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.

Let's talk!

Years ago, I quit my 9 to 5 job and became a freelancer first, then a solopreneur, and finally a digital nomad. Managing my company back in Spain was a nightmare until I discovered the e-Residency program and opened my company in Estonia. That changed my life.

After some years managing my business, I know the tricks of the trade. I can offer you advice on how to become location independent, found an European company you can manage online while traveling, and avoid unnecessary costs. If you are ready to take the leap, but have some doubts or don't know where to start, let's get in touch.

Let's do this!

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12 Comments

  1. Carlos Wright May 23, 2018 at 10:59 am

    Thank you very much for these clarifications. My question is basically the following:

    I am a Spanish citizen and resident in Belgium for 4 years and I pay all my taxes here in Belgium.
    I am opening a company in Estonia, I will work in Belgium most of the time. Maybe I will travel to Spain but it will be punctual.
    In principle I am the only worker in the company, but I do not know if Belgium can demand that I register as a self-employed worker.

    What do you think? Can you help me in this doubt?

    Thank you very much.

    Reply
    1. nacho May 23, 2018 at 3:20 pm

      Hello there Carlos. Without specifically knowing the legislation in Belgium, generally speaking in Europe, if your services are exclusively digital/online, and your company does not have premises, offices or physical belongings (like a car) there on a permanent basis, and you don’t spend most of your time there, then maybe there’s the possibility that you don’t need to register there as a self-employed.

      Reply
      1. Max June 23, 2018 at 9:10 pm

        Hi Nacho,

        Carlos is tax resident of Belgium and likely spends more than six months there. The second part of the quote from the taxation website of the e-Residency program says “if a company is managed from Germany by a tax resident of Germany, the company becomes tax resident in Germany”, so it seems to apply to his case, and his company would become tax resident in Belgium.

        Or would it be enough, in addition to having an international web site and international customers (which covers the first part of the quote), to do some work on a one-month trip to Spain, to show that the company does not depend on being located in Belgium? And if not one month, two, or how many? Between “not 100% of the time in Belgium” and “at least 6 months out of Belgium” there’s a lot of space for costly mistakes.

        I know you’re not a lawyer and you may not have the answers but I think it’s important to know that some questions are open.

        As to whether or not he may have to register as self-employed, that concerns *personal* income/taxation. He’ll want to receive some of his company’s profits somehow and registering as self-employed in Belgium and then invoicing his own company might work, although many administrations frown on freelancers that always invoice the same customer (it’s fictitious employment, they say). Other options as we know are being employed by one’s own company or receiving dividends. Just to say, even if he doesn’t register as self-employed, he’ll still need some other kind of paperwork.

        Before I sign off let me say that this blog is hands-down the best resource on the subject. Thanks for putting all this information together and explaining it in plain English!

        Reply
        1. nacho June 25, 2018 at 10:17 am

          Hello there Max. Thanks for your comment. You see, that part is a “gray” area because right now governments are not ready for the digital nomad movement, and they are reacting slowly to the fact that we are in a single global market composed of multiple legislations.

          The law is clear in the “edge cases”, like being a full digital nomad, or being a full, 100% resident in a country. The in-between space is not that clear. In my opinion -but this is just an opinion- the law talks about a place where work is performed on a permanent basis, so if you can certify that your activity is not tied to that country, i.e: staying some time outside while doing your work, then that shouldn’t be the case. Unfortunately, the tax office may, of course, have a different opinion.

          So how much time? That is open to interpretation. As of today, I don’t know a single case of someone whose company has been “claimed” by the local authorities, and that includes people who live 100% of their time in their home countries. However, some interpretations claim that being tax resident is enough, as a sole owner of a company, for it to be considered tax resident in your residence country, even if you spend 6 months a year in another country.

          Reply
  2. Adam July 14, 2018 at 7:07 pm

    Hi Nacho,

    Thanks for creating such a great source of info on this. I’ve spent hours reading your articles.

