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here is how to lower the Estonian distributed profit tax from 25% to 5% legally

anotherone

Active Member
Estonia has the E-residency which allows to incorporate a company from home and open a corporate business bank account from home thanks to an EMI. The vast majority of E-residency owners are non resident. So, I have found a way to legally lower distributed tax profit to 5%

The distributed profit tax is 25% in the Estonian law.

So, a bit of math

ProfitSalaryDividend (25%)
80%​
20%​
10000​
8000​
2000​
tax in Estonia
0​
500​
Real distributed tax
5​

If your company makes 10000 euros, you will pay yourself through two channels.

Salary:
In the book keeping you will pay yourself 8000 (80%) euros as salary. The income can't be taxed in Estonia because you don't live in Estonia. If you are a fiscal resident of Belgium you should pay income tax in Belgium.

Dividend:
Estonian dividends are taxed as a high rate. so, it is important to lower the amount of distributed dividend to the smallest amount. You will pay yourself 2000 euros (20%). 25% of 2000 is 500 euros which will be paid to the estonian tax authority as distributed profit tax. This is another word for withholding dividend tax to me.

Real distributed tax is 500 / (8000+2000) = 0.05 * 100 = 5 %

It is not worth it if in your country dividends are less taxes than income tax. But it can be a handy solution for freelancers, IT developers, consultants. A webmaster who is also its own server admin and server support can easily justify high income as salary.

Estonia is a very interested jurisdiction because it allows you to manage your business online without a 3rd party.

For your information, I initially created this scheme for Ireland.


Reference:

What is your opinion?
 

fshore

Entrepreneur
Estonian dividend taxes is 20% not 25%.
If you take a 1666.66€ dividend the tax is 333.33€ (totally 2000€).
 

fshore

Entrepreneur
Estonian dividend taxes is 20% not 25%.
If you take a 1666.66€ dividend the tax is 333.33€ (totally 2000€).
Sorry that was wrong,
1600€ dividend would occur €400 taxes, totalling 2000.

Basically if you have 100€ you need to pay 20% of that in taxes before distribution, so 80 in dividend and 20 taxes.
 

anotherone

Active Member
What is your point? You are still going to pay a lot in your home countries income and social taxes ‍♂
The Estonian company is interesting thanks to E-residency. There are people like me who want to the smallest number of people to get involved in my business.

The estonian company allows to do everything online. It means that I can do my bookkeeping, my annual report. Noone else will see my bookkeeping. It is gold.

In eastern Europe, I already met a significant amount of scammers in Estonia, Lavia and Lithuania ( 1. lawyer 2. accountants). Long story short, an accountant wanted me to pay 6% of my turnover in Latvia. Because of this, I lost faith in lawyers and accountants. That's why I am not comfortable with Cyprus or Malta as it needs to interact with lawyers / accountants to set up the company. I had the opportunity to interact with the tax authority of Estonia by email. There were efficient. They didn't ask too much. That's what I expected.
I wasted thousands of euros in lawyers who set up complicated tax system that didn't work.

Your answer is quite interesting. Which jurisdiction has the lowest social contribution and the lower income tax?

I get it. Maybe you think that we are forced to pay social contribution of estonia.

It is not the case, you must pay social contribution in your country of residence.

In Europe, in the past, people didn't have to pay social contributions if they were paid as dividends. However, now, it is not the case anymore. I don't know which european country that allows to receive dividends without paying social contribution.
 
Last edited:

anotherone

Active Member
Sorry that was wrong,
1600€ dividend would occur €400 taxes, totalling 2000.

Basically if you have 100€ you need to pay 20% of that in taxes before distribution, so 80 in dividend and 20 taxes.
I just found the estonian page for the taxation of profit. I want to mention that here we don't about income tax. Income tax is paid in the country of residence.



Here is the reference:
Taxation of profits in Estonia | Estonian Tax and Customs Board


Distributed profit tax:
The real distrinuted profit tax is NOT 20% and I am going to explain it.

A resident legal person pays 10 000 EUR of (not regular) dividends to a natural person. A tax of 2500 EUR (10 000 × 20/80) has to be paid by the resident legal person (total cost 12 500 EUR).

All of these profit distributions are taxed at a rate of 20/80. this means , 20 / 80 = 0.25 (25%)
The people who created this law confused people, It is 20% of tax out of 80% of profit so, it is equal to 25 % = 25 of 100% of profit.

I guess that maybe if a double tax treaty exists in your coutnry with estonia, this high dividend tax will reduced the tax that you pay in your country. For instance, if you live in Germany, those 25% of distributed tax should lower your local dividend tax.



Reduced tax rate (14/86) for regular dividends (which is a distributed profit)


From year 2019, a reduced tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly (The profit distributed in a calendar year, which is smaller than or equal to the average distributed profit of the previous three calendar years (starting from 2018) on which a resident company has paid income tax).

The natural person receiving such dividends taxed at a reduced rate (14/86) in the hands of the Estonian company, has to pay income tax at a rate of 7% in addition. It has to be withheld by the payer.

