Coredo

I see that owners from the EU and Asia often postpone closing due to legal uncertainty, fear of tax scrutiny and concerns about reputation. In this article I will systematically lay out how to close a company in Hong Kong without fines or tax claims, what procedures exist, how long they take and how to build an ROI‑oriented exit strategy. The practice of COREDO confirms: proper preparation and disciplined execution save months and tens of thousands of dollars.

Why and when liquidation is the right move: diagnosis and ROI

Owners most often consider liquidating a Hong Kong company when the business model has changed, the project is migrating to another jurisdiction, the bank has tightened compliance, or maintaining a dormant company has become more expensive than closing it. I start with a diagnosis: financial solvency, risk profile, contractual map, assets and liabilities, tax position and compliance history in the Companies Registry and the Inland Revenue Department (IRD). We at COREDO carry out such an examination in 10–15 working days, using a risk-based methodology.

For managers, ROI matters. I suggest calculating:

• TCO of liquidation (government fees + professional fees + liquidator) vs annual maintenance costs (audit, secretarial services, Business Registration, banking compliance).
• Intangible effects: reduced regulatory risk, relieving directors of liability, release of collateral and bank guarantees.
• Alternatives: sale, merger, restructuring, transfer to dormancy. At COREDO we model the NPV of each scenario over a 3–5 year horizon.

Legal framework: who regulates and which rules apply

Hong Kong relies on:

• Companies Ordinance (Cap. 622) – corporate law, including deregistration (strike‑off).
• Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), liquidation (winding‑up).
• Competent authorities: Companies Registry (register, publications, registration filings), Inland Revenue Department (taxes, tax clearance), Business Registration Office (business registration certificate), and the Government Gazette (official notices).

Key choice: solvent or insolvent liquidation. This determines the procedure, timelines and requirements for the liquidator.

Three main closure scenarios: from strike-off to compulsory winding-up

Voluntary strike‑off / Deregistration (removal from the register)

Members’ voluntary winding‑up (voluntary solvent liquidation)
Suitable when assets exceed liabilities and the directors sign a Declaration of Solvency. The procedure is transparent and allows distribution of assets to shareholders after debts are paid. Stages include a special resolution of members, appointment of a liquidator, notices to creditors and publication in the Gazette, preparation of final accounts and audit, distribution of funds and de‑registration.

Creditors’ voluntary winding‑up (creditor‑led liquidation)
If the company is insolvent, the directors convene a meeting of creditors. Creditors appoint a liquidator, approve a creditors’ committee and oversee asset realization, including floating charge realization. Notices and the deadline for submitting claims (proof of debt), the order of payment to preferential creditors (preferential creditors), including wage and tax arrears, are especially important here.

Compulsory liquidation (compulsory winding‑up in Hong Kong)

Step-by-step procedure for liquidating a company in Hong Kong: from preparation to publication in the Gazette

Preliminary preparation: audit and clearing “loose ends”

Tax clearance (tax clearance) with IRD

Working with the bank: AML/KYC during closure and account closures

Contracts, leases, IP and data
Contractual unwinding is important to avoid claims:

• Lease termination and break clause handling: agree on early termination and demobilisation of the office, arrange handover of the premises.
• Contract novation and assignment: transfer or terminate obligations without “loose ends”.
• Intellectual property transfer and assignment: transfer rights to software, domains, trademarks; if necessary, to the holding company.
• Data protection: for owners from the EU we take into account the GDPR and local rules on storage of corporate and personal data.

Personnel, salaries and MPF

Communications with creditors
In liquidation we:

• send notices, publish a notice in the Gazette, collect proofs of debt;
• maintain a creditor claims timeline and verify claims;
• conduct negotiations with creditors and settlement strategies, including for secured and unsecured debts;
• observe the payment hierarchy, including preferential creditors, and document all distributions.

