Finding it difficult to understand the international tax system? Read this guide to get an overview of cross-border taxes for your Estonian business.
Tax is an important topic for entrepreneurs. And for those operating internationally, navigating cross-border taxes is unavoidable.
At e-Residency, customers consistently ask us questions about cross border taxes. Questions like: what taxes do I need to pay? Where do I pay them? Do I pay taxes in my home country or in Estonia? How can I pay my taxes in Estonia?
Understanding cross-border taxes is key for e-residents, just as it is for any person running a company based in another country or operating a business across borders. In this article, we aim to provide an overview of the international tax system, summarise the main taxes to be aware of as an e-resident entrepreneur, and provide a general guide for where to pay taxes for your Estonian company.
It’s important to emphasise right upfront that we can only provide general guidance. Cross-border taxes are incredibly complex and dependent on the facts and circumstances of each case. Where you and your company pay taxes will depend on your individual situation and a number of specific factors. Do not rely on this article as legal advice. Instead, seek the counsel of professional tax experts in both Estonia and the country where you live / are a tax resident. Find them on the e-Residency Marketplace.
The ‘international tax system’ and cross border-taxes
The ‘international tax system’ is complex and challenging. It is in fact not one system and has not been designed as such. Rather, it is made up of hundreds if not thousands of domestic laws, inter-state treaties, regional harmonisation standards, and international guidelines. What this means is that today, international tax is largely characterised “by a pragmatic compromise between countries”.
Tax regulation within and between countries is still largely based on old assumptions of individuals and businesses being location dependent and generally not moving or transacting across borders. International tax rules and arrangements rest on concepts of ‘residence’ and the ‘source’ of income, both of which globalization has made increasingly fragile or even meaningless.
Increased global movement, digital technologies and integration of global supply chains has meant that in reality people and companies are more and more location-independent. There is thus a tension between how people live and how companies operate in practice versus the assumptions of cross-border taxes. This creates additional difficulties for people and businesses navigating such a a complex web of laws. And uncertainty about where exactly to pay the correct amounts of what taxes. It also leads to huge costs of compliance. Large multinational companies generally have the human and financial resources to deal with this reality. But more and more small to medium businesses, not to mention freelancers are going global too. This of course includes e-resident company owners.
Despite the difficulties of the international tax system, e-Residency does wish to provide any support and guidance we can to our community on tax topics. So let's first dive into the taxes you need to be aware of as business owners.
What are the cross-border taxes to be aware of?
There are four broad categories of taxes to be aware of if you run a company. In this section, we will introduce them and offer general advice on where you - as an e-resident and owner of an Estonian company - will declare and/or pay them.
Personal income tax
The first category is personal income tax. This is the tax an individual is liable to pay in their country of tax residence based on their personal income. Income could include a salary or wage, board member fee, rental or interest income, etc.
Declare personal income taxes in the country in which you are a tax resident. Each country has its own set of tax rules and laws, different tax rates, and different obligations and procedures to follow when filing tax returns.
Say an e-resident who lives in Spain pays themselves a salary as an employee of their Estonian company. The e-resident must declare their salary as personal income in the country in which they are a tax resident, in this case Spain.
There is an exception for e-residents to be aware of here: the board member’s fee. If you pay yourself a fee for work you do in your role as director of your Estonian company, you will declare this income and pay tax in Estonia. The personal income tax rate in Estonia is a flat 20%. You’ll also be liable to pay social tax of 33% on this income in Estonia. However, you will be exempt from paying these social taxes in Estonia in certain circumstances. For example, if you are already covered by a social security scheme in another country in the European Economic Area or a country with which Estonia has a treaty to avoid double taxation of social taxes (e.g. Australia, Switzerland, Canada, Ukraine).
Digital nomads sometimes ask us where they should pay personal taxes if they are not tax resident anywhere. First, read this guide especially for you and then speak to a professional adviser expert in taxes for digital nomads.
A company pays corporate taxes out of its income, which include profits, rental income, interest, etc. In general, declare company taxes in the country where it is tax resident and/or in any country where the local tax authority might consider the company to have a permanent establishment. We’ll cover this concept more in the next section.
Each country or state has its own system and rules for taxation of companies. Some tax annual income and others like Estonia tax distributed profits. Countries have different tax rates and ways to deal with deductions, exemptions or specific categories of income and expenses. In some countries, there are different rules for companies operating in different sectors or at different stages.
For paying corporate taxes as an e-resident company owner, read the next section for more guidance and examples.
Social taxes are a broad term encompassing the taxes a company pays for their employees. Countries refer to them by different names, including payroll taxes, labour or employment taxes, social contributions, superannuation, pensions, etc. In general, declare social taxes where the employees of your company are located or registered.
If your Estonian company has employees located in Estonia, make sure to register them there. Payroll taxes and social contributions will apply according to Estonia’s laws and procedures. If your employees are located in another country, you may need to register them there and ensure your company is paying the requisite social taxes. This will include you if you are carrying out work and receiving a salary as an employee of your company. Read more about hiring employees on our Knowledge Base.
VAT in Europe
Value Added Tax (VAT) is a consumption tax, also known as a goods and services tax or GST. In Europe, the law applies VAT to nearly all goods and services bought and sold for use or consumption in the EU. The EU has standard rules on VAT, but each EU country may apply these rules differently. Each EU country also sets its own VAT rates.
