TABLE OF CONTENTS
- What should businesses expect in a post-pandemic world
- Businesses rising in the wake of 2020’s economic crisis will embrace their digital identities
- Build your future and your online business with a company in Estonia
- Your guide to incorporating a company in Estonia
- Establishing and maintaining your payment and taxation accounts
- What you need to know about opening a bank account
- Incorporate in Estonia is open for business during the pandemic. You can be, too.
The 2020 Coronavirus pandemic has triggered a global crisis. The effects of the pandemic include tragic personal losses and widespread economic uncertainty. Given the current state of the world, is now the right time for you to consider company formation in Estonia? It may be.
Entrepreneurs are optimistic leaders. Many of them will find ways to meet this crisis head-on and shape the future for the better. You might be among them. And, European Union member Estonia, with its liberal incorporation policies and unique e-residency solution, may be the perfect jurisdiction to support you as you develop a company to rise and thrive in the “new normal.”
In this article, we share our predictions for the post-crisis economy and how Estonian company formation can position your organization to embrace the opportunities that await.
What should businesses expect in a post-pandemic world
Experts cannot fully predict what our world will be like once the crisis triggered by the spread of the COVID-19 virus passes. However, while much remains unknown, most pundits are certain that the world will be forever changed. Already we see signs of these changes. Entire industries, particularly in the hospitality sector, are being wiped out or revisioned. Tourism, entertainment, transportation, and dining are all experiencing rapid declines in revenue and market share from which they may never recover. Consumer purchasing behavior has changed as well. Purchases of cookware and home office and workout equipment are on the rise. Meanwhile, sales of clothing and luxury goods have taken a hit as cautious shoppers closely guard their disposable income.
Yet, as Aristotle once stated in his infamous postulate: “Nature abhors a vacuum.”
A global crisis such as this opens rare windows of opportunity in which extraordinary growth can happen.
History tells us that the foundations of new global businesses were laid upon the rubble crises. EBay was founded shortly after the dot.com bubble. Airbnb was founded in 2007-2009 during the financial crash.
What new businesses will rise to fill the void left by the companies this crisis eliminates?
Many of them will be digital-first businesses that will serve the needs of consumers and organizations around the world. And, they’ll do it with more freedom than ever before.
Businesses rising in the wake of 2020’s economic crisis will embrace their digital identities
Not withstanding the current economic conditions, the rise of the digital economy has made establishing and running a successful business easier than it has ever been. Digital applications, including e-commerce platforms, communication software, and technology solutions for customer management, accounting, and sales, are in high demand. Additionally, regardless of their location, today’s businesses have access to international talent and the ability to communicate with investors from around the world. Restrictions associated with individuals’ physical locations are a thing of the past.
Almost everything you need to do to operate a digital business can be done via your computer from the comfort of your own home–no matter where your home may be.
We predict that tomorrow’s economic winners will be entrepreneurs and companies that operate in the following sectors:
- Ecommerce — The ecommerce industry has been steadily taking over brick and mortar businesses for several years. As world populations shelter in place and remain under quarantine, the pace of ecommerce’s takeover has hastened. This may be the final nail in the coffin for brick and mortar companies.
- Subscription-based food delivery and commerce — Since the majority of shops are closed and people are steering clear of physical contact, home delivery services are experiencing explosive growth. Depending on how long the crisis lasts, we expect that the legal environment for delivery-based businesses will shift. In particular, regulations governing the use of drones and robots for home deliveries will likely be relaxed and refined in response to increased popular demand for these services.
- Air/water purification and sanitization — The availability of clean water, air, and environments will be crucial in the foreseeable future. Businesses that leverage technology to affordably produce clean, sustainable habitats will be in high demand.
- Online education — During the pandemic, educational institutions have sought new and different online teaching solutions as schools have closed. Following this crisis, students and organizations may be reluctant to return to the old way of doing things.
- Video conferencing — Physical meetings will be replaced by software solutions such as Zoom as organizations competing for top talent transform themselves to remote-friendly and remote-first business models.
