We receive a lot of enquiries about opportunities to set up companies in various countries around the world, so we decided to present some of the possibilities. Since Estonia is a particularly popular destination, we will first briefly summarise and share with you the most important things you need to know about Estonia. This article explains why Estonia is so popular, what the most important steps and points are that you need to consider when setting up a company there, as well as sharing some practical examples. First off, it will probably come as no surprise that you’ll need good skills in English in order to run an Estonian company effectively.
Of all the forms of company in Estonia, the most popular is the Osaühing (OÜ), or private limited company, which is why this article focuses on that form, among others. However, it may be that some other type of entity form would be better suited to your specific business goals, so it is always worth considering that beforehand with the help of a consultant, if necessary (for more information on the different forms of business, click here).
Our article examines the opportunities for setting up a company in Estonia as an EU citizen who has no particular ties to the country, and details the procedures involved. If you do have some Estonian or Baltic ties, there may be other options in terms of specific rules. Here, we have focused specifically on the most likely scenario as a non-Estonian EU citizen. The article reflects the current situation at the time of publication.
Advantages and disadvantages of setting up a company in Estonia
Before we dive into the specific issues of incorporation, let’s outline what the advantages and disadvantages of an Estonian company might be.
- No capital contribution is required at the time of setting up a company.
- Conventions against double taxation have been signed by Estonia with 64 countries, of which 62 are currently in force.
- Founders and board members do not need to be resident in Estonia – if you are an Estonian e-resident (see below), you won’t even need to be physically in the country during incorporation.
- Complete remote management is possible as an e-resident.
- Estonia’s tax system is relatively transparent and simple.
- 0% corporate tax – there is only a so-called distribution tax, i.e., tax is levied on distributed profits (dividends).
- The standard VAT rate is 20%, and VAT registration is not compulsory for annual income below €40,000.
- Estonian company registration does not cover persons registered as owners in the company register. So, if you are not an officer (e.g., a board member) of the company, your personal data is protected to a greater extent than in Hungary.
- Estonia is one of the best countries in Europe for start-ups: in addition to e-residency and favourable tax rates, there is a high overall market support for innovative start-ups, and the authorities and market players are very open to entrepreneurs and start-ups bringing new technologies and pioneering solutions.
- If you do not have your own registered office in Estonia, you will have to pay for a registered office service, which does increase the costs, but this is generally the case for companies in most EU Member States.
- If you buy a shelf company, you will not know the background, history or even the financial situation of the company. However, shelf companies are rarely the ideal solution – once you have seen how easy it is to set up a company you will understand why.
- If Estonian law is unfamiliar, you will find it harder to get by – this can, of course, be overcome with the right advisers. This represents an additional cost implication that could be higher than for a company in your home country.
- Dealing with banks, accountants and the authorities when you are not a confident speaker of Estonian (which we think is definitely a possibility) could be a barrier, but one that can be significantly reduced, particularly if you can speak English.
- There are tax items that could be higher than in your home country, depending on where you’re from.
- You will be less familiar with the foreign market, so if you want to build your business there, you will need to learn the business culture, for example, but this is generally true on any international market.
Incorporation – the process
Depending on the specific circumstances, the details of the process of incorporation may vary, but the main steps are the same in all cases, so these are presented here. Setting up a company in Estonia does not require the involvement of an attorney or countersignature; the equivalent is a notarial procedure, but if you have e-residency you won’t need that either. You can go through the steps of incorporation on your own if you prefer, thus also reducing the costs. However, in order to ensure that everything is thought through in detail and that you do not have to make corrections afterwards – which could end up costing you more – it is always worth consulting an expert beforehand. But let’s look at the steps to take and the points to decide on.
Possible routes: e-residency, power of attorney or personal appearance
There are basically three main ways to set up an OÜ as an EU citizen:
- you can get an e-residency card and then set up the company through the online portal;
- you can grant power of attorney to an Estonian company with a licence for such activities, authorising them to set up the company in your name; or
- you can travel to Estonia in person and visit a notary.
