As Estonia prepares to implement new fiscal measures from January 1, 2025, the nation is set to experience significant shifts in corporate and personal taxation, as well as value-added tax (VAT). These changes, motivated by a combination of fiscal adjustments and temporary defense funding, promise to impact individuals and businesses across the board. Below is a comprehensive overview of what lies ahead.

Key Tax Rate Adjustments

Corporate Income Tax

• The general corporate income tax rate will rise to 22%, up from the previous 20%. This rate is calculated as 22/78 on net distributions.
• The reduced 14% tax on regularly distributed dividends will be abolished. Consequently, all distributions will now be taxed uniformly at the new rate.
• For credit institutions, the advanced income tax rate will increase from 14% to 18%.

Personal Income Tax

• The standard personal income tax rate is set to increase to 22%.

Value-Added Tax (VAT)

• Until June 30, 2025, the VAT standard rate will remain at 22%. However, starting July 1, 2025, it will rise to 24%, reflecting an inclusion of the defense tax.
• Reduced VAT rates of 13% and 9% will remain unchanged.

Additionally, the VAT registration threshold will be set at €40,000, enabling businesses to plan their compliance strategies accordingly.

Introduction of the Defense Tax

To address a state budget deficit, a temporary defense tax will be implemented for a three-year period (2025–2028).

• Rate and Scope: A 2% tax will apply to taxable turnover, corporate profits, and personal gross income, affecting both residents and non-residents operating in Estonia.
• Corporate Implications: For resident companies and permanent establishments of non-residents, the defense tax will be levied on accounting profits, including unrealized gains, as reported in annual financial statements.

Businesses and individuals will be required to report and remit the defense tax alongside their existing tax obligations.

Corporate and Long-Term Contracts

For businesses, the changes in VAT and corporate taxation necessitate timely preparations:

1. VAT Adjustments: Businesses with long-term contracts signed before May 1, 2023, could retain the 22% VAT rate until June 30, 2025. Afterward, these contracts must comply with the new 24% rate.
2. Corporate Tax Planning: Companies must account for the abolition of the reduced dividend tax rate and the inclusion of unrealized gains in the tax base.

Compliance and Planning Checklist

For Businesses

• Revise financial systems to accommodate the 24% VAT rate and ensure all pricing strategies are updated.
• Review contract terms for long-term agreements affected by the VAT transition.
• Adapt accounting practices to report defense tax obligations accurately.
• Anticipate quarterly advance payments and ensure timely compliance.

For Individuals

• Reassess gross income projections to include the impact of the defense tax.

Looking Ahead

The 2025 tax reforms in Estonia represent a strategic response to both fiscal and defense-related challenges. While the higher tax rates and the introduction of the defense tax may initially strain businesses and individuals, these measures aim to stabilize the economy while addressing critical national priorities.

Stakeholders are advised to stay informed and proactive in adapting to these changes.

This article was created by Liisbeth Kiipus – Accountant at Gate to Baltics OÜ.

Gate to Baltics, a trusted name in accounting and company services, recently made its mark at Latitude59, Estonia’s leading startup and tech conference. This vibrant event, held in the heart of Estonia, brought together innovators, entrepreneurs, and investors from all over the world.

Engaging with Entrepreneurs at the e-Residency Stand

At Latitude59, Gate to Baltics was present at the e-Residency stand. Here, they provided valuable insights and answered questions from entrepreneurs looking to register their companies in Estonia. The stand became a bustling hub of activity. Gate to Baltics experts offered information on accounting services and legal advice to those aiming to establish a presence in this fast-growing tech hub.

Connecting with the Startup Ecosystem

The conferences were a melting pot of ideas and ambitions. Gate to Baltics representatives took the opportunity to engage with a diverse range of startup founders and investors. Each conversation revealed unique perspectives and interests, highlighting the dynamic and diverse nature of the startup ecosystem in Estonia.

Latitude 59, Witnessing Estonia’s Growth and Innovation

Known for its innovative spirit and thriving startup culture, Estonia has become a hotspot for unicorns and groundbreaking tech initiatives. Gate to Baltics’ presence at Latitude59 underlines its commitment to supporting these entrepreneurial ventures. By participating in such events, Gate to Baltics aims to contribute to the economic growth of the region and promote the success of new business projects.

