How does an Estonian e-resident pay themselves a salary?

Every business has bills to pay and commitments to meet, and here at World Company Setup, we do everything we can to help you fulfill your legal obligations to every creditor.

We've covered how you can take money from your business to pay yourself a salary or consultancy fee in Estonia, or alternatively, to distribute dividends to yourself or other shareholders.

The first thing you need to know about taxes when paying yourself from your Estonian business

Estonia is NOT a tax haven! Whatever you earn, you will eventually pay a fair tax somewhere. Benjamin Franklin articulated it clearly over 200 years ago; we all pay taxes and we all die, so we must learn to live with it.

One reason the tax haven misconception has been around for so long is the simplicity and clarity of the Estonian tax system.

The result of this, ironically, is that for those who want to do something risky, there are very few loopholes or strategies to reduce their tax burden in Estonia. People pay their fair share as they go.

This means our experts are always up-to-date on any changes in Estonian tax laws or policies that affect us.

Tax residency for an Estonian e-resident

There may be many reasons why you have chosen to set up your business in Estonia using the e-Residency program. There are great advantages to establishing a business resident in Estonia, and it gives you the freedom to operate from anywhere in the world, or even from many different places if it's convenient for you.

However, unless you move to Estonia yourself and live there for 183 days (with passport or visa rights), nothing changes regarding your personal tax situation. Your business is located in Estonia for tax purposes, but you are not. Understanding this important fact is crucial for finding the best way to pay yourself from the profits of your Estonian business.

Meanwhile, depending on your company's activities and how it operates, your e-resident business may also have some financial presence and tax obligations in the country where you are a tax resident. Estonia's many international tax treaties likely mean you do not have to pay tax twice on the same income, but you may have to register and declare it.

For anything related to your personal taxation, we recommend that you seek professionally qualified advice from an expert in the country where you live—ideally, someone with good knowledge of cross-border issues and international trade. World Company Setup cannot help you choose this advisor, but there are many experts from different places in the e-Residency Marketplace, and being listed there means they have convinced the Estonian government that they know what they are doing.

Operating as an e-resident does not make you a tax resident in Estonia.

How do you pay yourself a salary from your company in Estonia?

Assuming you have money in your business, you can pay yourself at any time.

This means funds that are not committed elsewhere to pay upcoming bills (including tax bills). If you have any doubts about this, you can clarify it with your accountant at World Company Setup. The amount to be paid is negotiated between you, the service provider, and you, the company director.

You will need to account for the payment by creating an invoice to your private limited company, and this invoice must contain all the usual information required for your country where you receive the payment. This usually includes your name and address, your unique tax or identification number, a date, an invoice number, and a breakdown of costs - what is being billed for (e.g., professional services January 2023) and any taxes added.

When you pay yourself from your business account, use the invoice number as the reference for your transaction — it will help your accountant to reconcile both sides of the deal and account for it in spreadsheets you will never have to see.

Many e-residents get into a pattern of paying themselves at the end of each month or another regular time, after normal bills have been debited and, of course, after your clients have been invoiced. It fits with many outgoing payment cycles for software subscriptions and VAT. But there is no reason why you can't invoice more or less frequently. So, you might want to pay yourself a mid-month bonus or take an extra draw to meet your personal cash flow needs if you wish.

However, one advantage of separating your business and personal finances in this way — by operating as a sole company rather than a freelancer who mixes everything in the same account — is that you can use it to draw your salary. Accumulate a buffer in your business as good times come, and you will be grateful when the next lean month arrives. Most of us can never know when the world's best client will drop you overnight for reasons completely beyond your control, so saving some money in your business account can be a lifesaver.

But likewise, don't forget the bills you might have to pay later in the cycle (e.g., all the VAT you collect if you work with clients in Estonia).

You can invoice the rest to yourself and make a bank transfer to your personal account. You do not need to create a payroll, and payrolls are used to account for your income if you are not taxed on that income in Estonia.

Is income tax paid on your salary in Estonia?

This is particularly the case for World Company Setup clients, as the requirement depends on the decision of whether you are genuinely spending measurable billable time managing and administering your business, rather than just delivering your service or product.

One cannot realistically claim that any measurable proportion of time spent is dedicated to managing and running the business as an entity in Estonia. It could be argued that invoicing is already part of your cost of sales - there is always admin to be done in any business, but most of it will relate to operational matters when you are not even wearing your 'company director' hat.

However, we are not joking when we say that you are not working in Estonia as a foreigner - and therefore, you can pay yourself in full without paying income tax in Estonia.