Depending on which of these you choose, the process of incorporation will vary slightly. Here, we point out the most important practical steps and differences.
Total number of e-residents of Estonia
Number of Estonian companies established by e-residents
Number of applications for e-residency, submitted in July 2022
New Estonian companies established by e-residents in July 2022
Global service providers on e-Residency Marketplace
One of the advantages of e-residency is that it allows you to set up your company online with a few steps and at minimal cost. You can start the application process on this website, where you will also find all the other information you need. To highlight some of the important things:
- The application fee is €120 (€100 if you receive the e-residency package in Estonia)
- The process takes about 3-8 weeks
- At the end of the process, you will have to collect the e-residency package – which includes the e-residency card that will allow you, for example, to sign documents electronically – in person. There are numerous possible pick-up points, in most cases it will be the local Estonian embassy. You can also choose from any of the available pick-up points when you apply (for a current list of pick-up points, click here)
Online incorporation is a good choice if the founder is an individual, natural person with e-residency, or if you are not an e-resident yet, but you have time to wait until your e-residency is finalised prior to incorporation.
The cost of setting up online:
- fee: €265. This is the amount you pay the Estonian authorities for the registration procedure, via the portal.
Time for online incorporation: a few to 1-2 working days, provided all the details of the incorporation are in order.
Procedure: As an e-resident, you can set up a company online by logging onto the e-business register, basically by filling in a form. The system and the form can be used in English, and at the end of the process the system will generate the necessary documents in both English and Estonian. You can also find a longer video tutorial about the process here. The electronic system guides you through the steps of setting up a company using a very simple template, which you can choose to deviate from. That is, for example, if you have signed a specific shareholders’ agreement that requires significantly different documentation from the template provided, it is possible to change it, but doing so may mean you need to create your own document in Estonian instead of just filling in the template.
In our opinion, e-residency is the best option in most cases, as it also means that you can initiate almost any changes later on online, through the electronic system, with electronic identification and signature, so you won’t have to bother with extra paperwork or sending documents by post, for example. Some amendments can be made free of charge in the system, while other amendments are subject to a fee, as in most EU countries.
Incorporation using power of attorney (POA) is a good option if online incorporation is not suitable for some reason and you do not want to travel to Estonia in person.
The cost of incorporation: these consist of several elements, the most important are:
- The official fee: €200
- The fee for a company using POA, including the notary’s fee (varies, ~ €700 – €1000)
- Fees for notarization and apostille (if necessary) in your home country
The official fee is usually added to the agent’s (the company with POA) own fee, as is the notary’s fee, and is then paid by the agent, so these items can be settled in one lump sum.
Time to set up a company: usually 5-7 days from the date power of attorney is physically received by the Estonian agent.
The procedure: first of all, you can either contact a company in Estonia that conducts this type of business (there is a list of such companies to choose from on this link, for example), or you can choose to contact a consulting company or law firm in your own country that has an Estonian partner (including us at KassaiLaw, for example). You will then need the personal data and IDs of the founders and some information about the company to be formed, as explained below. On the basis of that, the appointed consultant(s) will prepare power of attorney for the incorporation. Some personal involvement of the founders will be required here, as power of attorney will have to be certified by a notary in English (or alternatively, in the administrative language of your home country, and then translated to English by a certified translator) and then apostilled (this is not required for documents notarized in certain countries, such as Latvia, Lithuania or Poland, so always check the applicable requirements with your advisor). The completed power of attorney will have to be sent to the Estonian partner by post or courier. If you contact us, we will help you with these steps and we will also deal with communication with the Estonian partner.
From this point on, the founder has nothing further to do in the process, in possession of power of attorney, the Estonian partner will initiate the incorporation of the company on behalf of the founders using an Estonian notary, and will then forward the registration certificate to the founder.
Incorporating in person is a good option if you enjoy travelling and want to see Estonia – we have been there, Tallinn is stunningly beautiful.
