We at Leinonen OÜ have provided accounting, legal and tax services for many e-Residents for many years. During those years, we have come across several myths regarding e-Residency, which may eventually result in claims and fines to the e-Residents, who decide to establish a company in Estonia. Hereby, we provide you and debunk four common myths regarding e-Residency:
Myth 1. No taxes have to be paid in Estonia.
It is true that there is no corporate income tax in Estonia but this is only in the case the profit of the Estonian company has not been distributed among the shareholders. After the annual report the entity has submitted to Commercial Register, the shareholders can decide to take the profit out as dividends. The company is obligated to pay income tax of 14-20% from those dividends. The company also has the obligation to pay tax on fringe benefits. Fringe benefits are for example an apartment rent for a board member, free lunches for employees and selling company’s property to employees or board members below the market price. Not paying the taxes correctly will likely result with a claim from the Estonian Tax and Customs Board with additional interest.
Myth 2. No accounting is necessary for companies in Estonia.
In Estonia, all legal persons in private or public law registered in Estonia as well as sole proprietors, and branches of foreign companies registered in Estonia (hereinafter branches) are accounting entities. At the end of each financial year, an accounting entity is required to prepare an annual report, which consists of the annual accounts and the management report. There have been cases where e-Residents have not submitted annual reports, which resulted in the deletion of the company of the e-Resident from the Estonian Commercial Register.
Myth 3. A bank account in an Estonian bank can be established online.
With Estonian banks having to follow money laundering regulations very strictly, they also implement their own due diligence measures. This also applies to e-Residents, who are required to be physically present at the bank to have the account opened. The Estonian banks may eventually refuse to open the bank account in case they find the information provided to them insufficient or otherwise suspicious.
Myth 4. Establishing a legal entity in Estonia helps to avoid paying corporate taxes in the country of origin.
This myth is seen very often among the e-Residents from neighbouring countries, e.g. Finland. In case the permanent economic activity of the Estonian company is in another EU country, the Estonian company is a subject of the taxes of that EU country. For example an Estonian company may be taxed by Finnish tax authorities if the permanent establishment of the Estonian company is in Finland (all the economic activity and the management is in Finland). Needless to say that a failure to take this into account can result in considerable unexpected expenses and legal issues for the company.
To avoid the negative outcomes mentioned above, it is highly recommended to consult specialists before making business or financial decisions regarding the e-Residency. Leinonen OÜ has very experienced accountants as well as legal and tax advisors to help the e-Resident find the best possible solution.