Tax-free residency in Estonia

[JustAnotherNomad]

Hmmm, I’m not sure if we are talking about the same thing.

The structure I suggested was something like this:
- Romanian microcompany (1% tax on revenue) with some substance
- Apartment (residency) in Estonia where you don’t have to spend much time
- You live where you want, as long as you avoid triggering tax residency or permanent establishment anywhere else

You should be able to receive dividends from the Romanian company tax free, assuming there is no Romanian withholding tax. (If there is Romanian WHT, you should be able to avoid it with an Estonian holding company.)
That’s essentially what people choose Portugal’s NHR or Cyprus’ non-Dom residency for. Estonia is a Schengen country like Portugal, but with a simpler tax code, everything in English, everything online, very modern.

I did not recommend incorporating a company in Estonia, except for a holding company to avoid foreign WHT if necessary.
And again, you need to double check everything with an Estonian tax lawyer. But they are professional and affordable. With Cyprus, you hear lots of stories about shady accountants and lawyers.

 

[b2bfoxman]

in Estonia I think it is allowed to pay dividends only after the first year of doing business. And paying salary to yourself is really expensive as there is the 34% social tax + 20 % income tax for salary. But the tax office page said a loan from a company would be taxable only if the interest was lower than 0%, so as long as you would pay some interest for a loan, would it work to use it as a way to start getting income without needing to wait full year? So pay yourself a minumum salary allowed, and take monthly more loan from the company with a deal of paying 1% interest .and after the first year is done and time to pay the dividends, you can just pay the loan back?

 

[JustAnotherNomad]

That’s not what this thread is about at all, but anyway: As far as I know it’s illegal for Estonian companies to give loans to shareholders.

 

[JustAnotherNomad]

I’ve googled a bit and it seems like it’s not illegal after all. But I still don’t see a reason to use an Estonian company.

 

[Traveler]

It's indeed illegal in Estonia to provide loans to shareholders. It's actually very clear in the "Business Law" (Äriseadustik) - look up § 159. "Laenukeeld".

A rough translation would read: "A business may not provide loans to its shareholders whose share represent more than 5% of the share capital".

As far as I'm aware, it's still being done in practice as there are enforcement issues, but that's beyond the scope of the discussion on whether it's legal. It is not.

 

[JustAnotherNomad]

I only found this article, which makes it sound like it’s legal?
https://lextal.ee/en/corporate-income-tax-estonia/
Either way, I wouldn’t set up a company in Estonia, unless you have very good, specific reasons for doing so.

 

[Traveler]

Sadly, especially in this industry, online articles can be anywhere from somewhat misleading to downright wrong. I'd recommend reading the law, rather than any online articles, though. In civil law countries, it's relatively straightforward to do and doesn't require expert knowledge.

 

[jscargo]

If you are an individual, tax resident in Estonia, you can do all the work-around you may want to. The moment the money lands in your account, if it has made to it paying 0% - no matter where it came from, you will be taxed at 20% at an individual level.

 

[JustAnotherNomad]

If you are an individual, tax resident in Estonia, you can do all the work-around you may want to. The moment the money lands in your account, if it has made to it paying 0% - no matter where it came from, you will be taxed at 20% at an individual level.

Wrong. Please don’t spread misinformation.
I don’t think you even read the thread because I clearly said that corporate income tax must be paid somewhere. But your personal income tax will be zero.

 

[jscargo]

Wrong. Please don’t spread misinformation.
I don’t think you even read the thread because I clearly said that corporate income tax must be paid somewhere. But your personal income tax will be zero.

I think you are just hoping for the best.

If this actually becomes true there will be millions of people willing to move to Estonia or partially establish themselves there to profit from this. EU would never let a member state get away with it.

There is no actual evidences backing your theory. I am not spreading misinformation, it is just a reasonable analysis considering the policies currently in place in the bloc.

 

[JustAnotherNomad]

No, this is not something that I just made up. It is a regular and valid scheme, like Portugal’s NHR. I know someone who has had this verified with tax lawyers. It is also explained on government websites, I think.
But like with Portugal’s NHR, there are requirements that must be met. If your business has no substance and is effectively managed from Estonia, it won’t work.
If you own a company in Japan with actual local directors, substance and operations, and you are only a shareholder, it will work.
If you don’t believe me, talk to an Estonian tax lawyer or send and email to the Estonian tax office.
Your claim is like saying “the EU would never get Malta get away with a dodgy scheme where they refund 30% of 35% corporate income tax, so that a company only pays 5% CIT”.

Also if you own an apartment in Estonia, but spend 200 days per year in France, obviously this won’t work. It also probably won’t work if you spend 200 days per year in some other country or your wife and kids live there, even though you officially don’t have an apartment there and the place of dwelling is the tie breaker with the highest priority.
But the rules are straightforward and much better than Portugal’s NHR, if you ask me.

Also I explicitly said that people should figure out the details with their tax lawyers. I hope nobody in this forum is stupid enough to blindly follow stuff they read on the internet.
But you wrote dividends will be taxed 20% on the individual level and that is simply not true if corporate income tax has been paid.

 

[jscargo]

No, this is not something that I just made up. It is a regular and valid scheme, like Portugal’s NHR. I know someone who has had this verified with tax lawyers. It is also explained on government websites, I think.
But like with Portugal’s NHR, there are requirements that must be met. If your business has no substance and is effectively managed from Estonia, it won’t work.
If you own a company in Japan with actual local directors, substance and operations, and you are only a shareholder, it will work.
If you don’t believe me, talk to an Estonian tax lawyer or send and email to the Estonian tax office.
Your claim is like saying “the EU would never get Malta get away with a dodgy scheme where they refund 30% of 35% corporate income tax, so that a company only pays 5% CIT”.