The cost of setting up a company:
- Fee: €200
- Notary’s fee (~ 250€ – 500€)
- Travel + accommodation costs
Time to set up a company: The total time taken to form the company can vary, but is usually 3-5 days from the date the documents are signed and notarised.
Perhaps the least common and most complicated option to choose is travelling to Estonia and incorporating in person at a notary’s office. To do this, you will need to contact an Estonian notary in advance, arrange an appointment and agree on the list of documents and details you will need. The notary will then prepare the company documents and all the founders will have to appear in person at their office at the agreed time to sign them. The notary then initiates the registration of the company and sends the registration document.
The specifics of incorporation
After getting an overview of the incorporation process itself, it is important to look at the points that need to be considered before or during the incorporation process. These are always worth thinking about, regardless of the country, and in many cases the same logic applies in different countries, but we will cover the most important aspects in a few words from the Estonian perspective, with some tips.
The company name can contain only Latin letters, no special characters are permitted
The name of the company must be distinctive and unique, i.e., there must be no overlap with existing Estonian companies and trademarks registered in Estonia and the EU.
|You can use the name query service of the Estonian Business Register to see if there is a company or trademark already registered with a similar name. It’s also worth checking the availability of the domain and, if you plan to use it, of the various social media accounts with the name you plan to register, so that you don’t find out later that they are already taken.|
|Scope of activities||In Estonia, this is based on the EMTAK code, which you can search for here or download the full list.||When setting up a company, you can only specify one field of activity – this will be the main field of activity. It is important to choose the most appropriate one. You will be able to add additional activities later on, in the form of an amendment.|
|Registered office and contact person||You will need a registered office within Estonia where you can receive various mail. This should be a physical address, not a PO box, but you can use a registered office provider who will also provide a local contact person. This obviously comes at some cost (usually an annual fee is set by the service provider), but it is much cheaper than maintaining an entire office.||Here you can search for companies providing such services – of course, a Google search will give similar results. It may be worth choosing a firm that also deals with accounting and tax issues, so you can have all the important matters dealt with in one place.|
|Share capital, ownership||
The minimum share capital is €2500 and the nominal value of a share (‘osa’ in Estonian) must be at least €0.01.
If the founders are all natural persons, there is no obligation to pay the share capital immediately upon incorporation: the provision of the capital contribution can be deferred for up to 10 years. However, until the contribution has been paid, or more precisely, registered, this has several consequences for the operation of the company, such as the owners being liable for the unpaid amount through their personal assets and the fact that no dividends can be paid.
Based on our practical experience, it makes sense to take advantage of the option to pay the contribution following establishment. This is because the contribution can in principle be made either by transfer to the company’s initial bank account or to a specially designated escrow account. However, the latter option is better suited to Estonian residents who already have a relationship with an Estonian bank; as a foreigner, it is easiest to open a company bank account after the company has been registered.
Waiting for the 10-year deadline may not be advantageous, but you can pay the contribution in a few simple steps a few weeks or months after the company is established and register it on the company register. You can read more about the steps here, and we share some thoughts on bank accounts below.
|Management board||The management board may have one or more members, with full or limited representation rights. It is therefore necessary to define the composition of this board and the way in which it is governed.||To make full use of the online business registry services, all members of the Board of Directors must have e-residency.|
Once the company is registered, there are still a few things to do and think about. Only the most important of these are outlined here, specifically from an Estonian perspective.
|Opening a bank account and payment of share capital||
You can choose an Estonian bank, but in practice, you will usually need to appear in person to open an account.
