This was the most frequent question I received this fall while participating with the Estonian e-Residency team at major startup events like FDday in Paris, France and How To Web in Bucharest, Romania. Great events with great atmosphere, events and people!
While start-up people know quite well what the e-residency is and what it’s benefits are – mostly, that dividends are taxed, not profits, which let’s the founders to develop and grow the business and online, location independent management of the company. On both events , though, one question I repeatedly had to answer and also when following up with potential founders and e-Residents was „how to get money out from the company?“. The answer, expected or not, is actually pretty easy – salary or dividends, which, of course, means taxes.
Let me get into more details below.
How to Web Conference, the leading startup and technology event in Eastern Europe, 1-2.10.2025 in Bucharest, Romania.
Contrary to common belief, Estonia is not a low tax country. Quite the opposite to be honest. However, Estonian tax system has been designed keeping entrepreneurship in mind – that’s why re-invested profits are not taxed, which stimulates businesses to invest and grow. The term, „re-invested profits“, is a bit misleading though, as funds which are not distributed as profits, but kept on companies accounts, are not taxed, so funds can be accumulated until there’s a good opportunity or a business case in sight. This unique opportunity attracts many, so Estonia’s popularity for registering a business entity and growing it from the scratch is continuing.
Still, at one point everyone has a question – how to get paid for the work put into the company? There are quite a few options and I’m going to introduce a few most common ones.
So let’s have a look how an entrepreneur can get compensated for the work put into a company.
DIVIDENDS
One of the most common ways to extract profits from an Estonian company is through the payment of dividends to its shareholders. A significant feature of the Estonian corporate tax system is that 100% of profits that are retained and reinvested within the company are exempt from corporate income tax. Tax is only levied when profits are distributed.
Key Considerations for Dividends:
- Corporate Income Tax: When a company distributes dividends, it is subject to a 22% corporate income tax, which is calculated from the net amount of the dividend payment. For example, to pay out €10000 in dividends, the company must pay €2820.51 in corporate income tax. This calculation is a constant source of confusion, but simply put – in the decision the company makes to distribute dividends (an official document, submitted to the registry), the amount is always NET. In this case, €10000 is net, so 78% . 22% corporate income tax (paid by the company) is added later on (and is paid by the company).
- No Further Personal Income Tax in Estonia: For the shareholder receiving the dividends, there is no additional personal income tax liability in Estonia. However, this income will likely be taxable in the shareholder’s country of residence, subject to any double taxation treaties in place.
- Prerequisites: To distribute dividends, the company’s annual report must be approved by the shareholders and the company must have made profits to be distributed.
DIRECTORS FEE AND/OR SALARY
If you are actively working for your Estonian company, you can draw a salary as an employee or receive a director’s fee for your management responsibilities.
Key Considerations for Salaries and Director’s Fees:
- Taxation in Estonia: Both salaries and director’s fees are subject to Estonian payroll taxes. This includes:
- Social Tax: A 33% social tax is levied on the gross salary or fee, paid by the company. This tax funds the pension and healthcare systems.
- Income Tax: A flat 22% personal income tax is withheld from the gross payment.
- Unemployment Insurance Contributions: Both the company (0.8%) and the employee/director (1.6%) contribute to the unemployment insurance fund from the gross amount.
When paying a director’s fee from an Estonian company, do I need to pay Estonian social tax?
YES, you must pay social tax IF the board member is:
· An Estonian resident.
· A resident of a country without a tax treaty with Estonia.
NO, you may be exempt IF the board member provides proof of insurance from:
· An EEA country or Switzerland: They must provide an A1 certificate.
· A tax treaty country: They must provide a certificate from their home tax authority showing social tax was paid there.
While it’s understood beginnings quite often mean limited funds, it is advisable to pay a regular director’s fee or salary, particularly if you are the company’s primary revenue generator, once the business has taken off. The Estonian Tax and Customs Board may scrutinize companies that rely exclusively on dividend distributions, viewing it as a potential way to avoid payroll taxes.
Of course, a company has many other acceptable expenses besides dividends, salaries, and director’s fees. Our next article will cover accepted business expenses in detail, so follow us on LinkedIn or check our know-how page in a few weeks time to read it!