Duties and responsibilities of directors and the liquidator

COREDO case studies: how we closed companies in Hong Kong without incurring penalties

Case 1. Voluntary strike‑off for a company with zero activity

Case 2. Step-by-step liquidation of a holding company in Hong Kong

Case 3. Liquidation of an offshore structure in Hong Kong for foreigners with supplier debt

Bank accounts and capital repatriation: how to return funds to investors from the EU and Asia

Timelines, costs and performance metrics

Restoration of a company after strike‑off and reputational risks

Alternatives to liquidation: when to restructure, sell or “put a company to sleep”

Answers to the questions we’re asked most often

• What is the total cost and ROI? Cost is a function of complexity: presence of assets, audit, liquidator. In a simple strike‑off TCO is often less than a year’s company maintenance. ROI shows up in savings of future expenses and reduced risks for directors.
• What risks do owners from Europe and Asia face with improper liquidation? Fines for late filings, creditor claims, difficulties opening accounts in other countries, AML/KYC inquiries from banks and regulators.
• Should one go into compulsory or choose voluntary winding‑up? A voluntary procedure with professional support is almost always better: you control timing, communications and the reputational backdrop.
• How are AML/KYC checks performed during closure and what documents will the bank require? The bank will collect KYC for the director and beneficial owners, confirmations of sources of funds and the distribution plan. We prepare the dossier in advance.
• What notices and clearances does the IRD require? Cessation notice, final tax return, confirmation of settled assessments, and, if necessary, letters regarding withholdings and explanations of transactions.
• Can a company be restored after strike‑off? Yes, through the courts. It’s expensive and time‑consuming; it’s better not to make mistakes during closure.
• What metrics should be evaluated when choosing liquidation vs sale/merger? TCO/ROI, time horizon, legal and tax risks, impact on the group and banking relationships.
• How to protect IP and contractual rights during liquidation? Execute an IP assignment in advance and novate key contracts, secure license agreements and data rights.

Practical checklist for closing operations in Hong Kong

• Strategy and diagnostics: solvent vs insolvent, KPI, ROI, roadmap.
• Corporate actions: special resolution, appointment of liquidator, minutes.
• Regulators: notifications to Companies Registry and Business Registration Office, publications in the Government Gazette.
• Taxes: cessation notice, final tax return, tax clearance certificate, DTA and TP reconciliation.
• Banks: AML/KYC package, bank account closure checklist, confirmations of source of funds.
• Staff: payroll calculations, IR56F/IR56G, MPF closure, letters to employees.
• Contracts and leases: termination/break clause, novation/assignment, handover of office.
• Assets and IP: valuation, disposal, assignment of trademarks/patents/software.
• Creditors: notices, proof of debt, meetings, prioritization and calculations.
• Reporting and audit: final accounts and audit, distribution of assets, final liquidator’s report.
• Archive and records retention: corporate records retention and statutory retention periods.
• Insurance and regulators: cancellation of policies, closure of licences and notifications (Customs/Immigration/Social Security – if applicable).

How COREDO operates on a company closure project in Hong Kong

I believe in a managed, transparent process. At the start we create an engagement plan with milestones and SLAs for communications. The COREDO team implemented a hybrid model: a local licensed liquidator and auditors, international tax and compliance advisers, a project coordinator and a single point of contact for the client. We work in two-week sprints: a progress report, a risk log, the next milestone.

We value a candid tone: if I see a risk of compulsory liquidation or restoration after wrongful strike-off, I flag it immediately and offer options — from negotiations with creditors to an alternative exit through a sale or restructuring. This approach helps owners preserve control of the process and their reputation.

How to close a company in Hong Kong without fines: my short advice

• Don’t delay the diagnosis. Any delay increases project cost.
• Enter the voluntary procedure where possible.
• Prepare the tax clean-up and bank KYC in parallel.
• Document every decision of the directors.
• Maintain transparent communication with creditors and banks.

Conclusion

Liquidating a company in Hong Kong is not just a legal formality. It is a management decision that combines law, taxes, compliance and reputation strategy. My experience and COREDO’s practice confirm: proper preparation, the correct choice of procedure – strike‑off, members’ voluntary or creditors’ voluntary: and careful handling of the IRD, Companies Registry and banks make it possible to conclude the business story neatly and without penalties. If you, as an owner from Europe or Asia, are looking for a way to exit a business in Hong Kong, calculate ROI and minimize risks, rely on a clear plan and professionals who will accompany you through every stage, from the initial diagnosis to the final publication in the Gazette and the closing of accounts. This is exactly the client-side partner role I envision for COREDO, and this is where we are strong.

