Taxation of subsidiaries in Estonia
In addition of being a member of WTO, EU, NATO, EMU and OECD, one of the reasons why Estonia has been successful in having steady economic growth despite the financial crisis - with a favorable expectation for economic growth on the following year as well - is the government’s practice to treat foreign investors similarly to domestic ones.
Moreover, as one of the most significant contributors to the businesses success is the taxation system it operates in, stability in the country’s governance, compliance with the laws, which in practice show as easily understandable regulations; Estonia has a flat 0% income tax rates for companies, low living expenses and only a few economic fields require licenses. Surveys show these aspects strongly influence fair and routinic increase of foreign investors interest in Estonia.
With one of the highest innovation levels today, having the lowest debt in the EU (10,1%) in 2012 compared to the GDP which grew 3,2% and EU providing continuous support to the so far successful innovative projects, Estonia also holds a leading place in a field of the future developments and innovation; in the Internet related business.
Estonia has been recognized for its good commercial laws where number of disputes in this field are very low. International arbitration awards and foreign judgements are well enforced and the judicial powers function separately from the government. Entrepreneurship is supported and various property rights are well respected.
Estonia has been successful in implementing the aims of the EU’s Parent-Subsidiary Directive; removing double taxation and administrative burdens for parent and subsidiary companies located in different member States. In addition, Estonia has multiple bilateral taxation agreements with countries outside the EU. The implementation of the Directive brings companies closer to a nowadays reality - in practice the parent company now can establish itself as one entity even though situated in multiple jurisdictions.
Under the current laws the parent company is enabled to collect profits and interests with 0% tax from its Estonian subsidiary in in-company transactions. Distribution of dividends and other profits to the shareholders from the subsidiary company can be done in a similar way; the taxes are paid only once, when the dividends are distributed to the shareholders.
Similar taxation applies in the field of reinvesting - one-off taxes are paid on time of distribution of dividends. Bilateral taxation agreements entered into aim to lower the companies administrative burdens and promote inter-country investing with countries inside and outside the EU. To mention a few, taxation agreements are signed with the economically steadily growing China, Switzerland, Belgium-Luxembourg Economic Union, UK and the United States as well as with high innovation level countries like Finland, Denmark and Sweden.
This enables the company to concentrate on developing the business while via its Estonian subsidiary being close to Scandinavian, Eastern European, Russian and Western European markets.
Estonia’s neighbour economies are also growing - a good example, Latvia joining the Eurozone in January 2014; Latvia is expected to increase its annual GDP to 4,1% and lower the unemployment rate by 1,5% for the next year.
With the latest developments, the shareholders are required to hold 10% or more of the Estonian subsidiary shares to be regarded as a parent company.
Gencs Valters Law Firm will be glad to help you in the process of establishing your company in Estonia as well as to provide legal expertise for existing foreign investors. Please contact us for more detailed assistance.