Finding it difficult to understand the international tax system? Read this guide to get an overview of cross-border taxes for your Estonian business.
Entrepreneurs have to be on top of their taxes. And if you’re operating internationally, that means navigating cross-border tax rules.
Founder who are e-residents – or considering becoming e-residents – often ask questions about cross border taxes, such as:
In this article, we 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.
We can only provide general guidance. Cross-border taxes can be complex, and depend on individual circumstances. This article does not constitute legal advice. It’s best to get advice from professional tax experts in both Estonia and the country where you live (or where you are tax resident). You can find them on the e-Residency Marketplace.
The so-called international tax system is made of hundreds – if not thousands – of domestic laws, international treaties, and international guidelines. Therefore it can be tricky for non-experts to understand.
Tax regulation within and between countries is still largely based on old assumptions that people are generally doing business from one place. The rise of digital nomads, and more generally globalisation, means that the rules are not necessarily written to make things easy for entrepreneurs who are operating businesses across borders.
That means how people live and businesses work in practice is often at odds with how the rules are written. This can lead to uncertainty around where to pay taxes, and which taxes need to be paid. While large corporations have teams of people to deal with this, if you’re running an SME or freelance operation as an e-resident, you will need to take some time to figure out where you stand.
There are four broad categories of taxes to be aware of if you run a company. In this section we have some general advice on where you – as an e-resident and owner of an Estonian company – will need to declare or pay them.
This is the tax an individual is liable to pay in their country of tax residence based on their personal income. Income includes things like salary, board member fees, rental income or income from interest.
Usually you 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, tax rates, and different obligations and procedures to follow when filing tax returns.
For example, if an e-resident lives in Spain they are tax resident there. If they take a salary as an employee of their Estonian company, they therefore need to pay their personal income tax in Spain.
There is a possible exception for e-residents around director’s fees. This is relevant if you pay yourself for work you do in your role as director of your Estonian company. Depending on the double taxation treaty between your country of tax residency and Estonia, you may need to declare this tax in Estonia.
The personal income tax rate in Estonia is a flat 22%. Your company in Estonia must also pay social tax of 33% on this income to you. However, you are 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 (such as Australia, Switzerland, Canada, Ukraine).If you’re unsure where you are tax resident, check our digital nomad tax guide. Make sure to speak to a professional tax adviser too.
A company pays corporate taxes out of its income, which include profits, rental income, and interest. In general, declare company taxes in the country where the company is based, or where the local tax authority might consider the company to have a permanent establishment.
Each country or state has its own system and rules for taxation of companies. Some tax annual income. Others like Estonia only tax distributed profits – meaning a tax rate of 0% on profits reinvested into your company. 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.
Social taxes cover what a company pays for its employees. They are variously known as social security, payroll taxes, or social contributions. As a rule, declare social taxes where your employees are based. If they're in Estonia, register them there. If they're elsewhere, you'll likely need to register and pay in that country instead. This applies to you too if you're on your own company's payroll.
Read more about hiring employees on our Knowledge Base.
Value Added Tax (VAT) is a consumption tax, and it applies to nearly all goods and services bought and sold in the EU. Each member state sets its own rates and may apply EU rules differently. VAT is generally due in the country where goods or services are consumed. Exports outside the EU are zero-rated, but you'll need proof that the goods left the EU.
Read more about VAT rules and rates in Europe.
The EU has two schemes to simplify cross-border VAT:
Estonian companies must register for VAT once they hit €40,000 in annual revenue earned in Estonia. If you earn revenue in other EU countries, register there instead. Thresholds vary by country. The general EU-wide limit for small businesses is €100,000.
Now we’ve covered the basics, let’s come back to the most common question from e-residents: Where do I pay corporate taxes for my Estonian company?
The answer depends on a number of factors. Due to the state of the international tax system, there is no one rule or guideline to follow. It’s therefore 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 two conditions.
First, another country may consider your company a tax resident if you effectively manage it from there, or may determine that your activities create a permanent establishment there. Either way, the company will have tax liabilities in that country too. Read more about dual residence and permanent establishment.
Second, e-Residency does not equal tax residency. It does not exempt your company from dual residency, permanent establishment, or foreign tax liabilities.
Permanent establishment allows countries to tax the profits of non-resident companies if their activities are carried out there. Tax authorities will look at factors such as:
For example: An e-resident runs their Estonian company as a solopreneur from their home office in Germany. They do client work there, make management decisions there, and serve mostly German clients. The German tax authority will most likely determine that the company is effectively managed from Germany or has a permanent establishment there, and will claim corporate tax on its income accordingly.
Having dual tax liabilities does not mean you will be taxed twice, however. Estonia has signed double taxation treaties with more than 65 countries. Find the full list here.
Continuing the example: if the German e-resident distributes dividends from their Estonian company and is already paying corporate tax on that income in Germany, they can claim an exemption from the Estonian Tax and Customs Board on those same dividends.
There are categories of e-resident who legally pay corporate taxes in Estonia. For example:
An example of the latter would be an entrepreneur who set up an office there, hired employees, and travels there regularly to make board decisions.
Some e-residents will choose to do this because the Estonian tax system has some advantages. In fact, Estonia’s tax system consistently ranks as one of the most competitive in the world. The key features of Estonia’s tax system are:
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.
Social taxes