Note that this situation is specific to simple solopreneur private limited companies, but even then, the situation can change. If, as a board member, you spend a significant amount of time on the administrative aspects of your company in Estonia (for example, if you are involved in a restructuring or a legal dispute or something else), you may need to declare part of your salary as a board member fee. These payments are subject to a 20% Estonian withholding income tax.

Your World Company Setup consultant can help you decide to mark an appropriate percentage of your invoice as a director's fee if you have unusual or temporary managerial activities, as opposed to the consultancy fee you receive for professional services rendered. This is the slice of income on which the 20% tax would be levied.

Get Information on Becoming an e-Resident and Starting a Company in Estonia

How do you pay tax on the income you earn from Estonia?

You will need to declare and pay tax on your income on your personal tax return in the country where you live and are personally tax-resident.

Every country has different rules and deadlines, rates and allowances, and even different tax years. Therefore, after getting advice, you can figure everything out and file and pay it yourself, but you may also find that working with a qualified local professional to help you manage your local taxes saves time and money in the long term. As a freelancer and solo entrepreneur, your time is money, and you should use your strengths.

If you have never hired an accountant before, you should take the decision seriously, as bad advice can be expensive. At the very least, make sure you understand what qualifications and indemnities they should have, and then choose them like any other professional you need to trust.

They can advise you on any special procedures for registering as self-employed and paying your social security contributions and income taxes. Hopefully, they can help you understand payment cycles and critical filing dates with appropriate reminders, ensuring you remain fully legal and compliant where you live.

Can't I just get away with not paying tax instead..?

We keep saying that the Estonian commercial register is very transparent. Your business earnings are a matter of public record, and Estonia has tax treaties with many other countries.

For example, tax treaties allow you to declare the tax already paid on your income in one country so that you do not pay it again elsewhere.

As we all know, there are various ways people try to minimize tax, paying attention to factors like where to be a tax resident and the timing of things like the sale of assets that create a gain or loss. Smart accountants can help you optimize for this, and this type of tax avoidance is often completely legal.

However, tax evasion is a serious crime in most parts of the world and entails large penalties. If you do it intentionally, you could go to jail, and that would be a serious blow to your flexible freelance lifestyle. Besides, taxes pay for schools and hospitals and all the nice things we all enjoy.

Estonian company dividend payment

One tactic your accountant might suggest to help optimize your total tax bill is to pay yourself dividends from your Estonian company instead.

As a company director, it is a completely normal thing to do, assuming there are dividends that can be distributed, i.e., profits, meaning you have funds on hand in addition to your capital, and all the needs of creditors have been taken into account.

To pay dividends, you must have paid in your share capital and keep your accounts in the commercial register up to date. You also need to issue and file a shareholder resolution to distribute a specific amount of dividends at a specific time.

Dividends are usually paid once a year. Payments can also be periodic (e.g., twice a year).

Your company will pay 20% corporate income tax at the moment of the dividend payment (this is calculated as 20/80 on the net dividend amount paid). If you choose to pay regular dividends, you may be eligible to apply for the reduced corporate income tax rate (14%). However, a 7% income tax will be withheld.

Firstly, if you leave your profits in the business, they are not taxed in Estonia - they are considered reinvestment and support your growth.

Secondly, you will need to declare the dividends you receive in your country of residence and pay income tax on it. However, in many countries, the dividend tax is lower than on salary payments, or there may be separate allowances or deductions you can apply.

Taking both factors into account (the advantages of reduced payments locally as well as the tax payment in Estonia) is not a straightforward question for your accountant, especially since the dividend tax in Estonia is a deferred corporate tax, not a personal income tax (hence).

How are taxes for employees paid for an Estonian company?

Once you understand how to pay yourself, you may find that you need to pay others' salaries as your business grows. Not every business scales this way, and you may prefer to be a lifelong solopreneur. But for others, the goal will always be to scale by hiring.

The simplest way to do this is to contract with other private limited companies in a simple, business-to-business manner.

This way, you receive a proper invoice and pay the stated amount in the same way as other business expenses. You do not need to run a payroll or be responsible for withholding and tax administration on their behalf. This is one reason why many freelancers find it advantageous to operate as a private limited company, as it makes things very easy for their own clients to pay them.

An overview of rates and allowances;

If you want to hire someone who is not a tax resident in Estonia, things become much more complicated and may cause your business to open a branch in another country.

Unless it is a very temporary and local arrangement (European Economic Area (EEA) or Swiss citizens can work in Estonia for up to three months for free), it will probably be much easier for them to contract with you through their own legal entity.

If they live somewhere else in the world, it is likely that your Estonian company will have to register as a foreign employer and start paying payroll taxes in that country.

Whatever your business goals, World Company Setup is the simplest and most versatile way to launch and scale your Estonian e-Resident business, and (at least until you become a multinational corporation), it is designed to grow with you.