Estonia's e-Residency program has made it a popular place for entrepreneurs around the world to run their business online, supporting over 100,000 people as digital citizens who have digitally established 30,000 companies.
As well as the unique digital infrastructure that enables this program, Estonia has always scored very highly on tax transparency and fairness indices… But just like every other nation in these challenging times, sometimes taxes need to go up, and Estonia has never been a tax haven. Starting in 2024, Estonia is making changes to its Tax Code, and some of these changes will affect businesses owned by e-Residents, especially the taxes on profits shared as dividends.
This is important for e-Residents who own and operate businesses in Estonia. Understanding these tax changes is key to making smart business decisions.
At GroüHub we want to make it easy for e-Residents to understand these changes and plan their business strategies accordingly.
What is Corporate Income Tax Anyway?
Corporate Income Tax (CIT) is that tax on the money a company makes. Just like as an individual you pay income tax on what you earn, a company pays tax on its earnings.
CIT is a tax on profits, not gross income. So, it is calculated on the money a company has left after paying for things like products, employees, and other costs. The tax is a percentage of these profits. Different countries have different tax rates, and these rates can change over time, even in Estonia, as we will get to below.
Corporate Income Tax is important because it affects how much money a company has left. After paying this tax, the company decides what to do with the remaining money - they might reinvest it in the business, save it, or share it among the owners, as dividends.
When a company gives some of its profits to its owners, these are called dividends. There is an obvious connection then between the corporate income tax and dividends: The more tax a company pays, the less it might have to share as dividends.
Understanding corporate income tax helps you see how much money a business might have to grow, save, or share. It's a key part of running a business and planning for the future.
In Estonia, the standard CIT rate has been 20% for some years. However, the government has announced a raft of recent tax changes, many of which have the potential to affect e-Residents - such as the increase in VAT we reviewed recently.
Included in these changes was the announcement that the standard rate of CIT will increase to 22% - a change which will apply from January 2025
Note, that this is one year later than the VAT hike. Tax planning, and tax law, are long games!
Estonia's Unique Corporate Income Tax Rules on Reinvested Profits
Estonia has a unique approach to corporate income tax that is especially attractive to entrepreneurs and e-Residents. Here is what makes it special:
In Estonia, companies don't pay any Corporate Income Tax on profits that are reinvested.
This means that if your business earns money and uses it to grow the business, there is no tax on those earnings. Amazing, isn’t it?
So, imagine an Estonian company generating some income in one year. If the company decides to use this profit to invest back into the enterprise — like buying new equipment, developing a product, or expanding the business by leaving the money in the company’s bank account — this reinvested profit isn't taxed. This represents a big advantage because it allows your company to use more of its earnings to grow without being taxed from the very first day.
This 0% tax rate is a big reason why Estonia is popular with business owners, including e-Residents. It's an incentive to invest and grow businesses within Estonia.
Most countries tax corporate profits regardless of how they are used, so Estonia's approach is different and can be very beneficial for businesses that are looking to expand or to try something new and experimental. Estonia’s entrepreneurial and innovation-focused culture comes from many different things, but the fact that the government supports it directly through fiscal policy in this way is an important part of the e-Residency program’s success globally.
For e-Residents and entrepreneurs, this tax policy means they can plan for growth more effectively. By reinvesting profits, they can avoid the immediate tax burden and potentially build a stronger, more competitive business.
Taxation on Dividends: What Happens When Profits Are Distributed?
It's important to note that while reinvested profits are not taxed, dividends (profits shared/distributed among owners) are subject to tax. This creates a balance and encourages businesses to reinvest and grow sustainably.
To support this balance, the Estonian tax code previously provided for a lower rate of income tax when dividends were paid out regularly, i.e. when business owners took out profits from their business almost like paying a salary.
Because the standard rate of personal income tax started at 20%, it meant that it was tax-advantageous for owners of limited companies to pay themselves in this way, if they were residents in Estonia - and due to the ease of business formation and administration in digital Estonia, a great many people have benefited from this.
E-Residents may or may not have benefited directly from this policy, incidentally, depending on their tax residency. Many e-resident businesses pay no taxes at all in Estonia itself.
However, from January 2025, this lower rate of 14% is being scrapped, and the standard CIT rate will be applied to all distributed profits, i.e. 22%
This brings income from business and employment into line in a way that many may see as fairer and raises the overall tax take of a country that has - like many others - faced increased pressure on defense and energy spending, in recent times.
How Do These Changes Affect Me?
These changes to corporate income tax and how dividend payments are distributed will affect every business and individual differently and need to be considered in combination with personal tax residency and liability issues, permanent establishment, and the impact of VAT changes.
An article like this can only offer the most general overview of the legislation and rates, and it’s vital to take professional advice. Advice about your tax planning, but also your business investment and distribution cycle - because all of these changes are being phased in gradually, and the timing could make all the difference.
To understand and optimize for your corporate tax and profits, schedule an appointment with GroüHub today, and receive professional advice through a personalized consultation.
We offer you to book a personalized advisory call with our expert, who will listen, understand, explain and clarify your questions about e-Residency and doing business in Estonia.
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