Company Registration in Estonia
Company registration in Estonia provides access to the benefits of the local tax system and opportunities for cost optimization and accounting services.
What Expenses Are Taxable?
Let’s examine various money withdrawal options, from the most taxed to completely tax-free ones.
Taxes in Estonia for Fringe Benefits
The concept of fringe benefits is defined in § 48 of the Income Tax Act. A fringe benefit is the non-monetary provision of any type of goods, services, bonuses, or financial advantages.
Fringe benefits are not cash payments for work.
You can find information about how the tax on fringe benefits is calculated on the website of the Estonian Tax Department.
Who Is Covered by Fringe Benefits?
Fringe benefits apply to employees working under employment contracts and associated persons, including:
- Members of governing or supervisory bodies;
- Individuals selling goods to the employer for more than six months;
- Individuals providing services under contractor, agency, or other agreements;
- Spouses, partners, or relatives of the above individuals;
- Members of the same enterprise group (concern) as the employer.
Key Points About Fringe Benefits
- Fringe benefits are not classified as employee income.
- Taxes on fringe benefits are not personalized.
- Employers are responsible for paying taxes on fringe benefits.
Examples of Transactions Subject to Fringe Benefits Tax
- Full or partial coverage of employee housing expenses;
- Use of employer property free of charge or at a reduced price (e.g., cars!);
- Payment of insurance premiums if the benefit is received by the employee;
- Reimbursement of travel expenses beyond allowable limits;
- Loans provided below a 4.25% annual interest rate;
- Sale of goods or services at non-market prices;
- Forgiveness of debts from related parties;
- Coverage of non-work-related training expenses;
- Provision of stock options (with a three-year rule and exceptions);
- Entertainment events for employees (excluding client events).
Tax Rates:
- 2024: 20/80 + Social Tax 33% = 66.25%
- 2025: 22/78 + Social Tax 33% = 70.24%
Salaries and Contract Payments
Tax Rates:
- 2024: Social Tax 33%, Income Tax 20%, Pension Tax 2%, and Unemployment Insurance Taxes (1.6% employer-paid + 0.8% employee-paid) = 57.40%
- 2025: Social Tax 33%, Income Tax 22%, Pension Tax 2%, and Unemployment Insurance Taxes (1.6% employer-paid + 0.8% employee-paid) = 59.40%
Advice: Paying a salary is often more efficient than offering bonuses.
Dividends
To pay dividends after registering a company in Estonia, certain conditions must be met:
- Share capital has been paid and reported to the Commercial Register and TSD;
- The company’s annual report has been compiled and approved;
- The fiscal year ended with profit, or retained earnings exist, and dividend payments will not harm the firm’s financial stability;
- Equity remains within legal limits after the dividend payment;
- A shareholder resolution for dividend distribution is in place.
Tax Rates:
- 2024: 20/80 = 25% or 14/86 = 16.28% + 7%
- 2025: 22/78 = 28.20%
Non-Taxable Expenses
One of the most attractive opportunities for entrepreneurs is spending money before taxation.
Key Principle:
All documented expenses directly related to the company’s business activities are not subject to tax. Proper invoices and receipts are necessary to validate such expenses.
Examples of Non-Taxable Expenses:
- Materials and Services Procurement: Business-related goods and services.
- Office Expenses: Utilities, stationery, office rent, etc.
- Work Equipment and Office Setup: Furniture, computers, and materials used in the office.
- Work-Related Training: Courses and seminars directly linked to employees’ duties.
- Advertising and IT Services: Online advertising, website creation, and software development.
- Drinking Water: Expenses for water purchases (without additives).
- Asset Depreciation: Depreciation can be an effective tool to lower taxable income.
- Uniforms and Protective Clothing: Exclusive use during work hours.
Uniforms and Protective Clothing
Expenses for uniforms and protective work clothing are not taxable if the clothing is used exclusively during working hours. This is particularly important for companies operating in construction, healthcare, or other industries where safety and hygiene standards are strictly regulated.
My Role as an Owner and CEO
As the owner and CEO, I work 24/7, regardless of where I am. My mind is always focused on work, searching for any legitimate opportunities to earn money. Therefore, I can justify purchasing a business suit, jacket, or coat with my company’s logo. For employees, work clothing should remain at the workplace. In my case, I even work from home — for instance, I am writing this article at 12:40 a.m., while my family sleeps and no one calls me. However, I still choose not to exercise this right to avoid unnecessary debates about expense justification. My time is more valuable.
When Are Expenses Truly Necessary for Business?
According to §32 (2) of the Income Tax Act (TuMS), expenses are not taxable if they are incurred for the purpose of generating taxable income from business activities and if the connection between the expenses and the company’s operations is clearly substantiated.
Tax exemptions may apply to expenses related to hygiene and occupational safety if they are required by law. Examples include costs for employee medical check-ups, first-aid equipment, or reimbursement for eyeglasses for employees working with computers.
Expense Reimbursements
Under §12 (3) of the Income Tax Act, reimbursement of expenses based on supporting documents is not considered personal income and is not subject to taxation. However, it is important to note that this rule does not apply to benefits in Estonia, which are subject to specific conditions and limits.
