There’s one recurrent fear many solopreneurs face when considering starting a company in Estonia. Namely, that if they live and work in their home country, their companies will be considered tax residents there. Worst case scenario, they are scared of having to pay taxes twice.

Luckily, there are double-taxation treaties in place to avoid these situations. Nonetheless, it’s true that, under certain circumstances, your country of residence could consider your company a tax resident there too.

If you are a solopreneur or freelancer, managing your company in Estonia while living somewhere else -perhaps even traveling without a steady home-, you definitely want to separate your company from yourself, tax-wise.

In this post, I want to help you understand how tax residency works for individuals and companies, and how to prevent your country from considering your Estonian company a tax resident.

I tend to stick to the most strict legality and give you advice that’ll keep you in safe territory. However, I am not an accountant or expert in your home country legislation, so if in doubt, it’s better to ask a professional accountant.

The Basics: Taxation Systems, You Are Not Your Company, And How We Pay Taxes

Before reading any further, it’s important that you clearly understand some basic concepts.

If you haven’t already, it’s a good idea to read first about the different taxations systems in the world, the difference between residency and citizenship, and what tax residency means.

Additionally, you need to understand the difference between you -as an individual- and your company. Even if you are a micropreneur, and the sole owner of your company, these are two different entities, with different legal and tax duties.

If you are European, chances are you are subject to a residence-based taxation system. That usually means that you pay taxes in the country where you spend more than 6 months every year. That’s you as an individual.

But what about your Estonian company?

Will My Estonian Company Have To Pay Taxes In My Home Country?

Can Another Country Claim My Estonian Company As Tax Resident There?

Your company has been founded in Estonia. That means that generally speaking, it is a tax resident in Estonia. It has to pay taxes in Estonia.

There are many myths and misleading information affirming that if you live outside Estonia, your home country will consider your Estonian company a tax resident there. If that was the case, the Estonian e-Residency program will not exist, cause it won’t make any sense opening a company in Estonia for a non-resident.

Quoting the taxation website of the e-Residency program:

Q: I currently work in Germany as a freiberufler (self employed), providing writing services in the IT and possibly travel industry. I travel a lot while providing these services, mostly to non German companies. I’d like to look at the possibility of running through an Estonian company, and would like to make sure the total gross income would not be considered German income, but only the “salary” I take out of the company.
A: In this case, Germany’s taxation rules apply to your company’s profits if the work is completed in a permanent establishment in Germany (emphasis mine). If a company is managed from Germany by a tax resident of Germany, the company becomes tax resident in Germany.

Here, the devil is in the details, concretely in this part:

… if the work is completed in a permanent establishment in Germany.

This is a classic example of a situation that can make Germany -in this case- consider this company German, instead of Estonian.

The rule of thumb here is: a country will consider your company a tax resident there if you are generating all the value in that country. That usually means that you have permanent premises in the country. Other interpretations suggest that if you are a tax resident in Germany, and 100% of your activity is performed there, Germany may also claim the tax residence of your company. Unfortunately, there’s a gap in the in-between situation, and depends a lot on the specific legislation of your country, and the interpretation of the authorities.

What Happens If My Home Country Claims My Company As Tax Resident There?

In that case, there will be a negotiation. Both countries want your company. More concretely, they want your company to pay taxes to them.

While this negotiation does not actually require your intervention, it’s in your best interest to take part in it. It’s your responsibility -as the taxpayer- to start the taxation dispute, submit the application and provide all the appropriate documentation, including any evidence that may help your case.

However, it’s always better to take the necessary precautions to skip this undesirable scenario.

Will My Estonian Company Have To Pay Taxes In My Home Country?

Preventing Your Estonian Company From Becoming Tax Resident In Another Country

So how do you avoid your company from becoming tax resident in Germany (or any other country)? How do you make sure it will pay taxes in Estonia?

Easy: avoid being a German company! 

Ok, so how do I do that?

  • Above all, avoid having a permanent office or headquarters in Germany.
  • Do not hire only german employees and put them to work at a German office.
  • If you are the only member of the board, do not have a permanent establishment in Germany, performing 100% of your activity there.

Optionally also, if you can afford it, try to apply some of these additional measures:

  • Don’t have your website only in German.
  • Avoid, if possible, having all your customers in Germany.
  • Finally, don’t have all your commercial interests in Germany.

You need to be able to prove that you are an international company:

  • Have your website in multiple languages.
  • Hire a VA or employee from another country.
  • Try to make business with some international customers.
  • Travel regularly, or at least from time to time, spend some months in another country. If possible become a resident of another country sometime… It’s important that you can prove that the activity of your company is not tied to a concrete country.

You don’t need to follow all these rules. Generally speaking, it’s enough if you don’t have a permanent office in your home country and live abroad for some months a year. A co-working center, or being a member of a startup community is ok. Renting an office outside Estonia for more than 6 months is not.

Take into account that e-Residency Estonian companies are perfect for solopreneurs, freelancers, digital nomads. They’re not been thought for big German companies -following the example- that are completely based in Germany and do all their business there. If that’s your situation, you would be better off opening a company in Germany.

Word Of Warning

The most edge cases of having a company abroad are quite clear:

  • if you are a digital nomad and have no home country, you won’t have -generally speaking- problems.
  • if you have a permanent establishment in another country, and/or are a permanent resident there and all your activity is performed there, probably your company will be asked to pay taxes in that country by the local Tax authorities.

