Estonia is known to have the least bureaucracy, low tax rates, and a stable political climate making it an ideal place for establishing a business. The country facilitates seamless online transactions and communication allowing new businesses to make it big in the Estonian market.
With the literacy rate reaching 99.99% in 2021, Estonia is famously known for providing a skilled and educated workforce, mainly in STEM (Science, Technology, Engineering, and Mathematics) disciplines. Hence, companies find it easy to scout for highly qualified experts. It ranks consistently high in international rankings for education, quality of life, press freedom, and prevalence of technology. Companies can take advantage of Estonia’s business opportunities and set up a legal entity.
One of the easiest ways to enter the Estonian market is to set up a subsidiary in Estonia. Before delving into the nitty gritty of the incorporation of a subsidiary of a foreign company in Estonia there are several things you need to be aware of. This article will give you a clear view of the subsidiary system in Estonia.
What are the Types of Subsidiaries in Estonia?
The most common types of subsidiary business in Estonia, according to the Commercial Code of Estonia, have been elucidated below:-
Private limited liability company (OÜ)
- A private limited liability company has its shares capital divided into shares of a private limited company,
- A shareholder is not liable for the company’s obligations.
- The minimum required capital is EURr0.01 per shareholder.
- If the founders of a private limited liability company are private persons and the shares capital is less than EUR 25,000, they can opt for paying the shares when establishing a company or postpone the payment.
Public limited liability company (AS)
- A public limited liability company requires at least one shareholder and three members on the supervisory board.
- It requires a minimum capital of EUR 25,000
- When establishing a public limited liability company, you must appoint an auditor.
- Shareholders are not personally liable for financial liability.
General Partnership (TÜ)
- A general partnership is a firm owned by two or more partners.
- There is no specific minimum capital requirement when establishing a general partnership.
- The financial liability is shared equally between partners.
Limited Partnership (UÜ)
- A limited partnership includes two partners: General and limited partners.
- In a limited partnership, general partners manage the business’s day-to-day operations and are liable for the business’s debts and obligations.
- Limited partners provide capital to the business but have limited involvement in the business operations and are only liable for the business’s debts up to the amount of their contribution.
- Limited partnerships are often used in industries such as real estate, where investors can provide capital without being involved in property management.
Commercial Association (ühistu)
- A commercial is a company that promotes and supports members’ economic interests by sharing economic activity. Members can participate as:
- Consumers or users of various benefits
- Via work contribution
- Via usage of services
- Instead of being personally obligated, all members of an association are holistically liable for their obligations with their assets.
- There is no specified minimum capital requirement for Commercial Association.
How to Set Up A Subsidiary in Estonia?
Here is a step-by-step guide on how to register a subsidiary company in Estonia:
- Decide on the business location in Estonia, depending upon the business activity. Different cities or regions may have different establishment laws, affecting fees, availability, and more. You can contact a business service provider to obtain a legal address for your business.
- Next, decide what type of company suits your business goals. Note that a private limited company gives you the most flexibility to operate in Estonia.
- Companies need to decide on the subsidiary name. Ensure the name is available and does not match any other company name. You can use the free tool on the official website – e-Business Register.
- Filing the certificate of registration and articles of association of the parent company and preparing the articles of association for subsidiaries mentioning the company’s operations and purpose
- Register your subsidiary online via Company Register Portal. A fee of €265 applies while registering through the state portal.
- Set up a bank account and get proof of paid-up share capital.
- Registering with the Estonian Central Health Insurance Fund and VAT for the taxation of foreign subsidiaries in Estonia
Benefits of Setting Up an Estonian Subsidiary
Some of the key benefits of a subsidiary company in Estonia as a foreign business owner are as follows:-
Estonia has the least bureaucracy and this country’s tax system is transparent and un-progressive. Hence, setting up a subsidiary in Estonia comes with the following tax benefits:
- The corporate income tax in Estonia is 0% which is highly advantageous to business owners who have not paid out their revenues as dividends and have reinvested them instead.
- There is no need to contribute the subsidiary’s share capital (2,500 euros) at its creation. Hence, there is no need to file a report with the Estonian Tax Board or to register for a VAT number if you don’t receive remuneration.
- As a foreign business owner, you can purchase property tax-free from any Estonian corporation.
- Receiving a tax refund while obtaining a vehicle is easy. You don’t have to pay additional transport tax on the company-owned vehicle.
There is end-to-end transparency in all commercial transactions in Estonia. Hence, the incorporation of a wholly-owned subsidiary in Estonia comes with the following financial perks:
- While setting up a subsidiary business in Estonia, you can borrow unlimited money from your shareholders after registering it officially. The minimum yearly cost of running the business is 500 euros.
- You do not need to pay the compensation for the company’s board members (CEO); hence no taxes can be withheld from that payment.
You can reap several benefits from setting up a subsidiary company in Estonia. Estonia’s business front will not only give you a positive reputation and boost your image in the market but also give you the following additional advantages:
- Unlike other EU nations, you don’t have to mandatorily appoint an Estonian resident in the company’s governing body.
