Why set up an oversea company?
Growth and profitability. How to achieve both? It is a principle of every business.
Once a business entity has developed experience of making profit in its originate market, exploring new market is the feasible method to drive growth and profitability. Depending on prevailing business culture, or just customers’ preference. Setting up an ongoing business presence in a particular region can improve operation, market exposure and sales.
Particularly in a sales cycle, some customers are aware a permanent office of an oversea entity in their region as a sign of commitment and confidence in their market, many prefer local presence for handling post-sales support.
What to set up?
Major economies offer various business entity to support business to take place. For foreigners, they can consider “representative office (RO)” and “private limited company (company)”.
Generally, RO is a low cost option to begin with but it cannot take part in transactions related to profit making and it is not a separate legal entity from its parents. In other word, RO is an expenditure-only body tied down its liability to its parent.
In contrast with RO, limited company is a separate legal entity can it is able to handle transactions under its name.
We would focus on setup and maintenance of limited company in various jurisdictions.
FYI, Hong Kong is a famous pro-business jurisdiction for oversea company incorporation, AsiaBC can provide full-range services regarding Hong Kong company, bank account, and taxation for worldwide investors.
Background of Estonia
Estonia at a glance:
Officially the Republic of Estonia, Estonia is a country in eastern Europe on the eastern coast of Baltic Sea, is bordered by Latvia and Russia, and shares a maritime border with Finland. 1.3 million people are living in Estonia where it spans 45 thousands square kilometers of land.
Gained independence in 1991 from former Soviet Union, Estonia is now recognized as a developed and well-functioning economy. The core of Estonian development are openness and liberal economic policy. Service sector is the major pillar of Estonian economy including commerce and logistics, it counts for 70% of the country’s GDP. More than 65% of Estonian workforce is working in the service sector.
Estonia is currently a member of European Union (UN), Eurozone, NATO and Schengen area for regional support, and engage Organisation for Economic Co-operation and Development (OECD) and World Trade Organisation (WTO) for global commerce support.
The Heritage Foundation praises Estonia as one of the world’s most dynamic and modern economies for its government’s strong commitment to economic freedom, rule of law, and simplified tax system. As a result, Estonia is ranked the ninth place of the world’s freest economy in year 2016.
Also, Estonia has the EU’s lowest debt-to-GDP ratio.
Large number of foreign investors are attracted to Estonia for doing business here. As of January 2016, Estonia has attracted in total 17 billion euro worth of investments of which 26% have been in the financial sector. Foreign direct investment is among the leading countries in Eastern Europe regarding foreign direct investment per capita.
Estonia has an investment-friendly taxation system, companies registered in Estonia do not have to pay income tax for re-invested profits.Estonia has transparent and functioning legislation, the business start-up process is straightforward, and the cost of completing licensing requirements has been substantially reduced.
All new investors and external partners are just as welcome here as the entrepreneurs who have operated here for years. Private property is sacred and untouchable and all entrepreneurs are treated equally.
Successful Story of e-Estonia:
Estonia has the leading I.T. infrastructures in the world. For Estonian, access to internet is not only a basic necessity, but also a human right. Nowadays, free WiFi are everywhere, and has been there for a decade. It is because Estonian government believes that she must make internet publicly available to everyone even they cannot afford it, so she can promote I.T. service across the country.
Back in 2000, Estonian government enacted the law granting digital signatures as the same legal identity as traditional signatures. Many e-services can take place to change how people live and do businesses in Estonia.
Now 42 Estonian services are now managed mainly through the internet, for example:
- Estonia mandatory electronic ID card system transforms every Estonian to e-Estonian. The ID card is a digital access card for all of Estonia’s secure e-services.
- By 2015, 95% of all tax declarations were filed electronically, with most of it pre-filled.
- It takes only 15 minutes to establish an Estonian company on the Internet.
- Government’s cabinet meetings have been paperless since 2000.
- Estonian can use i-voting in nation-wide elections since 2007.
- Wide adoption of paperless transactions and banking – you can pay for bus ticket, parking and other Estonian by texting them on your mobile phone.
