A balanced budget, lowest national debt in Europe, one of the highest credit ratings in the region, a member of EU, NATO and as of 1.01.2011 eurozone, absence of restrictions on foreign investments, legal protection of property rights – these are only a few of the reasons why foreign investors have preferred to invest into Estonia, including setting up a holding-company structure in Estonia to act as a hub for investments in the regions.
A great advantage why Estonian companies are popular for holding assets and channelling investments is the tax law according to which a company’s profit is taxed with corporate income tax only upon the actual distribution of profit upon the payments of dividends.
The Estonian Commercial Code foresees five types of companies, but due to their most essential characteristic – the limitation of the shareholders’ liability – the private and public limited companies are the most commonly used forms of entities for holding purposes.
A private limited company (osaühing) and a public limited company (aktsiaselts) – each defined as a company which has share capital divided into shares and the shareholders of which shall not be personally liable for the obligations of the company, but which (itself) shall be liable for performance of its obligations with all of its assets.
Estonia has relative low cost for setting up the companies, public limited company is required to have a minimum share capital of 25 000 EUR, private limited company must have a minimum share capital of 2 500 EUR.
As of 2010, it is possible to establish a private limited company without paying in the share capital contribution, however this option is available only in case company is founded by natural person and the amount of share capital can not exceed 25 000 EUR. In case a private limited company is founded without payment into share capital, then in such case the company shall have a claim against the founder and the founder is liable for the obligations of the company up to that amount.
The setting up a company shall involve a payment of state duty and notarization fee. State duty is fixed at 140,60 EUR, the notary’s fee depends on the amount of share capital. If attorney’s assistance is requred, then legal fees 1000-2000 EUR depending on the circumstances may be applicable.
The commercial register shall make the registration within 5 (five) business days from the submission of the documents to the register.
There is no need to have an Estonian resident or citizen to act as one of the founders or shareholders of the holding company. There are no limitations on jurisdictions or citizens who may found a company in Estonia.
As of 2010 there is also no residency requirement with respect to members of the management board of the company. The law only requires that in case at least half of the members of the management board do not reside in Estonia or in any other country of European Economic Area or Switzerland, then the company must designate an Estonian address whereto the register and third persons may send official documentation.
Estonia has been one of the pioneers of flat rate taxation. The main distinctive feature of Estonian corporate income tax system is that there is no requirement of payment of corporate income tax until the distribution of profit, i.e. retained or reinvested earnings are not taxed with the corporate tax. Corporate income tax is also payable by the company for gifts, donations and representation expenses and expenses or payments not related to business. This applies to Estonian resident companies and permanent establishments of non-resident companies.
Any resident company or permanent establishment of a non-resident is subject to tax on the payments described above at a rate of 21/79 (21/79 on the net payment made equals to 21% on the gross amount distributed).
It is important to note, that Estonia has concluded double-taxation avoidance agreement with around 50 countries, which not only ensures the exclusion from double taxation on the income from the business with treaty countries, as well as lowered withholding tax (WHT) rates on dividends, royalties and interest income received by Estonian tax residents. With respect to the corporate income tax, the double-taxation treaties do not have that much significance as corporate income tax is payable by Estonian tax resident companies in Estonia.
The taxable period for the corporate income tax is a calendar month. The declaration is to be submitted to the taxation authority by the 10th date of the months following the month when dividend was paid.
For example – in case a company adopts in February 2013 a shareholders resolution approving the annual report of 2012 and profit distribution resolution resolving to pay dividends of 100 000 EUR (which is paid in May 2013), then the company is under obligation to submit respective corporate income tax declaration by 10 June 2013 and pay by the same date corporate income tax equallying to EUR 26 582,29 EUR (100 000 EUR multiplied with 21/79).
As of 1 January 2009, dividends payable by Estonian company to non-resident is not subject to any withholding taxes. Similarly in case of interest payments, provided that the interest rate is at arms-lenght, then the interest payments are not subject to withholding taxes. Any payments of interest over the arms-lenght level, is subject to 21% withholding tax.
If the value of a transaction conducted between a resident legal person and a person associated with the resident legal person differs from the value of similar transactions conducted between non-associated persons, the tax authorities may, upon determining the income (i.e. distribution) tax, use the values of transactions applied by unrelated independent persons under similar conditions.
There is no group-consolidation for the taxation purposes on the basis domestic laws per se, therefore an Estonian company is taxed on company per company basis alone. However, the law also foresees participation exception principle to exclude double-taxation of dividends to shareholders. Therefore under certain conditions the Estonian holding company may pass through the dividends to its shareholders without any additional tax obligation.
The participation exemption is automatic and applied vis-a-vis parent-subsidiary relations where the parent owns at least 10% of the subsidiary. Thereby in case an Estonial holding companies has at least 10% participation in an Estonian subsidiary, then that subsidiary shall be liable for any dividend issued by the subsidiary, but thereafter the dividend may move upstream without additional tax burden.
For holding structure purposes it is important to note that the participation exemption applies also with respect to any dividends payable by subsidiaries which are tax residents of European Economic Area country or in Switzerland. The participation threshold is the same 10%, so for example in case an Estonian holding company would own at least 10% of participation in Lithuanian company, then that subsidiary shall be liable for any dividend issued by the Lithuanian subsidiary as per Lithuanian laws, but thereafter the dividend may move upstream to Estonian holding and its shareholders without additional tax burden.
The participation exemption applies also to subsidiaries of Third Countries, e.g. Russia, Ukraine etc. The additional requirement is that for the participation exemption to apply, it must be evidenced that either 1) the underlying profit of the foreign subsidiary was subject to income tax or 2) withholding tax was applied on the dividend payment.
This article outlined the most important aspects to take into account when considering setting up a company in Estonian. As always, any specific corporate and tax structure should be looked at by professionals on a case-by-case basis and we would be delighted to be of your further assistance.
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