- Virtual event technology — During the current crisis, conventions and conferences packed with crowds have been replaced with virtual events. Expect that a commitment to reducing carbon footprints and economies of scale will make this trend a lasting one.
- Remote work technologies — Technology solutions such as Loop and Slack that streamline work processes will become more relevant than ever before as employees who have become accustomed to working from home during the pandemic decide to stay home after the crisis passes.
- Subscription-based entertainment — Netflix, HBO, and others have filled the entertainment void caused by restrictions on outdoor activities. Major entertainment producers are already eyeing on-demand and home delivery models that will cut movie theaters and other away-from-home options out of the loop.
- Video games and virtual reality — Being stuck at home has meant reduced working hours and more boredom for a lot of us. Employers have less control over their employees which, in turn, means people have more free time to pursue home entertainment activities. As digital entertainment becomes one of the few available forms of entertainment at hand, more and more consumers are becoming adopters of virtual entertainment technology.
- At-home exercise companies — Restrictions on when and where we can work out have produced a surge in home exercise equipment sales. Will consumers return to the gym after the pandemic passes?
- Internet-based services — Internet usage has seen an enormous upsurge since the issuance of stay at home orders. Overloaded servers and connections mean that new tech solutions to address bandwidth needs will be more than welcome.
The demand for digital solutions among businesses and in everyday life is growing dramatically, and it will most likely stay this way far into the future.
That is why now is the right time to form your digital business.
Build your future and your online business with A company in estonia
The country of Estonia is the ideal jurisdiction for forming a future-facing business. The nation’s e-Residency program offers an innovative way for entrepreneurs to establish and manage their digital businesses. E-Residency enables digital entrepreneurs to start and manage an EU-based company online from anywhere in the world. With e-Residency you have access to the Estonian government’s e-services, which enable you to carry out everyday business tasks 100% digitally and remotely.
Below you will find a detailed overview of what you need to know and do to be a part of Estonia’s fantastic business environment and learn how to make it work for your business in these quickly changing times.
Four major benefits of choosing a company in estonia for your next enterprise
There are many benefits to forming your business in Estonia, below are the four primary ones.
- 100% online formation and management — By far, the most important advantage of forming a business in Estonia is that, once you obtain your e-Residency card, you can start and manage your company from anywhere in the world. As an e-resident, you can digitally sign documents and contracts, declare Estonian taxes online, and use online banking services in Estonia. You do not need to be personally present in Estonia to conduct your business.
- 0% corporate income tax on profits retained in the company — Estonia has a unique corporate income tax (CIT) system which differs from traditional systems. In Estonia, profits earned by a company are not immediately subject to CIT. Instead, CIT is only due when the profits are taken out of the business (e.g., in the form of dividend). Profits retained in company accounts or reinvested and used for business purposes are not subject to CIT.
This taxation structure means that the shareholders of the company can control when CIT taxes are paid by deciding if and when profits will be distributed.
- Presence in the European single market — Estonia, as part of the European Union, is part of the largest international single market in the world. Member states and their citizens enjoy the economic benefits of removed trade barriers as well as the ability to travel freely between member countries. A shared currency and harmonized corporate laws between the member states, among other EU member privileges, ease commerce, and empower businesses growth.
Further, as a member state of the European Union, Estonia is a part of the Single Euro Payments Area (SEPA). Making electronic payments within the SEPA is as easy as making cash payments. Businesses formed in Estonia can make fast and secure transfers between bank accounts anywhere in the euro area. SEPA’s guidelines also mean better banking services for all: transparent pricing, valuable guarantees ensuring that your payments are received promptly and in full, and banks assuming responsibility if something goes wrong with your payment.
- Estonia has a great business environment — Estonia has consistently been ranked among the world’s best business environments by various international indices. For example, in 2017, the World Bank ranked Estonia as 12th best in the Doing Business category. A study published in 2018 by Tax Foundation, a US-based think tank, ranked Estonia as having the best tax code in the OECD for the fifth year in a row.
If these benefits have convinced you that you should launch your digital business by forming a company in Estonia, then your next step is to choose the business form that is right for your organization.