Insightful Talks and Networking Opportunities at Latitude59

The conferences featured an array of insightful talks and discussions. Participants shared their deep wells of knowledge and experience. Highlights included speeches by notable political figures, such as Estonian Prime Minister Kaja Kallas or the President of Estonia President Alar Karis, alongside emerging technology experts. These experts play crucial roles in advancing new technologies. The audience, comprising keen and knowledgeable attendees, added immense value to these sessions through their engagement and feedback.

A Step Forward for Gate to Baltics

Gate to Baltics found their experience at Latitude59 immensely rewarding. Being amidst the “movement where it happens” allowed them to stay at the forefront of the latest developments in the tech and startup world. They were inspired by the energy, innovation, and collaboration that characterized the event. This reinforced their resolve to support and nurture entrepreneurial initiatives in Estonia and beyond.

Gate to Baltics’s participation at Latitude59 was not just about providing services. It was about being part of a larger narrative of growth, innovation, and entrepreneurial success in Estonia. As they continue to engage with such pivotal events, Gate to Baltics is poised to play an integral role in shaping the future of startups and technology in the region.

1. Changes to the Estonian Value Added Tax Act

From January 1, 2024, the standard rate of the VAT in Estonia will be 22% instead of the current 20%. The VAT Act contains two transitional measures:

• Only concerning the users of the cash accounting scheme, if the supply of goods and service, which are applicable to standard VAT, was made effective before 1 January 2024, the invoice issued may apply a 20% VAT rate.
• When dealing with long-term contracts connected to immovable property which are concluded before 1 May 2023, a taxable person will be entitled to apply the 20% VAT rate until 31 December 2023. This implies that the contract does not specify price adjustments from a possible change in the rate of VAT.

By increasing the tax rate from 20% to 22% it is estimated that the price of goods and services will rise 1.67%.

The reduced rates 9% and 5% affecting accommodation services and press publications remain unchanged for the year 2024, however, changes are planned for the year 2025, with the tax rates being 13% and 9% respectively.  

The Estonian Tax and Customs Board has provided examples of taxation related to the VAT rate change, which can be found here:

Conclusion

In tax legislation, the biggest change for the upcoming year is clearly the increased VAT rate. This will mostly impact consumers, as they are the ones who will be paying the increased rate. The main aim of the change is to balance the state budget by increasing the collection of tax revenue.

GATE TO BALTICS OÜ stands as a prominent accounting and legal consulting firm rooted in the vibrant city of Tallinn, Estonia. Our core mission revolves around facilitating seamless business establishment and operation within Estonia’s thriving landscape.

Through our expert consulting and meticulous accounting services, we have orchestrated the successful entry of over 350 companies into the Estonian business arena. As of August 2023, we proudly extend our adept accounting prowess to cater to the needs of 80+ companies, predominantly hailing from the dynamic IT and service sectors.

At GATE TO BALTICS, our service philosophy is elegantly straightforward: empower our clients to channel their energies into business growth, while we adeptly shoulder the weight of administrative complexities.

We are currently looking for the following positions:

1. Accountant. More info here.

If you have an Estonian company but are not an Estonian resident, you have likely received an email from the e-Business Registry recently, informing you to add a term of office for a contact person. In this article, we will explain what this is and what actions Estonian company owners should take.

Legal basis

First things first: why is this happening now? As of 01.02.2023, amendments to the Commercial Code of Estonia became effective. Among other changes (Our article about amendments), the amendments affect how the legal address of Estonian companies is treated, and provisions regarding the Contact person are now removed from the Commercial Code. However, the Contact person rules are now regulated by Commercial Register Act §24.

Until 01.02.2023, when creating a company, there was an option to select “company is managed from a foreign country,” which indicated that the management board is located abroad. From 01.02.2023, there is no longer such an option, and the company needs to indicate either an address in Estonia or an address abroad (instead of the location of the management board).

