Estonia is a country located at the heart of the Baltic Sea Region in Europe. It has an excellent business environment and a stable government. The liberal economic policy, moderate cost of living and the ease of doing business has attracted numerous multinational companies to Estonia. Estonia has also become a new player in the international field of holding jurisdictions. The tax legislation of Estonia has created a unique environment for international trading companies. However, Estonia is not a classical tax heaven. Estonia is a well regulated onshore jurisdiction being both a member of the EU and the OECD. Estonia?s adopted currency is the Euro from January 1, 2011. Estonia?s competitive tax legislation, which is fully compliant with EU regulations, makes it one of the most attractive onshore tax planning jurisdictions for international trading and holding purposes.
Main advantages of Estonia:
? Estonia is the only country in the EU where corporate profits are not taxed;
? No corporate income tax (until distribution of profit);
? Participation exemption;
? No withholding taxes on outbound dividends and interest;
? No thin capitalization rules (debt-to-equity ratios);
? Ready made companies are available with bank accounts for immediate use;
? Tax residence certificates are automatically available for all Estonian companies;
? Considerable planning opportunities for trading and holding structures;
? The cost of company formation and administration is low;
? A suitable base for doing business between the EU and Eastern Europe;
? No requirement to disclose the beneficial owner to state authorities during company formation;
? The shares of a private limited company can be registered with the Estonian Central Register of Securities (ECRS), thus shares can be sold via e-banking facilities;
? An extensive tax treaty network (48 treaties), further enhanced by EU membership
? EU Parent ? Subsidiary Directive applies.
The most remarkable part of the Estonian tax system is that profits of an Estonian company are not taxed until distributed in the form of either dividends or fringe benefits. This clause was specially designed to encourage reinvestment, as tax liability does not arise if the owners leave earned income in a company in the form of cash, call deposit, invest it into gold, other commodities, or other financial instruments. Profits may also be lent to third parties, or within the group creating excellent opportunities for intra-group finance.
Dividend payments will trigger a deferred corporate income tax. As this tax is still considered a corporate income tax, i.e. it is not a dividend withholding tax, this tax liability cannot be mitigated by the EU Parent-Subsidiary Directive. The corporate tax rate of Estonia that is applied to dividend payments is 21/79.
The following chart illustrates the timing of tax payment under the Estonian tax system. If, for example, one hundred euros is earned and it stays within the company, no tax is due. If 79 euros is distributed to the shareholders, 21 euros of corporate income tax must be paid. All distributions are subject to corporate income tax at the grossed-up rate of 21/79 of the amount of taxable payment.
With the ever increasing scrutiny and vigilance of the tax authorities, especially with the introduction of offshore blacklists, it has, in recent years, become increasingly difficult for companies formed in tax haven jurisdictions to trade directly with onshore companies. Today, in an international tax planning scenario, the selection of the location of an onshore trading, or holding company is one of the most important decisions to make.
With the implementation of the Estonian tax legislation in the year 2000 and the relevant tax provisions and amendments enacted later, Estonia has established itself as a new player in the international field of holding regimes.
Estonia applies a full participation exemption for dividend income for qualifying holdings. This means that dividends flow through Estonia with no tax whatsoever. The holding threshold for participation exemption is 10 per cent. There is no withholding tax on outbound dividends, including those paid to non-resident offshore companies (e.g. Belize, BVI, etc.)
The following chart illustrates the use of an Estonian company in an international holding structure:
The corporate tax system applies to:
? Estonian resident companies (all Estonian registered companies are tax residents)
? Permanent establishments of foreign companies
? Branches of non-resident companies
An Estonian company is an excellent tax deferral vehicle, applying no corporate income tax until distribution. The flat rate of corporate income tax is 21/79. A full participation exemption applies for dividend income. There is no withholding tax either on outbound dividends or on outbound interest.
Prospera, as a professional consulting and accounting group, can help you with all steps regarding the setting up and maintenance of an Estonian company. For more information please contact our highly qualified team at our Tallinn office:
www.prosperainfo.com
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