The problem is that there’s a gap in the in-between situation, and there’s no unified legislation on how this situation is solved. Different countries apply different rules.

To make things worse, the criteria followed by the Tax Offices of different countries can be completely arbitrary sometimes. They are in the position of power, and they want the taxes of your company. You are the small fish and they are the shark. If in doubt, I recommend you to consult a lawyer or accountant.

My suggestion is: make the right questions. Instead of asking “can I live in Germany and have an Estonian company?” ask yourself: “Will having a Estonian company allow me to become a digital nomad and take my business with me?”. Take advantage of what the digital nation has to offer.

This is one of the biggest challenges for the e-Residency program, as I mention in this post.

Conclusion

In this post, I try to dissipate a common concern for entrepreneurs considering opening a company in Estonia. Namely, that if you live and manage your company in your home country, your company becomes a tax resident there.

That would obviously mean it will pay taxes there.

While it’s true that this might happen in certain situations, You can have a company in Estonia and live somewhere else. You just need to understand what kind of companies the e-Residency program is appropriate for, and the rules of residency and taxation for companies and individuals.

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34 Comments

  1. Samuel January 2, 2021 at 9:45 am

    Hi, so I just started my Estonian company and I live in Germany at my parents. I am offering web design and app development services and I cannot have any employees. First of all, do you think I can convince the german authorities that I do no have to pay taxes in Germany if I only sell to international clients and do not have a business website in Germany? I also do not have an office in Germany and I do not intend to offer my services to german customers. Because I have a romanian passport, I could also go live at my grandparents house for a few months a year if needed. And regarding the negotiation between Estonia and Germany, how do I know the decision that has been made? And do I need to initiate the negotiation or will I just be informed of their decision? And do I need to tell Finanzamt that I have a business in Estonia or do they already know?

    Best regards!

    Reply
  2. GeorgyPorgy August 14, 2020 at 9:38 pm

    First of all congrats!!
    I read some other comments about this, but just to clarify.
    – I live in Germany for 5 years and so far have being employed in german companies (so I guess I’m Tax Resident here),
    – I am “registered” as living here in the city hall (I rent a flat)
    – I create an Estonian company with VAT to bill other EU (German and Non German) companies for freelance work (software development for example) which I will be doing FULLY REMOTELY. (I will be renting coworking space in other EU countries as well)
    ==> not only I will have to pay taxes for the salary I get from my Estonian Company, but also my Estonian Company will be considered a Tax Resident of Germany therefore I will be paying corporate German tax rates and not fall into the Estonian system?

    Does someone here have actual real-life experience on this happening? I guess the question would be: “how likely is that they’ll find out?” and “what can I do to avoid that”.
    For Reference I will be working REMOTELY and I do plan to be spending a lot of time in Greece as well. (possibly more than 6 months)
    Otherwise I don’t understand the appeal to the e-residency: having no Tax Residency is practically impossible and even if you manage to move every 182 days then you will fallback to your last tax residency..

    Reply
    1. Andy September 29, 2021 at 1:16 am

      Hi Ignacio and Georgy,
      I would like also to clarify the point mentioned by Georgy.

      1. I have permanent residence in Germany and I do not plan to change my current working place (Germany based, permanent contract and so on)
      2. I live in Germany and I do not travel, so that means for example I spend 365 days a year in Germany
      3. I do work from time to time on-line (freelance design or programming) and I am invoicing company which is non-eu based. So I sign contract with non-eu based company to provide service for them.

      Does it make any sense to open a company in Estonia? (ideally I would like to work in my current company and from time to time do extra jobs independently from my company) Does it mean that I have to pay extra taxes in Germany then?

      Thank you very much in advance

      Reply
  3. Neto February 28, 2020 at 8:26 pm

    Hi Ignacio, that’s really a great article. Very enlightening article.
    I plan to open a software company, with international website, sell that software license online, globally.
    There are plans to travel around the world to sell this software. The income will come mostly from other countries than the resident one, so we’ll do bussiness mostly
    with international customers.
    But I also plan to rent a place to put the employees working there.
    This does meet some of rules about international comapanies in your article.
    I’m afraid of renting a place to put the employees working. Do you think even albeit it’s digital company, the government can claim the company
    to pay taxes in the resident country?

    Reply
    1. nacho March 1, 2020 at 7:55 pm

      Hi Neto, maybe we can comment your specific situation better in a consultancy session! Best regards

      Reply
      1. Wout October 15, 2020 at 12:03 pm

        Hi Nacho, I really do like your articles. How can I plan a consultancy session with you?

      2. nacho October 19, 2020 at 7:45 am

        Hi Wout, thank you. I am currently not giving consultancy sessions anymore. Thanks anyway and best of lucks.

  4. Jerry January 30, 2020 at 4:24 pm

    Hi,
    I am considering opening an Estonian company but with 3 directors each in a different country,
    Germany (me), Poland and Austria. In that case, according to CPC rules would be the tax residency of the company? Can it be in all 3 countires ?

    Reply
    1. nacho January 31, 2020 at 10:02 am

      Hi Jerry, well, in that case no country can claim that all the activity of the company, or even the majority of the activity, is being performed in that country. That would be an ideal situation for a e-Residency company. Again, this does not mean certainty, as local tax offices can be quite unreasonable sometimes. In this case, however, the law is on your side.

      Still, it would be interesting to check the CFC rules of each one of these countries carefully, and the permanent establishment rules with a lawyer, just in case.

      Reply

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