In case of regular dividends paid, corporate income tax of 14/86 has to be paid instead (10000*(14/86)=1627.91 EUR).
If the recipient of such dividend taxed at a reduced rate is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld in addition (10000*7%=700 EUR).


So, there is this reduced rate 14/86=0.162 = 16% + 7% "withholding income tax" = 23%


So, if I understand well you can only use a reduced tax rate only if you paid distributed profit tax in the 3 previous calendar years. The reduced tax rate is a gift for people living in countries with a double tax agreement with Estonia. The withholding income tax will lower the income tax of the person where he lives. for instance, if somebody lives in Germany, the German tax authority will take the 7% withholding tax into account and it will act like a discount on the german income tax.
 

fshore

Entrepreneur
It can be confusing because other countries tax profit when it happens. But it is indeed 20% tax on profits also in Estonia.

Compare it to the UK (a few years ago when taxes was 20% there for simplicity):

If you have made 10000 then you will need to pay 20% tax in the UK. 20% tax paid from 10k = 2k. Then there is 8k left in your bank that you can pay out in dividends.

Same in Estonia, if you've made 10k you can pay out 8k and you need to pay 2k (20% of 10k profit) in taxes.

Your calculation in first post it correct, except that the company needs to pay the 500 tax, so you can only pay out 1600 dividend in your example.
Also why not pay out everything in salary and pay 0% tax in Estonia? Salary amount should follow industry though.
 

anotherone

Active Member
Following my last post about lawyers and accountants.

I have found that in Cyprus or hong kong, you must hire a tax auditor who will review all your transactions of the fiscal year.

1. The tax auditor can charge me whatever he wants because it is a legal compliance. For a small business, this amount of money is like a tax. If you are into micropayments like in videogames. You will get thousands of transactions and a tax audit will cost you a big amount of money. But for sure, Cyprus is a great jurisdiction for IT consultants. When they get 12 transactions equal to 12 monthly salaries, Tax audit is not a problem, you would spend a small amount of money in tax audit and it is not really important if the accountant looks into your bookkeeping.

2.I also don't like people to look into my business. I live in west europe, I worked for many years in the accounting software industry.
I don't trust accountants because I know they can trick you and they can get a lot of very sensitive information about your business by looking at your bookkeeping. I can't trust someone who live thousands of kilometers away and look into my bookkeeping. They can understand my business model and steal it. They can also report me to a law enforcement authority. It sounds strange but according to my experience, government and law enforcement authorities are less bad than accountants and lawyers.

Tax authority is already a concern. However, in many jurisdictions like Ireland, UK, Estonia, as long as you pay taxes they are fine.
 

JustAnotherNomad

Entrepreneur
LOL. I have an even simpler solution for you: Why don’t you set up a company in the Seychelles (I’ve heard it’s cheap). They have no accounting requirements, so you don’t even need an accountant! And they have no taxes! So then you simply live in Belgium and pay no taxes! Much smarter!

Just forget about it already. You should really pay for some advice or you will have to learn the hard way that this won’t work.
Without substance in Estonia (which is exactly what you are proposing since you mention it will only be you running things), your company will be taxed where you live. If you live in Belgium, you will be paying the Belgian corporate income tax. You will also be paying Belgian personal income tax on both salary income and dividends.
 

cyprus123

Silver Member
At the end it depends on the country of residency where usually income tax and social insurance shall be paid. In my personal opinion you want a set up with small or no corporate income tax and then distribute dividends to the shareholders. The tax on dividends is usually lower than income tax on salaries (in most jurisdictions and of course for bigger amounts). That's why I personally like Georgia, they adapted many good things from Estonia and improved them ;)
 

xzars

Entrepreneur
Estonia's appeal is in absence of CIT tax which allows for tax free compounding of capital: it's attractive for investment holding companies which by their nature expect a high profit every year at a very low running expense. There's no ceiling to how much profit a 5-employee holding company can make. Consequently, CIT tax deductible expenses such as hiring new employees make no sense after a certain point. This inevitably leads to net tax expense in a typical EU state, but not in Estonia.

For an active manufacturing or service business: having a 27%+ CIT liability in western Europe is not as big of a problem until you stop expanding. You can just take your pre-tax profits and invest in a new factory, and carry forward the loss for 5 years. Repeat the procedure 5 years later, and you still pay 0 CIT despite a high nominal rate. As a founder and major shareholder, your net worth increases with or without salary/distributions because the company is worth more as it produces more, has a bigger market share, and is a recognized brand. Pick a good time to exit, and you usually pay not more than the capital gains tax.
 

anotherone

Active Member
I forgot to mention something important. This was for people who want to maintain a bookkeeping in euros, be independent and get an access to the SEPA area for bank transfers. It was also possible to do the same thing in the UK but it implies keeping bookkeeping records in pounds sterling. Ireland is not a good idea for a single director since it requires a secretary for co-signing every official paper.
 
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