Which Estonian form of business will suit your needs?
When choosing an appropriate business form, you must first evaluate your opportunities and risks. You need to understand what type of company is best for your business taking your goals and financial position into account. The most widely used business forms in Estonia are sole proprietors (FIE), private limited companies (OÜ), and public limited companies (AS). The forms of business differ from each other with regard to the size of the required start-up capital, number of parties in the company, the extent of proprietary liability, and type management organization.
What business form is best for you?
We recommend the private limited company solution for many of our clients because a sole-proprietor is obliged to pay income tax and a social tax on the earned profits annually. The owner of a sole proprietor is also personally liable for the obligations and debts incurred by the business. However, some entrepreneurs prefer a sole proprietorship because, unlike a private limited company, there is no start-up capital required to form a sole proprietorship.
Comparison of Estonian sole proprietorships and private limited companies
- Sole-proprietors carry personal liability for all the obligations related to the activities of the sole-proprietor. In the case of a private limited company, liability is limited up to the capital requirement (the minimum amount is EUR 2,500), until the share capital is paid in.
- Taxation of sole-proprietors is more complicated than that of public and private limited companies. Sole-proprietors are obliged to declare their profits/losses annually, and their profits are subject to income tax (20%) and social tax (33%). Private limited companies may postpone their tax obligation until distribution (e.g., in the form of dividends), and such distributions are only subject to corporate income tax (not social tax).
- The state fee for registering a sole-proprietor is EUR 13. The state fee for registering a private limited company is EUR 190.
- A sole-proprietor is not able to employ himself in the company and be paid a salary, but may hire employees.
Despite the lower cost of entry, the tax and personal liabilities of a sole proprietorship make it a less attractive option for many entrepreneurs. Most of our clients choose a private limited company as their Estonian form of business.
Your guide to incorporating a company in estonia
After choosing your business form, you next need to register your company in Estonia and establish your banking and other accounts. Working with an experienced partner such as Incorporate in Estonia will enable you to complete this process quickly and hassle-free.
Filing your incorporation documents in Estonia
To incorporate a business in Estonia, you must be physically present, make use of a proxy, or complete the transaction as an e-resident. For entrepreneurs who plan to build and operate their business remotely, the easiest method is to obtain an e-Residency card.
Once you have an e-Residency card, our team can establish your company directly in your name.
If you choose not to become an Estonian e-resident, we can still help you form your business in Estonia. Incorporate in Estonia will file the necessary paperwork to form the company. Then, we will transfer it to you. This transfer may take place in person when you visit Estonia or by proxy who has a power of attorney to act in your name. In either case, notarization is required to complete the transfer. It takes up to 5 working days for all information to be changed and reflected online.
Using an Estonian e-Residency card for your Estonian company formation
Estonian e-residency makes your life a lot easier as it provides you an opportunity to administer the company from anywhere in the world. You can digitally sign documents and contracts, declare Estonian taxes online, and use online banking services. The average processing time to obtain an e-Residency card is one month, but it may vary based on demand and pickup location.
Selecting Smart-ID to register your company in Estonia
Smart-ID is the easiest, fastest, and safest way to authenticate yourself online. It is a convenient mobile application that works as an identification solution for anyone that does not have a SIM card in their smart device but needs to prove their online identity securely. Smart-ID can be used to log into e-services, for online banking and signing documents.
Using Smart-ID for personal identification is free, totally unlimited, and you can download the app on all of your Android and iOS smart devices.
Since the signature given by Smart-ID is equal to a signature given by an Estonian Mobile-ID and ID-card, Smart-ID users are now also able to establish an Estonian company online and remotely by using the benefits of Smart-ID. You just need to have an Estonian personal identification code for this.
If you wish to use the benefits of Smart-ID and you are not yet an Estonian e-resident (meaning that you do not have an Estonian personal identification code), let us assist you in applying for Estonian e-Residency.
