When it comes to operating an Estonian company via the e-Residency program, there’s some confusion in regards to corporate tax, or rather taxes overall.
I’ve repeatedly mentioned that you only pay taxes on distributed funds, not revenue/profit per se.
Of course, this brings up a legitimate question …
If taxation is just delayed, but eventually (once you distribute funds), you’re going to pay 20% tax anyway? – How is this better than the conventional tax model?
To answer this question, I need to explain how I see the Estonian company model in the grand scheme of things.
If you want to earn money online AND distribute those earnings into your private bank account right away, then operating an Estonian company is probably not the ideal business structure.
In such a case, the distribute funds would be taxed at 20% (plus income tax in your country of residency).
That doesn’t sound good at all. 20% + Income Tax?
Estonian Company Is A Stepping Stone
Yes, that’s right.
It’s not the be-all and end-all of tax planning. Let’s look at the alternative …
You could give up your tax residency in your home country, move to Panama (or Dubai). Set up a corporation in Dubai (or another tax haven) and you’d be all set.
Zero taxes for you.
However, going with this option, the initial fees are over $1,300 (not including in-person visits, lawyer fees) – then you need to factor in annual, recurring costs of operating such a company structure, which add up to $1,310.
The fees listed above do not include costs for accounting.
What’s THE Alternative?
Simply get e-Residency, set up an Estonian company and have your online business up and running in a matter of days.
Total costs are 315€ – and you don’t even have to leave your home country.
There’s literally no risk in terms of time, or money.
All you do is focus on making money – building up your online income streams.
… and you watch your business bank account grow.
All this while still paying zero taxes!
You grow your funds until you decide that it’s time to use them. That’s when you pull the trigger and look at your tax situation holistically.
Pulling The Trigger
Now it’s time to look at the options of transferring the funds from your business bank account into your personal account – legally and whilst being 100% compliant with local and international tax laws!
1.) Optimize Income Tax
Income tax is an often overlooked part of the equation.
Even if you operate a company which doesn’t have to pay corporate tax, once the money received is yours (as a private person), it’s considered personal income.
In most countries, you would then have to pay tax on that income.
There are only a number of countries which don’t have personal income tax. Most of these countries are located in the Middle East.
In terms of income tax, you have 2 options:
OPTION A – Take up tax residency in a one of those tax havens. In which case you’d also need to factor in costs of living and other expenses. For most people, it makes no sense trying to eliminate income tax while quadrupling their monthly expenses.
You can also take up tax residency in a country with a territorial tax system. Territorial taxation means “resident persons are taxed only on income from local sources”.
(Keep in mind, the above is an over-simplification. Each country has different criteria for ‘local sources’.)
In terms of territorial taxation, you have the following options:
- Costa Rica
- Hong Kong
OPTION B – You can also do what I consider ‘drip payout‘. While it’s true that most countries have personal income tax, most also have a yearly allowance. For example, you don’t pay income tax for the first $11,000 per year.
You could decide to receive not more than the yearly allowance and keep doing that over several year as to not trigger personal income tax.
Whether that’s feasible or smart in your case, you’ll have decide yourself.
Alright. We’ve taken care of income tax and eliminated that altogether – or at least I’ve shown you how to go about doing that.
2.) Optimize Corporate Tax
For this, you will need another company in a jurisdiction which doesn’t have corporate tax.
This company can then render services to your Estonian company, which is how the funds are being transferred.
There are many ways of rendering/providing services to your Estonian company.
Once funds are in your second company (and you have taken care of income tax also), the payout can take place and there’s not taxation.
Quite a bit of work and not super easy, right?
And that’s precisely the reason why I do recommend the Estonian e-Residency company set up over and over again.
It allows you to get started quickly and hold your funds there. The setup is mainly for easy operation and holding funds. It’s not meant to be the be-all and end-all solution.
This Is A Knife
The knife is neither good, nor bad.
It’s just a tool you can use.
The way I see it, e-Residency is like that knife.
Critics say e-Residency isn’t good for anything. It doesn’t confer citizenship, tax residency or anything else that’s useful.
How Useful Is The Knife If You Don’t Use It?
Same applies to e-Residency.
In itself, obtaining e-Residency serves no purposes – you gotta use it. For example, to establish an Estonian company (which you’d otherwise not be able to do).
An Estonian company is just another tool, which you can use in the way I’ve described above. OR you can decide not to, in which case it would be like the knife that is just lying around …
Ready To Get Started?
Long article, I know.
If this is your first time reading about taxation (and all it’s intricate details), you probably feel a bit overwhelmed.
Take it easy. There’s no need to rush things.
I recommend you read this article multiple times to really internalize everything I’ve mentioned. NOT understanding taxation can cost you A LOT of money and get you in legal trouble!
If you still have questions, I have an extensive course (which includes private consultations).