Estonian Company (e-Residency) – Income Tax EXPLAINED!

When it comes to the e-Residency program, specifically starting an Estonian company, a lot of people are surprised to find out that they still have to pay income tax in their home country.

I thought the benefit of e-Residency is so that I can avoid paying taxes altogether?

Well, not exactly …

Uncle Sam Tax Day

While it’s possible to (legally) pay no income, nor corporate tax – it’s not as easy as filling out a form thinking that will get yourself in tax heaven.

The common sense rule applies …

If it’s easy, everyone would do it.

You (as an individual) and your business are two separate legal entities. One doesn’t necessarily effect the other.

You Are NOT Your Business

If your friend is moving to Dubai, does that mean you don’t have to pay income taxes anymore?

You would say, ‘Of course not. What does my friend have to do with me in terms of taxes?

You can think of your Estonian company in the same way. From a legal standpoint, the company is a different person.

As such, you can optimize that person’s tax situation, but not yours.

Personal Income Tax

The following comment received on my YouTube channel highlights the confusion in regards to personal income and corporate tax.

e-Residency Question Tax

  • Individuals pay income tax.
  • Businesses pay corporate tax.

As such, whatever you do with your company ONLY effects your company’s tax situation, not your personal one.

There are only 2 variables which effect personal income tax:

  • Tax Residency
  • Citizenship

Citizenship-based taxation is only practiced by a handful of countries – for this reason (and the fact that it’s difficult to give up and get another citizenship), it’s not something the average person should spend time thinking about.

Tax Residency Matters

An oversimplification of tax residency would be to say it’s where you live.

If you live in India, you pay the Indian income tax rate. If you move to Singapore than other another rate/system will apply.

Income tax is the easiest to ‘optimize’ – you simply need to move to another country. If you operate an online-based business, that’s not too difficult to do.

For example, if you have an EU passport, you could simply get tax residency in one of the low income tax countries.

(NOTE: Tax residency does NOT mean you have to spend 365 day per year at this location!)

Income Tax Rates Europe

Say, you are from India, or another Asian country.

You could give up tax residency in your home country and spend your time in 2-3 countries per year as to not trigger income tax anywhere.

You might say that’s a bit too much – traveling around without a permanent base …

In which case you can decide to simply not do anything and keep paying income tax 😉

The fact of the matter is, with a bit of planning, you can avoid all taxes. Watch the video below for full info.

Personal Recommendation

Lowering your income tax often involves changing your lifestyle. If you are making less than $4,000 (USD) per month online, you could simply keep all funds in the company bank account.

If you operate an Estonian company, that means no corporate tax is due. For more info on how to do this, please get in touch. Each person’s tax situation is different.

Corporate Tax

Corporate tax is directly tied to the jurisdiction (location) in which the company is located.

This doesn’t necessarily mean the company has to pay corporate tax (as there are countries which have 0% corporate tax) – still, the tax laws of that jurisdiction apply for that company.

If you run an online business, there’s no physical business location. As such, it’s easy to change the location of your business.

Costs are often minuscule. No need to leave your home country.

If you are thinking of starting an Estonian company via the e-Residency program, in the video below, I share my experience – start to finish.

For any additional questions, please use the contact form to get in touch.