Power of Attorney: An alternative to e-Residency registration of your Estonian company
A Power of Attorney (PofA) enables the holder of the PofA to carry out transactions, such as incorporating a business, on your behalf. PofAs are often used to conduct business or complete legal transactions through a representative when the natural person or the legal representative of the legal person wishing to conclude the transaction cannot participate in the transaction personally. For transactions requiring a notarized form, a PoA issued in a foreign country may be used if it has been certified or certified by a competent official of the foreign country.
Our team is available to assist you in preparing a PoA. Once you notarize and legalize (if applicable) the PoA in your country and send the document via post to us, we can then conclude your company formation at an Estonian notary.
We also offer tailor-made solutions for more complex incorporation matters, such as setting up a public limited company or a company with licenses and authorizations. In addition, we offer and have companies that are ready-made which we can transfer to clients using a PoA.
How quickly can you incorporate a company in estonia using a power of attorney and what are the capital requirements?
Incorporate in Estonia can register the company as soon as we receive all the necessary documents. During the process, we will provide you detailed instructions on how to formalize the required documents. Because of our expertise and network of resources, we can establish an Estonian private limited company within one working day. The timing and necessary steps to transfer control of that company to you depend on many circumstances such as where you are located, how quickly we can receive an appropriate certified power of attorney, among other factors.
Usually, the share capital of the company is EUR 2,500. When we begin the formation process, you’ll decide whether to establish your company with distributed share capital or wait to input capital. This contribution of the share capital must be made before or at the time you decide to distribute dividends or change the share capital amount at the latest.
Importantly, until the complete payment of the contribution by all the shareholders, the private limited company cannot increase nor decrease the share capital or make any disbursements to the shareholders. Estonia’s private limited company rules also provide that until the share capital is distributed, the founder of a company carries personal liability for all the obligations which are related to the activities of a private limited company. This liability is limited up to the capital requirement (minimum amount is EUR 2,500).
Establishing and maintaining your payment and taxation accounts
To operate your business, you will need to have a business bank account and obtain a tax identification number.
What you need to know about opening a bank account
Requirements arising from different regulations have made the process of opening an account more complicated and expensive than they were in the past. To assist our clients seeking support for Estonian business formation, Incorporate in Estonia cooperates with LHV bank, the biggest Estonian-based financial group in Estonia. We put forth our best efforts and previous experience to achieve your aims. Nonetheless, the final decision is made by the bank, and it is dependent on circumstances that we cannot influence.
Due to their strengthened client acceptance rules, the bank will seek information enabling it to verify the background, origin of assets, and previous transactions of non-residential customers. As a prerequisite, the applicant’s business must have direct ties with Estonia, and the applicant must explain in detail how the business activity, owner, or management of a company is connected to Estonia. An Estonian company may choose to have a bank account in a foreign bank.
Payment service providers as an alternative to traditional banks
As an alternative to traditional banks, it is also possible to apply for an account at a payment service provider (PsP) or virtual bank. The fees for opening this type of account can differ quite a bit between service payment service providers.
To open a PsP account, we will send you the application form and questionnaire to complete. These documents are then forwarded to the PsP’s compliance department for review. If your application is accepted, the PsP will contact and invoice you directly for the opening of an account or/and ask for any additional documents. Until your account is opened, we will mediate the communication and assist you with the documentation. In general, the account opening decision is made within 1-2 weeks following the receipt of all necessary documents.
Ongoing accounting services and support for your business from Incorporate in Estonia
Businesses formed in Estonia should be familiar with Estonian laws and be prepared to communicate with tax and other authorities in the Estonian language. For these reasons, many of our clients engage our ongoing assistance to fulfill their tax and accounting obligations after their Estonian business formation. To this end, we offer subscription-based and single-need services.
Our subscription-based package includes a licence fee for the use of an accounting program as well as monthly monitoring of your accounting documents (e.g. reminders, etc.). Our services also include access to our accountant for consultations so that you can get instructions before making transactions or payments. In addition, our accountant will tell you which of your corporate costs can be covered by the company without any tax consequences and which costs cannot.
To use our accounting services, you will need to provide us with all the relevant documents such as invoices and bank statements.
Fees for these services will depend on the complexity of work and volume of transactions carried out through the Estonian company per annum.