If the company’s owner wishes to enter an address in Estonia as the company’s address, it can be done in two ways: 1) the company has a physical office in Estonia or one of the management board members/partners of the company is residing in Estonia; 2) the company uses one of the licensed trust and company service providers and rents a “virtual office” address.

The Commercial Register Act §24 states:

1. A legal person, including a foreign company that has a branch in Estonia, may designate a person to whom the procedural documents of the legal person and the declarations of intent addressed to the legal person may be delivered in Estonia (hereinafter contact person).
2. A contact person must be designated if the address of the legal person is abroad.

This means that a Contact person is not compulsory even if the management of the company is located abroad. According to the Commercial Code and the Commercial Registry Act, the contact person is now required only when the company decides to state their address abroad. However, if the company uses an address in Estonia as a registered office of the company (including a virtual office address), it can opt-out of having a contact person in Estonia.

How to add the term of office for contact person?

If you already have a company in Estonia and wish to keep your current contact person, you should contact your contact person service provider and inform them of your decision.

For all active Gate to Baltics customers, we are currently sending out detailed instructions on how to approve the Term of Office of the Contact person in the e-Business Registry.

Conclusion

1. All companies that currently have appointed contact persons should set the term of office by 30.04.2023. Otherwise, the contact person will be automatically removed.
   • If setting the term of office for the contact person is the only change on the Registry card, no state fee will be applied.
2. If a company has a legal address outside of Estonia, it is required to have a contact person.
3. If a company with an address outside of Estonia doesn’t appoint a contact person, the Registry has the right to issue a deletion warning and remove the company from the Registry 3 months after sending the notification to appoint the Contact person (§ 62 (2) Commercial Registry Act).
4. IIf the company uses a virtual office address service, it can “opt-out” of using the contact person service.
5. Only notaries, advocates, owners of law firms, sworn auditors, audit firms, tax representatives of non-residents for the purposes of the Taxation Act, or providers of trust and company services are allowed to provide virtual office and contact person services.
6. Gate to Baltics will not provide virtual office address services separately from contact person services. This means that all companies using Gate to Baltics’ virtual office address will have to use our contact person services and set the term of office according to the services the company is using (such as accounting services or only virtual office address and contact person services). This is done due to Gate to Baltics’ internal compliance rules, which allows us to maintain regular compliance of our customers.
7. Gate to Baltics is a licensed trust and company services provider with a license number FIU000191, and we are allowed to provide the virtual office and contact person services mentioned above.

If you have any additional questions or you are interested in our virtual office and contact person services, feel free to reach out via the contact form below.

In this article we will illustrate the main differences between account opening in standard banks (credit institutions) and Fintechs. This is certainly the TOP question that everyone creating a company in Estonia has.

For the sake of this article it is important to say that by Fintechs we understand financial institutions that are opening IBAN accounts for their customers and are not considered as credit institutions. For example, TransferWise (or Wise now), Paysera, Revolut Payments (before switching to the banking license in Lithuania). By “standard” banks we understand institutions that are operating under banking license and are defined as a credit institution – for example – Swedbank, SEB, Luminor, JP Morgan Chase. etc. There are several differences between Electronic Money Institutions / Payment Service Providers and Credit Institutions. This article will illustrate the main differences that could be important for business owners when opening accounts in these institutions. 

1. Safety

The most popular difference between Fintechs and Credit Institutions is assumption that Fintechs do not protect their customers’ money. 

According to the EU regulations (Directive 2014/49/EU) credit institutions are required to protect money of their customers by a so called Deposit Guarantee Scheme. According to the EU rules Deposit guarantee schemes: 

1. protect depositors’ savings by guaranteeing deposits of up to €100,000; 
2. help prevent the mass withdrawal of deposits in the case of bank failure, which can create financial instability. 

The logical question here is why does standard banks protect customers’ funds, but Fintechs don’t? Answer is quite simple. The main reason for protecting customers’ money for standard banks is that they are operating with it. Standard banks make profit by lending customers’ money and therefore they are required to insure it up to a certain amount in case if something goes wrong. 