Also if you own an apartment in Estonia, but spend 200 days per year in France, obviously this won’t work. It also probably won’t work if you spend 200 days per year in some other country or your wife and kids live there, even though you officially don’t have an apartment there and the place of dwelling is the tie breaker with the highest priority.
But the rules are straightforward and much better than Portugal’s NHR, if you ask me.

Also I explicitly said that people should figure out the details with their tax lawyers. I hope nobody in this forum is stupid enough to blindly follow stuff they read on the internet.
But you wrote dividends will be taxed 20% on the individual level and that is simply not true if corporate income tax has been paid.

I haven't written that dividends will be taxed on 20%. I said that as a tax resident in Estonia it is unlikely that the money will be in your physical account without paying 20% in tax sooner or later. You know better than I that Estonia has a flat tax rate of 20%. So from all the documentation provided, let's say you paid 5% on taxes wherever the dividends or income came from. It is very easy and convenient for them to just say, ok, you paid 5% there, so more 15% here, and then you have 20%.

With the substance aspect it is another thing which is likely to be used against you than in your favor more often. You can think "I have substance" and the government may disagree.

If you can provide a company or a link of someone actually doing this and succeeding, i would be very interested in reading it. It would provide the perfect loophole that almost any Estonian entrepreneur would use, smashing tax revenue. That is why I have strong doubts about it. Unlike Portugal NHR, where Portuguese residents can't apply, what would stop one or all Estonian residents from doing it?

 

[jscargo]

I have read more about the subject. It could work if let's say you own shares of a garment factory in a low tax company, in which you have no managerial role and there are various shareholders.

For an IT business being the sole director of a company, they can just say what they always do - you live here, you work actively in the company, therefore the work is performed here, pay CIT here. In this scenario it would work as long as the tax office want it to.

 

[JustAnotherNomad]

I didn’t claim anything else.
Those are also the rules for Portugal’s NHR. Except Portugal has a ton of additional rules that make it risky, and the program is limited to 10 years. If you live in Portugal, there is always a risk that they say you work from Portugal and you have to pay Portuguese taxes for your “offshore” company. NHR was intended for retirees, i.e. the garment factory owner you mention.
And by the way it’s the same with countries like Thailand that have territorial taxation: You can receive dividends tax free from your factory abroad. But if you work from Thailand, you will need to pay Thai taxes.

I have spoken to somebody who owns companies in several countries and he was strongly considering moving to Estonia because of this. He had consulted with tax lawyers in all relevant countries, and the conclusion was that he wouldn’t have to pay any taxes in Estonia. But to be fair, those were high-tax countries.
I only mentioned this here as an idea. Whoever is interested can and should check the details with proper legal counsel.

 

[anotherone]

I don't understand this thread. I went myself to Estonia in 2016, as en E-resident. I hired some attorneys and they told me that I had to pay 20% income tax. I didn't check again since. When I saw in Estonia, people told me that local people tried to declare their income as dividends. The tax authorities saw it because people declared a dividend every month and re-qualified those dividends as income. Estonia monitors the account of everyone a lot. Thy have super powerful algorithms. It is more advanced than anywhere in Europe.

Estonia has invested a lot of money in everything that is digital. I would not try to make the Estonian gov. that I am a resident. Since, their system is linked to utility bills. I am sure they can check and find out if you are a resident.

I just checked and I think it didn't change.

§ 6. Resident
(1) A natural person is a resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia. Estonian diplomats who are in foreign service are also residents. A resident natural person shall pay income tax on all income derived by him or her in Estonia and outside Estonia, regardless of whether the income is listed in §§ 13–22 or not.
[RT I, 06.07.2012, 1 - entry into force 01.04.2013]

https://www.riigiteataja.ee/en/eli/ee/509012020002/consolide/current

 

[JustAnotherNomad]

I don't understand this thread.

Yes, that’s quite obvious.
Everything you write is about having a company in Estonia, running things from Estonia. That’s not what this is about.
This is about owning a business elsewhere, living as a “retired” person off dividends which that business outside of Estonia pays.
Very different situation.

 

[dziter]

My question is not directly in link with the thread but connected since you spoke about Cyprus and different setups.

I was connected with someone, living in Cyprus and willing to be tax resident in Cyprus.
However, this person is create an Estonian company and staying resident in Cyprus.

I am wondering what's the interest? Cyprus alone without managing another structure (Estonian company) is simpler. It's already a small "eldorado".

And it will be 20% tax WTH dividends from Estonia.

If you have any idea, I will be happy to understand.

 

[JustAnotherNomad]

There is a thread about that here:
https://www.offshorecorptalk.com/threads/register-estonian-company-with-local-tax-authorities.29484/

 

[avalanche]

Georgia has "virtual zone companies". Same tax concept as Estonia - no CIT until dividends are paid out, and only 5% in that case.
So it should be possible to have a company in Georgia, be a resident of Estonia and pay only 5% tax on dividends that are paid out.

Now the fun part, how would you open bank account for such company? What about acquiring?

 

[avalanche]

With Cyprus, you hear lots of stories about shady accountants and lawyers.

Every country has shady lawyers and accountants.

At least in Cyprus you can check their reputation and credentials more easily