Since 2016 I have been leading COREDO across dozens of markets in Europe, Asia and the CIS. We have helped clients register legal entities, obtain financial licenses, implement AML‑frameworks and build resilient corporate structures in the EU, the Czech Republic, Slovakia, Cyprus, Estonia, the United Kingdom, Singapore and Dubai. Over the past three years Saudi Arabia has come into focus: requests for joint ventures in Saudi Arabia are growing, and with them – the need for practical and reliable schemes of control, compliance and localization (Saudization). I have compiled COREDO’s working methodology in this article: from partner due diligence and the rules for creating a joint venture in Saudi Arabia to calculating OPEX for mandatory Saudization quotas and protecting minority shareholders.

How to Think Strategically Now

Vision 2030 is transforming the KSA economy on all fronts: diversification away from oil, accelerated industrialization, local industrial clusters and economic zones, and a priority on technology transfer and skilled jobs. Our experience at COREDO has shown that strategic investment planning in Saudi Arabia is justified when you address three tasks at once: market access, localization of production/services, and building compliance to participate in public procurement.

The 2020 Foreign Ownership Law in the KSA and related changes to the investment regime have allowed foreign investors to hold equity participation in Saudi Arabia up to 100% in a number of sectors. At the same time, sectoral restrictions on foreign participation remain (energy, security), and the rules for the oil and gas sector and the local partner require a separate assessment of local content and participation in major client initiatives. Here, a Joint Venture often proves to be the optimal structure – you combine control with local presence, meeting the expectations of regulators and clients.

Market Regulators: How to Engage

COREDO’s practice confirms: the map of regulators determines the project’s roadmap. Licensing of business in the KSA begins with the Ministry of Investment of Saudi Arabia (MISA). Company registration in Saudi Arabia and the commercial register are under the responsibility of the Ministry of Commerce. Financial services are overseen by SAMA (the central bank) and the CMA (Capital Market Authority), while personnel policy and Saudization are controlled by the Ministry of Human Resources and Social Development (HRSD) of the KSA.

Requirements for hiring Saudi citizens and the assessment of an employer’s compliance with Nitaqat are handled through HRSD and automated Saudization monitoring. Payroll payments are processed through the Wage Protection System (WPS); without WPS files the bank blocks payments and HRSD records the violation. In this architecture, the solution developed at COREDO is to build a single compliance calendar and compliance checkpoints for Saudization before operations launch.

Registration and licensing of a JV in KSA

A joint venture in KSA is not a single document but a sequence of coordinated steps. The COREDO team has delivered projects where we, in 8–12 weeks, carried out Due Diligence of a partner in Saudi Arabia, prepared the JV agreement, simultaneously obtained the MISA license and assembled the package for Commercial Registration. At the same time we embedded KYC/AML procedures to meet banking requirements for the joint venture to speed up account opening.

LLC / Branch / Holding: Why WLL Is Not Suitable for Saudi Arabia

Most often an LLC is chosen for a JV — a flexible limited liability form adapted to local realities. A branch is appropriate when direct control by the parent company is required and there is no local shareholder, but then Nitaqat and localization fall on the parent company. In a regional structure you can use a holding to own shares and IP, whereas in KSA it acts as the parent company over the local LLC. The WLL format, typical for a number of Gulf countries, is not the same in Saudi Arabia, where different designations are applied — an important point to consider when preparing documentation.

Company registration and licenses in the Kingdom of Saudi Arabia

• obtaining an investment license MISA, where the type of activity and equity participation are recorded.
• Signing the articles of association and the JV agreement, filing for Commercial Registration with the Ministry of Commerce.
• Registration with ZATCA (taxes/VAT), with the Chamber of Commerce and Industry, obtaining a municipal license.
• Connecting to WPS, setting up the HRSD portal, uploading Nitaqat data.

When to register a branch in Saudi Arabia

A branch is appropriate for companies with project contracts and a limited period of presence. Registration and licensing of a branch in KSA also proceed through MISA and the Ministry of Commerce, but corporate governance is simpler.

How to avoid losing control of shares

Equity participation: not just percentages in CR, but the architecture of control. How to agree participation shares and control mechanisms we record in two documents: shareholders agreement (SHA) and the joint venture agreement (JV agreement). There we also define corporate governance in the JV: composition and quorum of the board, the list of reserved matters, budget limits, banking mandates and KPIs for Saudization and localization.

Key provisions of the SHA and JV agreement

We recommend including: deadlock‑mechanisms, option schemes (call/put), tag‑along and drag‑along, contractual guarantees and sureties for investors, non‑compete agreements and corporate restrictions.