According to EU Regulations, licensed Payment Service Providers are required to store the money of their customers separate from their own operating money (Directive (EU) 2015/2366, Article 10.1). The main reason is that customers’ money can’t be used for Fintech’s operating needs. Basically, if Fintech will go under and won’t be able to pay salaries to their employees, Fintech won’t be able to use customers’ funds to finance their own operations. 

Conclusion from a safety point of view is that there is a reason why standard banks have to participate in Deposit Guarantee Schemes and Fintech’s don’t. That reason is that standard banks are using customers’ funds to make profit and therefore they must apply a certain insurance for that. In a situation if Fintech will become insolvent and will be forced to close down its operations, the customers won’t lose their funds, because they will be kept separate from the funds of the Fintech. Technically this means that your funds in Fintechs are insured for the whole amount while in credit institutions they would be insured for up to EUR 100.000. 

However, another important aspect that should be mentioned here is what happens if the credit institution where Fintech stores customers’ money becomes insolvent? Theoretically Fintech customers should be able to apply for Deposit Guarantee Scheme for the insured amount in the credit institution. However, this has never happened before and there is no precedent on what would happen with funds of Fintechs’ customers if Tier-1 credit institution would become insolvent. 

2. Ability to open an account (remotely)

This point in fact could be even more important than the 1st one, because it all comes down to whether or not a customer is able to open a bank account in a standard credit institution in Estonia. 

As a general rule all Estonian credit institutions are requiring a local connection with Estonia for companies willing to open business accounts with them. Local connection could be one or several of the following:

• Employees in Estonia;
• Physical office in Estonia;
• Several business partners in Estonia. In most cases accountant and legal service provision company won’t cut it;

Additionally to physical connection to Estonia, most of the credit institutions in Estonia will require a personal visit of the Ultimate Beneficial Owner for identification purposes before opening an account. All the documents and account opening forms customers will be able to fill in remotely, but for the last step – Identification – customers will have to physically arrive in the bank. This is the situation on February 4, 2021. Hopefully remote ID will soon be possible for credit institutions in Estonia as well. 

All Fintechs that are opening corporate accounts are opening accounts remotely. None of fintechs has the requirement of physical connection to Estonia, however most of them will ask for a proof showing that your company operates in Estonia. As proof you can use invoice for a certain service (utility bill) or a tax certificate showing the registered address of your company. 

3. Legal aspects (share capital contribution, tax payments, etc.)

According to the Commercial Code of Estonia § 520 (4) share capital of the company can be contributed from the account that is opened in credit or payment institutions within EEA. Therefore, it means that the share capital can be contributed also from Fintechs that are registered in EEA. 

In order to increase the share capital via Company Registration Portal online, it is necessary to submit digitally signed statement in Estonian showing that the company has received the share capital to its account. Obviously it is unreasonable to expect that all Payment Service Providers registered within EEA are able to issue digitally signed statements in Estonian. Therefore, it would be important to make sure that the Fintech where you are opening an account is able to issue at least digitally signed statements. This would mean that you would have to translate it with a sworn translator in Estonia for approximately EUR 50.00. However, there are several Fintechs that are operating in Estonia and are able to issue digitally signed statements in Estonian (Transferwise, Paysera) which are valid to be submitted immediately to the Company Registration Portal. 

All Estonian credit institutions (standard banks) are able to automatically issue such statements at no extra cost.

4. Other aspects to be considered when choosing Fintech vs Standard Bank

Fee comparison is an important aspect when you choose your financial service provider. By default Fintechs are known to be cheaper than the standard banks, especially when it comes down to international transfers which are important for e-Resident Estonian companies. 

International vs SEPA payments. Several Fintechs are able to provide IBANs only for SEPA transfers. This means that for all international payments customers will have to use IBAN of the payment institution by showing the payment institution as the beneficiary of the transactions. While this shouldn’t be a big issue for companies that are working within the EU, this can get uncomfortable for companies engaging in international transfers. Our recommendation for companies working with international customers is to open accounts with payment service providers who are able to provide you with international transfer options (Transferwise, Revolut Business). 