An Overlooked Point for New Entrepreneurs
A common oversight among new entrepreneurs is failing to account for personal assets used for business. A company may be registered, but it might not yet own any assets. Suppose the company owner already has a phone, computer, equipment, or furniture previously purchased with personal funds. In such cases, a sales agreement must be created between the individual and the company, listing the items and their market value at the time of sale.
Why Is This Not Taxable?
For example, I am a business consultant, and selling phones, equipment, or furniture is not my regular daily activity. Based on this, I can sell my used personal assets to anyone, including my company, without paying any taxes.
Company Registration in Estonia and Benefits with Applicable Conditions and Limits
After registering a company in Estonia, entrepreneurs need to understand which benefits are suitable for their business and the conditions and limits associated with these benefits. This understanding helps avoid taxation on expenses that can be reimbursed or exempted from taxes.
1. Home Office Expenses
If your office is located in a residential building, you can reimburse the following expenses proportional to the space used for work purposes:
- Repairs
- Furniture
- Utilities (electricity, water, heating, internet, phone)
- Security and cleaning services
After registering a company in Estonia, it is important to include the reimbursement of these expenses in an agreement and provide all necessary documents confirming them. However, rent payments are not eligible for reimbursement and must be subject to income tax. Contributions to a residential building repair fund and loan payments are also not eligible for reimbursement.
2. Compensation for Personal Vehicle Use
If an employee uses their personal car for business tasks, they can receive compensation. However, there are some important restrictions:
- Compensation can only be paid to employees under an employment contract or members of the company’s management board (as per TuMS § 9).
- Commutes between home and work do not qualify as business trips and are not eligible for compensation.
- The employer compensates for the use of a car that does not belong to them. The right to use the car must be confirmed by the vehicle registration or a power of attorney.
- Starting in 2025, the compensation rate will increase to €0.50 per kilometer (currently €0.30), with a maximum monthly payout of €550 (currently €335). Compensation requires a mileage log, and the payments must be declared in the annual INF 14 report.
In this article on our website, you will find a link to a calculator for calculating the tax on personal vehicle use: https://fpro.ee/en/tax-for-personal-use-of-the-car/
3. Per Diems for International Business Trips
After registering a company in Estonia, entrepreneurs often go on business trips. It is important to understand that per diems cover meal expenses. These invoices do not need to be submitted to your accountant. Simply transfer the per diem amounts to yourself within the established limits and collect all other expense receipts for flights, accommodation, taxis, and exhibitions for accounting purposes.
Tax-Free Per Diem Limits for International Business Trips:
- €50 per day for the first 15 days of the trip (from 2025: €75 per day)
- €32 per day for subsequent days (from 2025: €40 per day)
Per diems can only be paid to employees under an employment contract and members of the management board. Contractors are not eligible for per diems.
4. Representational Expenses
After registering a company in Estonia, you can incur representational expenses, such as paying for meals, accommodation, transportation, and entertainment for guests or business partners. These expenses can be reimbursed tax-free but are subject to certain limitations:
- Tax-free limit: €32 per month (from 2025: €50 per month).
- Plus 2% of the gross salary of employees if the expenses exceed €32.
These expenses do not apply to employees or board members. Representational expenses must be declared in Appendix 5 of the TSD report.
5. Promotional Gifts
Promotional gifts used to advertise the company are exempt from taxation if their value does not exceed €10 excluding VAT per item (from 2025: €21). The gift must be directly related to promotional activities. If the value exceeds this limit, the entire gift is taxable.
The costs of adding logos and gift packaging are not subject to tax.
6. Gifts and Donations
Gifts and donations are subject to income tax at a rate of 20% (22% from 2025) if the amount exceeds the established limits. However, gifts and donations are tax-exempt if they are made to approved entities and do not exceed:
- 10% of the previous year’s profit, or
- 3% of the salary fund subject to social tax.
7. Compensation for Health-Related Expenses
Since January 1, 2018, it has been possible to reimburse employees for participation in sports activities, gym memberships, and massages without tax. From 2025, the limit will increase to €400 per year.
Employers can reimburse the following expenses:
- Participation in sports events (e.g., marathons)
- Gym memberships
- Payments for medical services, including massages
- Maintenance costs for corporate sports facilities
Invoices and receipts must confirm these expenses. Reimbursement is possible for employees under an employment contract or members of the management board.
8. Training Expenses
Employers can reimburse training expenses if they help develop the professional skills of employees. Eligible expenses include:
- Continuing education courses
- Professional training, seminars, and conferences
- Business travel expenses related to training (e.g., tickets, accommodation)
The training must be directly relevant to the employee’s work responsibilities.
Conclusion
Understanding these tax benefits and limits is a critical part of managing a company effectively. Utilizing tax benefits not only reduces the tax burden but also creates more attractive conditions for employees. However, always ensure all expenses are documented and comply with established limits to avoid tax penalties. For any doubts or unusual situations, consulting with an experienced accountant is recommended.