Fix the exit and buy-out before the start

Exit mechanisms from the JV and the buy‑out must be clear from day one: buy triggers, valuation formulas, lock‑up, ROFR/ROFO and the procedure for bringing in a third party. In KSA we often

Protection of minority shareholders and risk management

The minority protection mechanism in a joint venture is not only a veto pool. It is audit, access to information, disclosure requirements to regulators, and automatic triggers to appoint an independent director upon covenant breaches.

Saudization and localization for joint ventures

Requirements for Saudization for JVs are based on the Saudi Nitaqat program: the industry and company size set mandatory Saudization quotas and a category “color” (from red to platinum). Compliance with Saudization is overseen by HRSD through automated Saudization monitoring and WPS.

Quotas and localization without business disruption

Adapting HR policy to Nitaqat starts with a workforce plan: quotas for national staff and training programs, a transition to local management and leadership over a 12–24 month horizon, and a succession matrix for key roles. The COREDO team builds a “local talent pool + expat mentors” model, which accelerates hiring, retention and the transfer of competencies.

Assessing the impact of Saudization on a project’s margin takes into account salaries, HRDF subsidies, training costs, penalties for Saudization violations in KSA and the effect on productivity. Minimizing OPEX while complying with Saudization requirements is achieved through proper job grading, hybrid teams and outsourcing functions with verification of local content.

KPIs and reporting in public procurement

Percentage of Saudis by job category, share of nationals in management, average cost of hire/retention, training hours, time to fill vacancies, and the stability of WPS payments. monitoring systems for localization and Saudization KPIs and real-time compliance monitoring are integrated into HRIS and payroll. How to ensure quota compliance for participation in public procurement: we record it in the “Saudization compliance plan for external audit” with documentary evidence for KSA regulators and procurement platforms.

Compliance, AML/KYC and sanctions risks

Compliance and AML for joint ventures in KSA is a fundamental discipline. Checks KYC and AML in KSA cover partners, beneficial owners and key suppliers: KYC requirements for partners and beneficial owners include UBO declarations, sources of funds, tax status (CRS/FATCA), background checks and proof of address. Banking requirements for a joint venture cover constitutional/incorporation documents, JV agreement, specimen signatures, business plan and WPS connection.

Export and import permits in Saudi Arabia, especially for dual-use equipment, require a separate stream of documentation. AML/CFT reporting in the KSA banking system formalizes cash transactions, cross-border payments and the beneficial ownership structure.

Taxes and the financial model: ROI and compliance

Taxation of a joint venture in KSA combines corporate tax and zakat: the foreign shareholders’ portion is subject to corporate tax (typically 20%), the Saudi/GCC-compatible shareholders’ portion: zakat under local rules. Plus VAT 15%, and possible withholding taxes on royalties, services and interest.

The JV ROI assessment in KSA must take mandatory localization into account. When budgeting and forecasting ROI under localization we build in opex markups for Saudization, local subsidies and loans, CAPEX requirements and the timeline to reach the target Nitaqat category. The cost‑benefit assessment of production localization takes into account the near‑shore effect, logistics and access to government procurement.

Foreign exchange transaction risks and FX position management in KSA are mitigated by the SAR peg to the USD, but supplies and services from third countries create cross‑currency risks; we hedge them through forwards and currency corridors.

Financial reporting, audit and transparency for a JV are not optional but survival requirements. Disclosure requirements to regulators, regular audits and agreed dividend distribution policies in the JV reduce the risk of conflicts and increase creditworthiness.

Operational readiness: visas, HR and IP

Procedures for obtaining investor visas and work visas are tied to the Nitaqat category and WPS compliance. We predefine the pool of positions for work permits and work visas for foreigners, as well as the localization schedule. Integration of HR and payroll systems in KSA provides WPS files, leave tracking, benefits and automation of reporting to HRSD.

We implement an onboarding program, manager training and communications «localization goals = business growth». Technology transfer agreements and IP protection, registration and trademark protection in Saudi Arabia, nondisclosure agreements and protection of trade secrets: this is the framework that safeguards your value during the knowledge transfer process.

Suppliers and Cluster Scaling

The impact of Saudization on supply chains is reflected in SLAs and price, we record KPIs and local content requirements in contracts.

