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?
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.
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.
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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