At present, we do not provide English online accounting. However, some of our English-speaking clients have found that they can provide most of the necessary information using an accounting program such as Quickbooks. Our accountant can then review the data. Such review services are charged based on an hourly rate. The exact budget depends on the input which is provided by the client and the work-load that is required to complete the reviews.
Tax considerations for Estonian company formation
Once a company is formed in Estonia, it will be liable under Estonia’s corporate tax rules. In addition, the company may be responsible for collecting or paying value-added taxes. The timing and rate of payment of these taxes vary.
Estonian corporate tax rates
As we previously mentioned, one of the benefits of company formation in Estonia is that corporate profits are not immediately subject to CIT. Instead, taxation usually occurs when profits are distributed, such as when a dividend is issued.
Since 2019, the dividend payment tax rate has been 14% on the average regular dividend payments of the last 3 years if the recipient of the dividends is a legal person. If the legal person who received these lower rate dividends is paying out the received payments to its owners who are physical persons in Estonia, there is an additional 7% income tax withheld. If the legal person who received these lower rate dividends is a non-Estonian company, the income tax rate is 14%. There is no additional tax upon forwarding those dividends as this transfer takes place outside Estonian jurisdiction.
2019 was the first year of this tax rate. One-third of 2018 of average distributed profits taxed with income tax, can be taxed with this lower rate. In 2020, 1/3 of 2018 and 2019 average distributed profits can be taxed with a lower rate. And, in 2021 and beyond, it will be the last 3 years’ average distributed profits which have been taxed with income tax. The rest (2/3) of profits will be taxed with a regular 20% rate.
Estonian company formation and tax registration
In Estonia, a value-added tax (VAT) number is not immediately given to the company. Until the company is not VAT liable, it acts based on a registration number that is also a tax number. Companies are free to choose whether they will voluntarily register for an Estonian VAT or do it later when the corresponding threshold is exceeded. The difference is that a VAT registered company must include VAT on the invoice and declare it on the corresponding declaration. However, if a company is not taxable, the tax will not be added to the invoice, and thus the total price of the service or goods for the customer is lower.
EU trade and VAT registration
If an Estonian company sells products or provides services that are not brought to or taken out of Estonia, the products and services are taxed according to the rules of the country where the turnover has arisen. However, if you register your Estonian company for VAT purposes, it may issue invoices for EU VAT registered companies with 0% VAT. Many of our clients register their companies for VAT purposes because their business partners throughout the EU prefer to cooperate with companies that have a VAT number.
The general VAT registration threshold is EUR 40,000 per calendar year. The company may register itself for VAT purposes voluntarily before the above-mentioned EUR 40,000 threshold is exceeded. To register the company for VAT purposes, your company will need to apply to the appropriate tax authorities. Applications are usually processed within 5 working days. The process may take longer if the authorities require additional documents or information. Generally, requests for additional information are related to the analysis of whether the company is engaged, or is planning to be engaged, in actual business activities.
Incorporate in Estonia provides VAT registration services for our clients. We also support you throughout the process, including providing legal advice about VAT registration possibilities.
We also provide EORI registration and LEI code registration services. If a company is registered for VAT purposes, then there is a need to compile and submit two (VAT and corporate income tax) declarations every month.
Incorporate in Estonia is open for business during the pandemic. You can be, too.
Despite the declared state of emergency due to the COVID-19 virus outbreak, we continue to provide services for both our current and new clients. However, you may not travel to Estonia if you are not a citizen or hold a residence permit of Estonia. If you do not have an e-Residency card or do not wish to apply for one, we can establish the company under our name and transfer the shares to you remotely based on a Power of Attorney using the e-Notary system.
Estonia’s entrepreneur-friendly business environment makes it the ideal place to incorporate your company. If you are interested in registering your company in Estonia, let us help you sail smoothly through the process. Just give us a call, and we’ll get you started.
Disclaimer: This article provides general information, which may or may not be correct, complete or current at the time of reading. No recipients of content from this site should act on the basis of content of the article without seeking appropriate legal advice or other professional counseling.