Government localization support programs and subsidies and local industrial clusters and economic zones provide tax incentives, infrastructure and services. Business scaling planning in Saudi Arabia relies on a pilot stage, a risk matrix and a succession plan and a personnel reserve in JV. risk management when scaling in Saudi Arabia includes credit limits, insurance and backup supplies.

COREDO JV: localization and control

Recently the COREDO team implemented a project for a European manufacturer of industrial equipment. The client targeted the B2B segment with high requirements for local content and participation in public procurement. We conducted due diligence of the partner in Saudi Arabia, including sanctions and reputational risk due diligence, and designed the ownership structure in the joint venture: 60% foreign investor, 40% resident partner, with banking and operational control through agreed reserved matters and bank mandates.

The joint venture agreement (JV agreement) and the SHA recorded exit mechanisms: option schemes, tag-along, drag-along, a deadlock procedure and ICC arbitration. We implemented a compliance framework for the international JV: KYC requirements for partners and beneficiaries, AML procedures, reporting on AML/CFT in the KSA banking system and a Saudization compliance plan for external audit. On the HR side we set KPIs for Saudization and localization, adapted HR policy to Nitaqat and established a KPI monitoring system for localization and Saudization with real-time dashboards.

Budgeting and ROI forecasting for localization took into account tax incentives and KSA tax specifics, JV financing models in Saudi Arabia, and the risks of foreign exchange operations and currency position management. As a result the client reached the target Nitaqat category within 8 months, gained access to large tenders, and preserved margin by minimizing OPEX while complying with Saudization requirements.

Checklist for joint venture preparation in Saudi Arabia

• Entry strategy: registering a subsidiary vs a joint venture in KSA; JV models – operational JV versus a holding structure.
• Regulators: engagement with regulators: SAMA, CMA, Ministry of Commerce, MISA; sectoral restrictions on foreign capital and rules for the oil and gas sector and the local partner.
• Law and control: shareholders agreement (SHA) and key provisions; how to structure equity stakes to protect investor control; minority protection mechanisms; arbitration clauses LCIA/ICC/SIAC.
• Compliance: compliance and AML for joint ventures in KSA; KYC and AML checks in KSA; KYC for partners and beneficial owners; compliance calendar and reporting to KSA regulators.
• Banks: which documents are needed to open an account and finance the JV; banking requirements for the joint venture; WPS connection.
• Saudization: assessing Nitaqat compliance for the employer; mandatory Saudization quotas; automated Saudization monitoring; preparing a Saudization compliance plan for external audit.
• HR and visas: procedures for obtaining investor and work visas; managing staffing quotas and localization; adapting HR policy to Nitaqat.
• Suppliers: assessing suppliers’ compliance with localization requirements; how to ensure compliance with quotas for participation in public procurement.
• Taxes and finance: taxation of the joint venture in KSA; tax incentives; ROI assessment for the joint venture in KSA; localization budgeting.
• Operational risks: sanctions and export risks for the JV; export and import permits in Saudi Arabia; administrative actions and penalties in KSA for violations.
• IP and agreements: intellectual property protection in the JV; registration and protection of trademarks in Saudi Arabia; non-compete agreements and corporate restrictions.
• Reputation and market: managing the JV’s reputational risks; analysis of the competitive environment and barriers to entry; impact of the national industrial policy Vision 2030 on the JV.

COREDO addresses overlooked nuances

• Profit sharing and dividend distribution in a JV require alignment with tax rules and bank covenants. We build in DSCR tests and an approval sequence for payments.
• AML/CFT reporting and financial reporting are not reduced to “tick-box exercises”. The COREDO team implements second-line control procedures and an independent internal audit.
• The impact of Saudization on margins is often greater than expected. We adapt the business model to Saudization requirements, including process redesign and moving roles to outsourcing with local content.
• Interaction with local suppliers and subcontractors affects the assessment of localization. We specify local content metrics and SLAs in contracts, as well as reporting requirements.
• Sectoral restrictions on foreign capital in sensitive industries can be removed through smart structuring and partnership with a Saudi resident, but the boundaries of what is permissible are fixed at the MISA level in advance.