All standard banks in Estonia are able to provide international transfer options by applying additional transfer fees. 

Loans for business. None of the Fintechs will be able to issue a loan for your business. Therefore, if this is important to you, then you should open an account with credit institutions. 

CONCLUSION

For non-resident Estonian company owners our recommendation is to start their business with a payment account in Fintech. As we showed in this article, your funds will be safe and you will save some time and money which you would spend while going through the account opening process in standard banks. 

Starting from February, 2023 new redaction of Estonian Commercial Code is in force.

This article will summarise the most significant changes in the Commercial Code of Estonia and explain how these changes will affect new company registration in Estonia and how they will affect already registered companies in Estonia.

1. MINIMUM SHARE CAPITAL IN ESTONIA EUR 0.01

This makes company registration in Estonia even easier than before. Until now, when registering a company in Estonia, the minimum share capital for limited liability companies was EUR 2500.00. It is useful to outline here that the share capital is not a state fee – these are assets of the company that owners of the company can use for their business after registering the company.

From 01.02.2023 the owners of the company will have the ability to choose the minimal share capital of the company according to their own business projections. For example, some businesses may need EUR 25.000 to start their operations, while other businesses may start with EUR 100.00.

2. SIMPLIFIED PROOF OF SHARE CAPITAL CONTRIBUTION.

Companies with share capital up to EUR 50.000 will no longer have to present a digitally signed bank statement showing that the share capital is contributed. It will be sufficient if the owner of the company will state that the share capital has been contributed.

This change will decrease the bureaucratic burden and will speed up the company registration process. The biggest benefactors from this particular change will be companies that wish to create a subsidiaries in Estonia. Until now, when creating a subsidiary, it was required to contribute the share capital in full which caused delays in company registration, because it took some time to open an initial account, then contribute the share capital, obtain a statement that the share capital has been contributed and then register the statement with the Business Registry.

3. LEGAL ADDRESS CHANGES.

The new changes in the Commercial Code will distinguish the legal address and the address of the contact person of the company. Until now, for the companies that have a legal contact person in Estonia, the address of the legal contact person was considered the address of thee company itself. With the new changes, the legal address of the company will be the address where the company can be reached for the official correspondence purposes.

WHAT DOES IT MEAN FOR EXISTING ESTONIAN COMPANIES?

The most significant changes that will affect the existing companies is the share capital decrease and the legal address change.

The companies that have the share capital of EUR 2500.00 and have fully contributed the share capital, can choose to decrease the share capital and withdraw EUR 2499.99 (or any other relevant amount, depending on the size of the share capital) to the account of the owner. To do that, the company needs to draft the Shareholders Resolution for share capital decrease and amend the Articles of Association. The new share capital has to be registered in the Business Registry accordingly. It is important to note that the company must inform the accountant about decrease of the share capital, as it will affect the total amount of assets.

If the company has registered share capital of EUR 2500.00, but haven’t contributed the share capital, then it has to follow the existing procedure to decrease it. According to the Commercial Code of Estonia, the company can increase / decrease the share capital only if it is contributed in full. Therefore, if it hasn’t been done, the owner of the company first needs to contribute it and only then decrease / increase it.

The change of the legal address is more “cosmetic” than practical and one off the goals of this change was to create more clarity with the exisintg definition of “place of the management board”. The companies that are already registered in Estonia, will have to choose which legal address to state in the Registry. The new address (if applicable) has to be entered until April, 2023.

CONCLUSION

It will be easier to create companies in Estonia. Considering the pace of business in 21st century, the meaning of the “minimum share capital” has changed quite a lot over the years. Just like we have mentioned it above, some companies can start their business with EUR 100.00 while others with EUR 50.000.

Until now, the private person shareholders could register the companies in Estonia with minimum share capital of EUR 2500.00, but choose not to contribute it. Therefore, this automatically defeats the argument that there should be some filter / limit that basically states that only someone with EUR 2500.00 on their account should create a company. The Status Quo in Estonia didn’t have this filter until now anyway. The most significant change is that finally the authorities have recognised this as well and by removing the minimum share capital requirement will speed up the company registration process.