Generally, VAT is charged and due in the EU country where the goods are consumed by the final consumer. Likewise, VAT is charged on services at the time they are carried out in each EU country. VAT isn't charged on exports of goods to countries outside the EU but you will need to provide proof that the goods left the EU. Read more about VAT in Europe here.
The EU has brought in several schemes over the last couple of years to attempt to simplify and harmonize VAT in the Single Market: OSS and IOSS. In summary:
- One-Stop-Shop or OSS: On 1 July 2021, the VAT rules on cross-border business-to-consumer (B2C) eCommerce activities changed. Online sellers can now register in one EU country to declare and pay VAT on all distance sales of goods and cross-border supplies of services to customers within the EU. The OSS replaces and extends the previously implemented MOSS scheme, which covered sellers of digital services only.
- Import One-Stop-Shop or IOSS: Since 1 July 2021, the EU created an electronic portal (IOSS) to allow sellers to easily declare low value sales from outside the EU. Importers can declare and pay VAT for distance sales of low value goods not exceeding 150€ imported from third territories or third countries in one EU country.
Read more about OSS and IOSS in this guest post by Marketplace member Silva Hunt.
For e-residents, you must register your company in Estonia for VAT once it has reached €40,000 in annual revenue. Upon registering, you can declare VAT returns in Estonia online with ease and take advantage of the above EU schemes to simplify your VAT procedures.
Where do I pay corporate taxes for my Estonian company?
Now that we’ve covered the basics, let’s come back to the most common question from e-residents:
The answer to this question will depend on a number of factors, which we’ll cover below. Due to the state of the international tax system, there is no one rule or guideline to follow. It’s thus important to seek advice from a professional tax advisor who is aware of the rules and procedures of the countries in question.
For e-residents, here are some guiding principles for cross-border taxes - focusing on corporate taxes.
The Estonian Tax and Customs Board automatically registers Estonian companies as tax residents of Estonia upon establishment. But this is subject to a few conditions:
- Firstly, another country could consider the company a tax resident, if the founder effectively manages it from there. This raises the concept of dual residence. Alternatively, another country could consider the company's activities to create a permanent establishment there. If either dual residence or permanent establishment arise in a country other than Estonia, the company will also have tax liabilities there.
- Secondly, e-Residency does not equal tax residency. That is, e-Residency does not exempt companies from dual residency, permanent establishment, or foreign tax liabilities.
Permanent establishment allows countries to tax company profits of non-resident legal entities if their activities are carried out in that country. Tax authorities might take into account a number of factors related to business activities to assess this. These might include: where the company is registered, where its directors make board decisions, where its activities are carried out, where employees and clients are located, where its headquarters and offices are located, or where its physical assets, intellectual property registrations and data servers are located.
For example, take an e-resident living in and running his Estonian company from Germany as a solopreneur. He does client work and makes management decisions from his home office. He also leases a company car in his home town and mostly serves clients located in Germany. The German tax authority will most likely determine that the e-resident's company is effectively managed from Germany. Or has a permanent establishment in Germany. They will be able to claim corporate tax on the income his company receives.
But, don't worry. Just because your company might have dual tax liabilities, it should not be double taxed. Estonia has signed treaties with over 60 countries around the world to avoid double taxation of various taxes. Find the list of countries here.
Extending the example above, say the German e-resident distributes dividends from his Estonian company. If he is already paying tax in Germany on the corporate income received, he can claim an exemption from the Estonian Tax and Customs Board from paying corporate tax on the dividends in Estonia.
As noted above, we can only provide guiding principles for e-residents on the topic of cross-border taxes. For specific advice on your situation, be sure to contact a local tax consultant.
Paying taxes in Estonia
There are categories of e-resident who legally pay corporate taxes in Estonia. An example are digital nomads. Also, business founders structure their operations so their companies are effectively managed in Estonia. For example, they have set up an office there, hired employees, and travel there regularly to make board decisions.
Why might they have done this?
The Estonian tax system has several convenient features. This makes Estonia an attractive place in which to set up a business and pay taxes. Tax regulation is light and thus easy to navigate. This also means that you can keep your tax and bookkeeping compliance costs very low. It’s unsurprising that Estonia has ranked number 1 on the International Tax Competitiveness Index for the last 8 years.
In Estonia, companies pay no corporate taxes on annual income and submit no annual tax returns, regardless of profit or losses. They also pay 0% tax on reinvested profits. Instead, companies pay a standard rate of 20% on distributed profits such as dividends or taxable expenses (calculated as 20/80 from taxable net payment). The standard rate reduces to 14% (or 14/86 from taxable net payment) if dividend payments are regular over three years. Use the online tax portal e-MTA to assess and declare corporate taxes in minutes.
Plus, e-residents can take advantage of the Estonian Tax and Customs Board’s non-resident email support helpline. From experience, we’re not exaggerating when we say they are one of the friendliest and most helpful tax authorities in the world.
Read this article by the Estonian Tax and Customs Board on how e-residents pay taxes.
We hope this guide has been helpful for you. Again, we'd like to stress not to use this guide as legal advice. Cross-border taxes are not an easy topic to understand or navigate. If you need specialised help with your business taxes or restructuring, contact an expert from the e-Residency Marketplace today.