Frequently asked questions: short answers

• How quickly can a JV be opened? A realistic timeframe – 8–12 weeks to CR and a bank account, assuming partners and documents are ready.
• Where to keep control? In SHA/JV agreement: reserved matters, option mechanisms and bank mandates.
• What about currency? The SAR is pegged to the USD, but multi-currency procurement chains require hedging.
• How to protect IP? Register trademarks and patents in the KSA, secure rights to improvements and export restrictions in license agreements and NDAs.
• What are the consequences of not complying with quotas?
  Legal consequences of failing to comply with localization quotas: fines, blocking of visas/transfers, downgrading of Nitaqat category, exclusion from government procurement and other administrative measures and sanctions in the KSA.

Role of the local counsel

В COREDO мы совмещаем локальную экспертизу с международным комплаенсом, что помогает увязать санкционные, экспортные и AML‑требования сразу в рамках одного комплаенс‑фреймворка для международного JV.

Клиент получает не набор разрозненных услуг, а сквозную траекторию: от выбора корпоративной формы (корпоративные формы: холдинги, филиалы, дочерние компании) и критериев выбора саудовского партнёра до планирования масштабирования и оценки возврата инвестиций при обязательной локализации. This reduces transaction costs and shortens time to revenue.

Joint venture in Saudi Arabia as a predictable asset

A joint venture in Saudi Arabia is a project at the intersection of law, tax, HR and operational design. If you take Saudization requirements for the JV into account in advance, establish Saudization compliance controls, and design corporate governance and exit mechanisms, you will get a predictable asset with a clear ROI. The solution developed at COREDO combines legal support for JVs in KSA, due diligence, licensing, KYC/AML and an HR model into a single roadmap and enables managing KPIs for Saudization and localization in real time.

I invite you to look at KSA pragmatically: assess the cost of entry, choose the format (a subsidiary or a JV), calculate the effect of Nitaqat on margin and prepare a JV agreement and SHA that will protect capital and control. The COREDO team is ready to become your long-term partner: from the first negotiations with a resident partner to reporting to regulators and scaling. This approach reduces risks, speeds up licensing and turns Vision 2030 into concrete commercial results.

I often hear the same question from founders and CFOs in Europe and Asia: how to preserve Estonia’s flexible and attractive tax model in light of the 2026 reforms. In focus: Estonia’s defense tax and the broad agenda of changes to Estonia’s tax legislation for 2026. Over a decade of COREDO’s work with IT companies, fintechs and global groups COREDO we have learned to quickly clarify the essentials, model the effects and build practical solutions. In this article I have compiled a structured guide with an emphasis on the IT sector, startups and technology groups headquartered in the EU and present in Asia and the CIS.

Defense tax in Estonia from 2026

Estonia is publicly preparing to introduce a defense tax in 2026 as part of strengthening the resilience of public finances and defense spending. At the time of preparing this material the market is discussing several designs, and it is sensible to prepare scenarios in advance. I advise clients to be flexible in calibrations, as final parameters may differ by base and rate.

Rate of the defense levy and its calculation

Under the models discussed, possible options include:

• an add‑on to corporate taxes at a fixed percentage of the tax base;
• a levy on the payroll fund (similar to an add‑on to social contributions);
• a top‑up on distributed profits.

The new defense tax in Estonia

Compliance costs depend on administration. Likely elements: taxpayer registration, reporting frequency (monthly/quarterly), declaration format and control ratios. The solution developed by COREDO includes a process map: who in the company is responsible, which ERP data are needed, which IFRS and local tax accounting views to reconcile, and the SLA for adjustments.

Tax incidence of the defense levy

The question is not only ‘how much to pay’, but ‘who economically pays’. The tax incidence of the defense levy is distributed between the company, employees (through compensation packages) and customers (through pricing changes). I use price elasticity and cost pass‑through as the basis for a negotiation strategy: what we pass on in the price, what we absorb through efficiency gains, and what we offset via fiscal incentives.

Impact on IT and startups

IT business is sensitive to costs for talent, infrastructure and scalability. Taxation of the IT sector Estonia 2026 affects key blocks of product economics and financial metrics.

Defense tax for IT and startups

For product and service teams Estonia’s defense tax can increase OpEx if the base, payroll, and reduce net returns on dividends if the base is distributed profit. Our experience at COREDO has shown: timely adjustment of compensation policy and bonus models softens the hit to the P&L, and smart pricing preserves gross margin.