A good option is Wise, both because the whole process is done online and because you will need an Estonian-language certificate of the payment of share capital, certified by electronic signature, in order to register it on the company register, and Wise provides this for business customers (unlike, for example, Revolut, where you can open an account if you wish, but you cannot currently prove the payment of share capital through them).
|Registration of Ultimate Beneficial Owners („UBO”)||After registration, it is necessary to determine who the so-called beneficial owners of the company are, and then to register this through the online portal (or, in the absence of e-residency, through a notary). You can find a guide on how to determine the beneficial owners here, and of course we at KassaiLaw can help you as well.|
|VAT and employment||
Under Estonian rules, VAT registration is mandatory for annual income of €40,000 or higher. However, you can register your company below this threshold voluntarily. Whether this voluntary registration is beneficial for a particular company may depend on a number of factors (for example, whether the company’s customers are individuals or VAT-registered businesses), so it is worth considering. Registration for e-residency can be done fully online, you can find the details here.
If the company also has employees, they must be registered in the employment register.
Accounting and tax matters
For detailed tax issues, we recommended that you consult a tax adviser, but we have put together some basic information.
Regarding VAT, we have already mentioned the €40,000 threshold. If you reach this threshold or if you register voluntarily to become the subject of VAT, the rate is 20%, which is among the lowest in the EU, and below the EU average of 21%.
You might have heard that Hungary’s 9% corporate tax rate is extremely favourable, and you may think it is unbeatable in Europe – and if you have heard this, then you may have been surprised at the beginning of this article. In Estonia, companies pay no tax on profits reinvested in the company. Only distributed profits (dividends) are taxed at a tax rate that is generally 20% of the distributed profits.
As far as personal income tax is concerned, it will be determined not by e-residency but by tax residency, so you will not have to pay income tax in Estonia simply because you are an e-resident. The exception to this is if you receive remuneration as a member of the management board: this is taxed in Estonia, where the income tax rate is 20% and the various social security contributions are, as a basic rule, 33%.
It is important to note that although Estonian companies automatically become Estonian tax residents upon registration, e-residency does not automatically create Estonian tax residency. In practice, this means that if you, as the founder, live in another country, the work in said country and the dividends paid to you may have tax relevance in the country where you live. The good news, however, is that there are conventions for the avoidance of double taxation in force between Estonia and 62 other countries. If you live in one of these countries, pure double taxation should not arise, the tax burden is unlikely to increase significantly, and the international elements are mostly associated with extra administrative obligations. The list and texts of tax treaties entered into force are available on the Estonian Ministry of Finance website.
However, international tax issues can be particularly complex, we must stress the importance of consulting a tax advisor both for the correct application of the rules and for tax-optimization.
Frequently asked questions
To close this article, we have put together some questions and answers that often arise in practice.
“What can I do if I need to set up a company quickly and it would take too long to wait for e-residency?”
Sometimes the need to register an Estonian company arises very quickly. If this is the case, so for some reason you do not have time to wait for the e-residency package to arrive before incorporation, you can set up the company by power of attorney or in person. Once you have obtained e-residency, you can then be subsequently assigned to the already established company as an e-resident, so you will have access to the e-government portal.
“What are the limitations of online incorporation: is it possible that I cannot use it even if I have e-residency?”
There are also cases where online incorporation is not possible, or where the online administration options are limited. For example, if:
- Not all founders have an e-residency card
- You are setting up a company as a legal person or a legal person is a member of the company,
- Part of the contribution of assets is a non-monetary contribution of assets (contribution in kind, e.g., ownership of property).
“How does a share transfer take place in an Estonian company?”
As a rule, an agreement for the transfer of shares can only be concluded before a notary. If both the seller and the buyer are private individuals and have Estonian e-residency, this can be done by using the e-notary service. However, if this is not the case, the same options as for company formation apply.
There is an important exception to these rules, but this is rare in practice, especially for start-up companies: if the company has a share capital of at least €10,000 and this has been paid in full by the owners, the articles of association may provide that the notarization of the sale of shares is waived, and the shares can be sold online.
If you are now ready to start your Estonian business, feel free to contact us at any of our contact details here on the website, or you can book a free online consultation by clicking here.
If, having read this, you feel Estonia is not for you, but you have no objection to higher taxes and want to operate in a stable business and legal environment, follow us, and we’ll soon show you how it works in Sweden.