    I’m curious about this statement in regards to the tax residency of the company:

    “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.”

    I’m a digital consultant living in Spain, tax resident in Spain, and I cannot be out of the country for long periods of time for family reasons.

    If I create a company in Estonia and rent a desk in a co-working space in Spain, would that not count as a permanent office in Spain?

    Thanks

    Reply
    1. nacho July 16, 2018 at 6:47 pm

      Hello there Adam. No, a co-working space is different, because it’s not a permanent office for your company. It’s a service you use, owned by another company. If you contact me at the contact form, I can describe it to you more in detail, especially for the Spanish situation.

      Reply
  3. Matt July 25, 2018 at 12:35 am

    Hi Nacho,
    Thank you for sharing your thoughts on this fascinating topic. Allow me to quickly explain my situation, hopefully you have an opinion/ suggestion: I currently live in Barcelona and have previously been living and paying taxes in a number of countries including France and lastly UK. The French and British tax authorities took a while to delete me of their tax resident lists..:). Whilst I have been registered as resident in Spain (estoy empadronado y con NIE) and by all accounts am a Spanish tax resident, Hacienda has not reached out to me (yet). Reason probably is that i/the little work I have done out of Spain I billed through my wife’s company and ii/ I have never paid into seguridad social (I have private insurance and don’t believe we’ll ever see public pensions :)). I am not sure this situation is sustainable and since I am increasingly consulting across a variety of EU countries I am thinking of setting up an Estonian company and declare dividends as income tax in Spain. My fear however is that as soon as I do this they will ask what I have been doing all these years in Spain..I have mainly lived of savings but also publicly collaborated on a number of public projects through my wife’s company.
    Hope this does not sound to odd but I am struggling to find tax advisors that ‘get’ my situation..
    Please do let me know if you have any idea/recommendation. Thank you!

    Reply
    1. nacho July 25, 2018 at 11:27 am

      Hi there Matt, thanks for sharing your experience and your words. In your situation, it would probably be best if we could discuss your specific case in depth. Just send me a message using the contact form if you are up for it!

      Reply
  4. Nacho September 26, 2018 at 2:51 am

    Hi Nacho,

    a really interesting blog 🙂 This topic on company residency has cleared one of my biggest doubts 🙂

    Another doubt I have is, if I am the sole owner of my Estonian company, what’s the best way to get a salary from it? In a previous post you mentioned to set a salary and split it between time dedicated to board duties and time dedicated to proper work, like 30/70 or 20/80 (it seems to be a gray area), taking into consideration that the board duties pay taxes in Estonia (including social security) but the rest will just pay revenue taxes in your residence country (IRPF in Spain, for example). Wouldn’t it be easier to be a freelance in your residence country and send a monthly invoice to your Estonian company? That way, you would be considered an active worker in your residence country, have full rights to social security, contribute to your pension, … What do you think?

    Thanks

    Reply
    1. nacho September 26, 2018 at 11:24 am

      Hello there Nacho, thanks for your comment. That’s a possibility, and I know many entrepreneurs from Spain that do just that. Some things you need to consider: 1) you will be paying the “autonomo” (freelancer) fee, which can be quite steep (280€). For that price, you can get a complete digital nomad health insurance worldwire and a pension plan (and have still money left to spare), and 2) it might be considered that you have a permanent establishment in Spain in that situation. Something to take into account.

      Reply
      1. Nacho September 27, 2018 at 11:33 am

        Thanks for your reply! Crystal clear and straight to the point 🙂

        Reply
  5. Sharat November 18, 2018 at 5:56 pm

    Hello, Very Informative article. I have a scenario. If I have a company in Estonia and get some project work from Germany (or any other EU country) and send that project work to India. Will It make a Germany Tax paying company? As all my invoices will be generated in Estonia and India.
    I am asking because My sales guy will be working in Germany to get the projects and they will get salary in Germany

    Reply

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