Taxes and hiring for startups in Estonia

The economic burden on small and medium businesses often appears as an increase in the total cost of hiring. I recommend recalculating the social cost in advance to assess the impact on offers, stock options, ESOP mechanics and retention of IT talent. We compare offer packages in Tallinn, Vilnius and Lisbon by final net compensation, taking into account tax residency and the defense tax.

CapEx vs OpEx: infrastructure/devops

The impact on IT capital expenditures (CapEx) and on IT operating expenses (OpEx) manifests differently. If you build your own data centers or invest in R&D equipment, the defense tax tied to profit hits free cash flow later. If the base is payroll, the burden falls into OpEx immediately. The COREDO team implemented a scenario analysis for a client: migrating part of the infrastructure to cloud services and CDNs reduced CapEx, and revising SLAs with providers kept OpEx in check while maintaining the same level of QoS.

Pricing, SaaS models and unit economics

The impact on digital services and SaaS models is noticeable through unit economics. I look at CAC, LTV, gross margin, NRR and payback period. When tax pressure increases we adjust pricing tiers (tiered pricing), introduce annual prepay discounts, strengthen retention mechanics and use geo-pricing for European and Asian customers. This way SaaS keeps LTV/CAC > 3, and the runway is not critically compressed.

Financial planning: DCF and scenarios

The new tax is about the accuracy of the financial model and treasury discipline. Here IFRS accounting and tax accounting in Estonia matter: they diverge in recognition timing and the calculation base.

Accounting for the defense tax in the DCF

I recommend updating the WACC, reassessing the tax shield, and including the defense levy in the FCF forecast. A DCF financial model with the new tax should cover:

1. three scenarios: base, moderately stressed, stressed;
2. escalation of the tax burden and scenario analysis over 3–5 years;
3. impact on ROI when paying the defense tax for key projects.

Cash flows under the new tax

I break down cash flow management under the new tax into four steps: synchronizing the payment calendar, reserving tax liabilities, automation through ERP systems and integration of tax calculation, and covenant monitoring. This approach supports discipline and reduces the cost of debt.

Cost of compliance and automation

The cost of compliance (compliance cost) for businesses rises not only because of payments but also because of processes. The solution developed at COREDO includes templates of control procedures, integrations with accounting modules, and dashboard configurations for the CFO. It eliminates manual errors and strengthens internal control and the audit of tax risks.

Tax architecture of Pillar Two

Estonia is known for the “tax on distributed profits” model, which helps startups reinvest. The defense levy may introduce new logic into corporate decision‑making.

Tax on distributed profits

If the defense levy is charged on distribution, companies will retain the incentive to reinvest. In that case, a legal structure to minimize the defense tax may include a holding layer to consolidate profits and plan dividends every 12–18 months to smooth tax peaks.

Transfer pricing and tax

Transfer pricing and the defense tax are directly linked: the margin at the Estonian company level determines the base. Transfer pricing documentation, master file and local file, support for benchmarks and a functions‑risks‑assets analysis: this is not a formality but a protection against reassessments and fines. The COREDO team implemented an IP risk rotation for a group SaaS business and updated the TP policy taking BEPS into account.

Anti‑avoidance: BEPS and Pillar Two

Thin capitalization, withholding taxes, VAT

Thin capitalization affects interest deductibility and, consequently, the ETR. Withholding tax on royalties and services should be checked against international double tax treaties. VAT and the defense levy for digital services are a separate block: SaaS providers must correctly determine the place of supply and use MOSS/OSS to avoid double taxation.

Residence and e‑Residency: migration

AML, compliance and reporting 2026

Tax transparency and AML requirements are increasing in parallel with tax reforms. I recommend establishing an overall compliance framework to avoid expanding control functions chaotically.

AML and KYC under new taxes

AML and KYC in the context of new taxes require verified beneficial ownership, source of funds and transparent payment routes. This reduces the risk of freezes and supports interbank limits and payment traffic (EUR) without disruptions. COREDO’s practice confirms: a clear AML profile speeds up onboarding at payment institutions.

Reporting 2026: requirements and disputes

regulatory requirements for 2026 reporting may include new forms and control metrics. I always prepare a «Plan B»: procedures to challenge tax decisions and legal mechanisms for appealing taxes. This is a working tool, not a call to conflict: a proper appeal reduces fines for non-compliance with tax reporting and resolves interpretive disagreements.

