad, or work as a freelancer for clients mostly outside of Estonia. - Individuals who can provide evidence that their income meets the minimum threshold during the six months preceding application. Currently, the monthly income threshold is €3504 (gross of tax). Documents required: - A detailed explanation relating to why you want to apply as an E-resident - An updated CV - Information relating to your business activity - Copy of your identity document - Photo of your face - A valid VISA or MasterCard credit/debit card.
How to apply? Fill in the application form online. Print the form and sign it after completion. The state fee is €80 for a Type C (short stay) visa and €100 Type D (long stay) visa. After that, schedule an appointment at your nearest Estonian Embassy or Consulate to submit your application. Make sure you bring copies of any required supporting documents. The applications will be reviewed within 30 days. Fees: You can expect to pay between 400-600 Euros in multiple fees. This also covers the cost of setting up a virtual business address and the opening of an online bank account.
What do nomads say?
"The set-up for E-Residency was super easy and straightforward. What I liked most is that in order to help you qualify, you are encouraged to sign up with an accountant, which ended up making my life easier. The accountant was able to clearly tell me what documents I needed to provide, and then that was it; I obtained the E-residency! Overall, it was a great experience, and now I don't have to worry about any further documentation or regulations." Natascha Winkler - Head of Customer Service, SafetyWing
How does Estonia benefit from this system?
Through launching the E-Residency and Digital Nomad Visa, Estonia has nurtured a thriving start-up scene, becoming home to more private businesses and high-grossing tech unicorns than any other small country in the world. These businesses had a valuation of over 1 billion USD per capita in 2018.
“What we are doing with the digital nomad visa it really reflects what our whole immigration policy is about, we want to attract the talented people, entrepreneurs that are beneficial to our society to our economy.” Killu Vantsi - Interview with CNBC, 2018
Disclaimer: SafetyWing and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own independent tax, legal and accounting advisors before making any decisions or engaging in any transaction.
About the author
Researcher & Writer
Luke has been traveling around the globe for the last decade and is currently based in Chiang Mai, Thailand. He's been working remotely on everything from directing music festivals, to online ESL coaching, to writing and contributing as a researcher for Borderless. He is a passionate advocate for the modern nomadic way of life and enjoys getting others started on their journey towards remote living.