- It is easy to obtain a D-visa for a director of the firm and apply for a residency permit application.
- Registering intellectual property in Estonia is straightforward and seamless.
Documents to Prepare When Opening a Subsidiary in Estonia
The following mandatory documents need to be submitted during the incorporation of a foreign subsidiary in Estonia:
- Certificate of Registration and Articles of Association of the parent company
- Articles of Association of the subsidiary
- Attested documents of the registered address of the subsidiary
- Attested documents of the subsidiary’s share capital deposit depending on the business form
- Information of the appointed manager(s) in the subsidiary
- Application for work visas if a foreign firm wants to transfer staff to the Estonian subsidiary
- Other documents that the Trade Register in Estonia has requested
The process of putting together the paperwork required to establish a subsidiary in Estonia can be managed by local consultants.
What Business Forms Can Estonian Subsidiaries Take?
You can register your business in Estonia as:
- A public limited liability company (AS)
- A private limited liability company (OÜ)
- General partnership (TÜ)
- Limited Partnership (UÜ)
- Commercial Association (ühistu)
Foreign nationals who want to fully utilize the Estonian tax system should register as a private limited liability company or OÜ. In the case of large businesses, they should consider setting up a public limited liability company or AS.
Shareholders at OÜ are not directly responsible for the firm’s debts. The required capital should be between €2,500 to €25,000. The most important thing is to pay the capital before distributing the dividend.
Estonia Subsidiary Laws
After the incorporation of a wholly-owned subsidiary in Estonia, you must abide by all the relevant laws. For instance, companies have to pay turnover tax at the rate of 20%. You are bound to the same accounting and reporting obligations as domestic businesses but can be entitled to some tax breaks.
Your company name must be different from the parent organization’s in compliance with Estonian law. As local laws may differ, LLCs must have a registered address in an Estonian subsidiary. The holding company must approve all business decisions taken by your subsidiary.
At least one shareholder and one director are necessary for registration during the incorporation of a wholly-owned subsidiary in Estonia. Foreign ownership is permitted, however, if most directors are foreign, the business must provide all contact information to the e-Business Registry to help the local representative handle future interactions with government agencies.
Post Incorporation Compliance
Once you have successfully set up an Estonian subsidiary as a foreign business owner, refer to the post-compliance checklist for incorporation of a foreign subsidiary in Estonia:
- Apply for Company Registration Code: The Registration Code in Estonia is unique to every company and is used to track all filings and compliance with the income tax assessment. Applying for it is the first step to post-incorporation compliance.
- Opening a company bank account: The second and most important step of post-incorporation compliance is setting up a company’s bank account. After registering a company as a legal entity that is lawfully recognized, the process of opening a bank account is quick and seamless.
- Appointing an auditor: After incorporating a company, the Board of Directors needs to appoint the first auditor; a chartered accountant.
Taxes on Subsidiaries in Estonia
From a taxation perspective, Estonian subsidiary firms will be regarded just like domestic companies. This implies that they must register with the Estonian tax authorities for tax reasons and pay the company tax on their international revenue. Currently, a 20% business tax is charged in Estonia.
The subsidiary must follow the same filing and accounting rules as domestic businesses. Nonetheless, if the parent company’s home country has signed a convention against double taxation with Estonia, they qualify for tax breaks and exemptions.
Tax Incentives for Businesses Setting Up a Subsidiary in Estonia
The reinvested or retained profits cannot be subjected to corporate income tax.
This implies that resident and foreign businesses’ permanent establishments (including branches) are only applicable to a 20% income tax on all disbursed earnings. No income tax is levied on reinvested and retained profits.
The distributed profits include:
- Distributed corporate profits during the tax period
- Donations, gifts, and representation costs
- Payments and costs not associated with the business
- Transfer of assets of permanent establishments to the head office or other organizations
The corporate income tax rate on general profit distributions was reduced to 14% from 20% as of January 1, 2018. However, it is only liable when dividends are given to legal persons.
Other Important Considerations
Subsidiary outsourcing is the best way to save time and effort while setting up a subsidiary business in Estonia. It might require repeated trips to Estonia to hire new talent, adding up to company costs. By hiring a company that offers outsourcing services, you can have the ability and the time to handle whatever comes up during incorporation. Most importantly, you will be able to clear your schedule and focus on other pressing matters.
Consider seeking an outsourcing service or the help of a specialist in Estonian subsidiary legislation. You can avoid receiving any penalties or delays because a consultant, accountant, or lawyer is trained to maintain compliance for a foreign subsidiary in Estonia.
How Can Multiplier’s Employer of Record Help You Hire & Expand in Estonia?
To establish a subsidiary business in Estonia, you must thoroughly understand the local laws, rules, and regulations. As an entrepreneur, it can be a handful to parse through volumes of documents and legalities before successfully establishing your company in this country.
Multiplier can help make your job easier by handling all your requirements. We have a dedicated team of legal experts trained to take care of legal matters, manage payrolls, hire employees, run extensive background checks, and help you speed up the process of setting up your business while you can focus on other important matters.