Estonia

Why can setting up a holding company in Estonia be so worthy?

The Republic of Estonia is a small republic in the north of Europe, it is part both of the EU and the Eurozone and in the past decade has reached a Western European living standard.

The "International Tax Competitiveness Index" report published by the Tax Foundation for 2021 ranks Estonia at first place among the 38 OECD Member States for tax competitiveness moreover to date Estonia has signed with foreign countries over sixty bilateral Double Taxation Agreements (DTA) to avoid international double taxation of income and property.

Honding company regime

The tax deferral system combined with the participation exemption regime (PEX) as they are both applied in Estonia, makes the country an ideal place for setting up holding companies.

The system of tax deferral until distribution of profits applies not only to "active income" which is the income generated by economic activity, but also to "passive income" as interest, royalties and dividends from other resident and foreign companies (not black-listed).

Gains from the alienation of shareholding in a subsidiary are also included in the tax base on distribution. Dividends that the Estonian holding distributes to individuals are also exempt from tax as taxation is imposed only once and at corporate level even where such dividends come from another entity; the exemption is provided by the Estonian law even where those dividends are distributed by a foreign company (as long as non resident in a “Black List” country) as long as they have already suffered corporate income tax in the source country according to the so called "subject-to-tax" rule which should be tested at any distribution. Another big plus in setting up a holding company in Estonia lays in the lower tax cost of its financing, in fact Estonian law does not provide any withholding tax on interest payments made by the company to other resident and non-resident companies or to non-resident natural persons, moreover in Estonia there is no limitation of the interests payable by a company as it is usually provided for by "under-capitalization" (thin-capitalization) regimes. As also provided for in neighboring Latvia, the corporate income tax (CIT) exemption regime of dividends distributed by other subsidiaries is commonly known as “flow-through dividends” regime or “dividends of transit".

As said, in order to benefit from this regime, the Estonian law requires that the profits from which such dividends are generated have been "subject to tax" at the level of the company distributing them in the country of residence (as long as not black-listed) or alternatively that CIT has already been paid by another Estonian distributing company. In order to avail of the exemption, the foreign subsidiary must be resident in a country of the European Economic Area or in Switzerland and the stake in the subsidiary must be at least 10%.

As long as the Estonian company retain their profits without distributing them no corporate income tax liability arises as tax is due only when dividend distribution is declared

Estonian corporate income tax (CIT)

Estonia was the first country in Europe to introduce the corporate tax deferral system which provides for postponement of taxation of accounting profits; corporate profits are not taxed when they arise according to the common method of the "arising" or "accrual" basis (taxation by competence) but instead, corporate profits are taxed only when they are distributed to their shareholders according to the so called "remittance" basis (cash taxation). The Estonian corporate income tax (CIT) provides also for a 0% tax on reinvested profits.

All retained earnings of an Estonian company are tax-exempt.

Distributed profits are taxed only once and only at company level, moreover Individuals shareholders who receive dividends are exempt from personal income tax (PIT), it follows that in Estonia income of legal persons do not suffer any "economic double taxation" (where profits are taxed twice by the same jurisdiction first at corporate and then at personal level). It must be noted that the Estonian CIT is widely regarded as not a withholding tax applied on dividends, but a real corporate income tax (CIT) this for the purposes of both Double Tax Agreements (DTAs) and the European Union Parent-Subsidiary Directive which exempts from tax dividends distributed between associated companies residents of the European Union. According to the Estonian CIT law, until the Estonian company holds its profits by not distributing them, a 0% tax is payable on corporate accounting profits. The main advantage of tax deferral system lies in the fact that the distribution of profits can be postponed indefinitely without any time limit allowing the company to put gross profits to reserve, to reinvest them or to use them to acquire equity investments in subsidiaries, moreover by paying corporate tax later, the Estonian company benefits from the interest generated by holding its profits in corporate bank current accounts. Estonia is a country where it is possible to be shielded from taxation of repatriated profits from equity investments in foreign companies.

20% standard EIT (enterprise income tax) rate

14% reduced EIT (enterprise income tax) rate

is due for dividends up to the average of the dividends paid over the past three years. In this case a 7% withholding tax applies to the share of dividends paid to natural persons which was taxed at reduced rate. The rest of dividends are taxed at ordinary rate of 20% without any withholding tax.

You can download this webpage with other more useful information in PDF

Estonia
Corporate Income Tax

English version

e-Residency: the virtual residency

In 2014, Estonia was the first country in the world to introduce e-residency as a digital identity tool aimed at the remote control and utilization of public services and which allows the user to prepare and submit to the legally binding documents on behalf of a limited company without going through a notarial deed. The e-residency allows entrepreneurs to completely manage remotely their Estonian company from anywhere in the world simply by using their tablet or PC with a kit issued by the Estonian government. In order to request and to obtain the e-residency a user my fill an application, this can be done easily online and within a few week, the Estonian government communicates its possible approval or denial. Via the e-residency toolkit it is possible to establish a new limited liability company or a partnership, to modify either the statute, the shareholder structure or the corporate purpose of existing companies and to perform many other duties of company directors and legal representatives, the only condition is that all subscribers of the deeds subject to remotely drafting are also holders of e-residency. Since its launch in 2014, nearly 70,000 individuals have applied for digital residency to the Estonian government.

RELIEVA is among the international tax consulting firms selected by the Authorities of the Republic of Estonia for the e-Residency Marketplace.

E-Residency holders can remotely manage their Estonian limited company, without the need of notarial deeds, in this case the appointment of a local contact person will suffice.

For more information about the e-Residency program you may download our brochure

Guide to the
e-Residency

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