- The first country to offer e-Residency – a transnational digital identity available to anyone interested in administering a location-independent business in cyber business space
It is no wonder that Estonia is one of the most powerful start-up countries, that Estonia host both the cyber security centre of NATO and the IT-agency of the European Union. Estonia has a considerable development and production platform for International knowledge-based companies such as Skype, Ericsson, ABB, etc.
Startup-up friendly corporate income tax system
Tax authority in Estonia is Tax and Customs Board.
Corporate income tax on only distributed income:
The core of Estonian income tax is that income tax is incurred ONLY in the moment income is distributed. So long as the the income is NOT distributed, there is ZERO income tax incurred.
In a tax period, an Estonian company is charged no corporate income tax even it makes profit. However, a losing company is charged corporate income tax because it has shifted its profit.
In other word, an Estonia company can save 100% corporate income in cash without the need to pay tax, for any period of time until the profit is distributed.
Once any amount of profit is distributed by the company, a fixed rate profit tax is generated on top of the payment and the paying company is liable to that.
Income tax rate is fixed rate 20% for Estonian corporate entities and residents
Define distributed income:
Taxable profit of Estonian companies can be distributed under either explicit or implicit items:
- Any other means to distribute the income
- Fringe benefits, gifts and donations
- Expenses and payments unrelated to business activity
Gross profit in account: 200 000 EUR
Dividends paid to shareholders: 80 000 EUR
Corporate income tax (generated at the moment of distribution, to be paid by the company): 20 000 EUR
It seems unreasonable, you think that over 20% of tax is charged on the distributed profit (20 000 EUR / 80 000 EUR x 100% = 25%)
Actually, corporate income tax is 20 000 EUR because income tax is charged on both deemed and actual distributed profit. In this case, the company is deemed to distribute 100 000 EUR profit to its shareholders via dividends, 20% of this profit are charged as corporate income tax, so the shareholders can finally receive 80 000 EUR.
However, dividends paid to non Estonian company and residents are no longer subject to withholding tax as of 1 January 2009, irrespective of participation in the share capital of the distributing Estonian company. Apart from dividends, various withholding taxes may still apply to other payments to non-residents unless the tax treaties otherwise provide.
Personal Income Tax:
Estonian personal income tax rate is fixed rate 20% of the taxable incomes.
For Estonia residents, they pay tax on their worldwide income, including income from employment, business, property, and capital gain.
For non Estonia residents, they pay tax on their income received from Estonian source, including:
- directors’ remuneration of Estonian entities
- income generated from assets located in Estonia
- gain from disposal of assets located in Estonia
- work under agreement in Estonia
- income from a business carried on Estonia
- interest received from Estonia
- pension and scholarships
Value-added Tax (VAT)
Estonian VAT is the same as that in other European Union member countries in principles. VAT is charged on goods and services in the course of business activities sold in Estonia, and import of goods from other countries.
VAT is paid by the end consumers. The standard VAT rate is 20% and a reduced VAT rate is 9%. The general VAT rate applies on the taxable value of a good or service while reduced VAT rate applies on selected items e.g. approved textbook, medicines and hygiene products.
If the taxable supplies of Estonian businesses or fixed establishments of foreign businesses in Estonia exceed 16 000 EUR in a calendar year, VAT registration is required (i.e. to be a “taxable person”). Voluntary registration is also possible, even if the threshold is not reached. Taxable person is required to add VAT on top of the selling price of items, collect VAT and pay VAT to Estonia tax body.
Monthly or Yearly base tax filing:
Estonian taxation period is one calendar month.
For tax person with registered VAT ID, he must lodge his tax return monthly even no transactions has done in this month. For tax person having no VAT registration and no expense of taxable items (e.g. expense of employment, fringe benefit, dividends), he can lodge his tax return annually.
Company Incorporation in Estonia
Estonia company registrar is Commercial Register.