Defense contracts, technology export

Investments, M&A and Venture: Keeping the Pace

The tax agenda directly affects the cost of capital, round terms and M&A.

LPs and the macro effect on venture investing

Runway, cost of capital, exit valuation

The impact on the cost of raising capital is measured in the delta to the discount rate and in covenant requirements. Assessment of the risk of a startup’s runway shortening is conducted through a rolling‑12 cash projection taking the defense levy into account. The impact on exit valuation appears through revenue and EBITDA multiples; an optimization plan and proven control of compliance costs are important here.

Due diligence for R&D

C-level roadmap for 90 days

I like a pragmatic approach: rapid diagnostics, priorities, checkpoints. The COREDO team has implemented dozens of launches following these steps.

Tax strategy for European IT startups

• Mapping the legal structure: corporate structure: holdings and branches, substance, nexus.
• Legal structure options for minimizing defensive taxation without aggressive schemes.
• International treaties and avoiding double taxation: verification of treaty benefits.

Optimization in compliance with the law

• Tools for calculating tax burden and automating taxes in ERP.
• Legitimate tax-optimization scenarios: TP‑policies, dividend calendar, CapEx/OpEx mixes.
• risk insurance for fiscal reform and updating the risk‑register.

What an operational contour is

• Price management and passing costs to customers taking into account elasticity and competition.
• development outsourcing vs a local team considering social costs and IP control.
• Structuring employee pay and taxes, social contributions, ESOP, buy‑back rules.

Communication and resilience

• Managing investor relations and communication: a memo on tax strategy and scenarios.
• Supply chain and business resilience: cloud providers, CDN, backup payment channels in EUR.
• Internal control: roles, limits, audit, report to the Board once a quarter.

COREDO case studies: solutions for clients

First case: a European cybersecurity SaaS with its main legal entity in Estonia and customers in the EU and Asia. The COREDO team implemented a TP model rebuild: they redistributed risk functions between the Estonian head office and a service center in Slovakia, updated the master/local file and implemented ERP integration to calculate the defense levy. A DCF model with three scenarios showed that with a 1.5% surcharge to the payroll fund the company maintains LTV/CAC > 3.2 and does not lose runway. Investors confirmed the round with the previous covenants.

Second case: a fintech with licenses for payment services and crypto services in several EU jurisdictions. Our experience at COREDO showed that the regulatory reporting requirements for 2026 and the AML/KYC framework go hand in hand. We strengthened AML procedures, synchronized tax transparency and beneficial ownership, reviewed withholding taxes under international treaties, and integrated a stress test of the defense levy into the treasury policy. The correspondent bank retained the limits, and the funding cost did not increase.

Third case: a product IT core with R&D in Tallinn and commercial operations in the UK and Singapore. The solution developed at COREDO involved shifting part of CapEx to cloud contracts, introducing annual prepay for clients and phased price indexation. We built a potential defense levy into the discount structure, updated the ESOP so that talent retention preserved the target net income. As a result, the EBITDA margin remained within the target range, and the exit valuation in the model did not drop.

Frequently asked questions about complex matters

What to consider right now

• Update the DCF financial model with the new tax, add stress scenarios and covenant testing.
• Recalculate unit economics and pricing: impact on CAC, LTV, gross margin and payback.
• Conduct TP diagnostics and prepare transfer pricing documentation.
• Synchronize IFRS and local tax accounting; set up ERP integration of calculations.
• Strengthen AML/KYC controls and beneficial owner transparency for banks and regulators.
• Review international double taxation treaties and withholding taxes.
• Document procedures for challenging tax decisions and internal tax risk controls.

Strategic flexibility – the main asset of 2026

Estonia retains its strengths: digital infrastructure, clear rules and historically favorable business taxation. The introduction of the 2026 defense tax changes the equation, but does not break it. Timely financial planning, a clear tax strategy and compliance discipline protect margins, capital and investor confidence.

The COREDO team helps entrepreneurs calculate the tax burden taking the defense levy into account, adapt legal structures and build transparent reporting. I base my approach on a simple logic: transparency, legality and business rationality. This approach ensures tax neutrality where possible and supports the long-term competitiveness of the Estonian IT cluster after the reforms.

If you are planning registration, Licensing or AML setup for an international group, factor the defense tax into baseline scenarios today. This will strengthen management confidence, lower the cost of capital and create a foundation for growth that investors and banks view with interest and trust.