By law of Estonia, there are 5 types of legal entities for doing business:
- Private limited company
- Public limited company
- General partnership
- Limited partnership
- Commercial association
In fact, the most popular type entity being set up by worldwide investors in Estonia is private limited company or “Osaühing / OÜ” in Estonian.
Private Limited Company (Osaühing or OÜ)
It is a legal entity that has its share capital divided into shares which are possessed by shareholders. A shareholder is not personally liable to the company’s’ obligation.
Requirement of minimum share capital is 2 500 EUR, minimum nominal value per share is 1 EUR.
When the company’s founders (i.e. initial shareholders) are private person and the total share capital is less than 25 000 EUR, these founders can agree to not contribute the sum of share capital upon the establishment of the company. So long as the founders fully pay their contribution, they are personally liable of obligations of the company, within the amount of their unpaid contributions.
The company must have at least nature person to act as director, a director is allowed to be a shareholder of the company.In case more than half of the directors in the management board are not residing in Estonia, the company must provide a Estonian address as postal address to receive necessary documents from government.
In addition, the shareholders and directors must provide their residential address and email address to the registrar.
Establishment of supervisory board is no mandatory by Estonian laws, the company can decide to set up that according to the Articles of Association.
Audit and accounting:
The length of a financial year is 12 months.
An auditor is mandatory when the company surpasses certain threshold values in terms of turnover, number of employees and asset value.
Branch of Foreign Company
When a non-Estonian commercial legal entity (e.g. foreign company) needs to establish a permanent business entity to supply goods and services in Estonia under the name of its parent entity, that foreign entity should register a branch.
A branch is not a separate legal entity of the foreign company, the parent company is fully liable for obligations arising from the activities of its branch.
The foreign company must appoint at least one director for the management board of the branch. The board can consist of more than one director, all directors must be natural person, they jointly represent the branch unless prior notice is specified. At least one of the director must be a resident of either Estonia, member state of EU, or Swiss Confederation (Switzerland).
Audit and accounting:
A foreign company must maintain and prepare for separate accounts of the branch, the accounts must be pursuant to the requirements of the accounting standard.
Procedure to setup a Estonia private limited company
In Estonia, if you want to interact with Estonian government, you should use the internet and go for electronic solutions. Estonia company registration is one of the government services take place electronically on a web portal namely Estonia e-Business Register.
A new Estonia company can be established in a few hours via electronic application. Meanwhile, you can route your application to the registrar in traditional paper form, it will take up to 3 days.
Why local notary?
So long as your are the holders of Estonian, Portuguese, Finnish and Belgian ID-card or Lithuanian Mobile-ID, you do not need help of Estonian notary. If not, you must appoint the notary as your representative for document verification and application presentation to the registrar.
Moreover, the notary can help you to go through tax registration and optional business licenses for doing businesses in restricted field.
Tailor-made or ready-made company?
Starting an Estonia company from sketch means setting up a tailor-made company, while acquiring all the ownership and directorship of an existing Estonia company means buying a ready-made company.
Since setting a new company can be done within a few hours and remotely, the common reason of needing a ready-made company is the company’s age.
Required Document and information:
- Appointment of an Estonian notary (mandatory for foreigners)
- Business Name: English & Estonian are acceptable. It must contain the suffix word “OÜ” or “Osaühing”. Then, perform a online business name check at e-Business Register.
- the Articles of Association
- personal identification document (e.g. passports, ID card), proof of residential address, email address and phone numbers of all founders, the management board,
- business plan (information about the planned major business activity)
- business address (you can rent Estonia virtual office service for the registration)
- amount of share capital
- Founders’ agreement concerning the shares distribution
- Bank notice regarding the payment as contribution to share capital among founders
- Government Fee: 145 EUR
Remark: Excluding notary service fee which is usually proportional to the number of founders and initial share capital.
- (If no registered address is provided) Renewal of the virtual office: fee depending on the service provider
- Annual return: Mandatory, fee depending on the notary and government
- Accounting: Estonian accountants usually charge on hourly basis
- Tax return: monthly tax return is mandatory for VAT registered company. Otherwise, annual tax return is required