Myth of “zero taxes” in Estonia is actively discussed among entrepreneurs, but behind this loud name lies a feature of the local tax system, not a complete absence of fiscal obligations. To understand what you need to know about the real taxation mechanisms in the country, it’s important to figure out how the deferred taxation system operates and why it creates the myth of zero taxes.
How taxation works in Estonia: deferred taxation
The main misconception: “tax-free company in Estonia“: is based on the unique system of deferred taxation of profits. In reality, an Estonian company without taxes is possible only if certain conditions are met. In Estonia, corporate income tax is not collected until dividends are distributed: as long as profit remains in the company, the tax rate is 0%. This is not an exemption from taxes but a deferral. Only when the company decides to pay dividends does a tax liability arise: a rate of 22/78 of the dividend amount, and from 2025 an additional 2% is added to the security fund.
Conditions under which a company does not pay taxes
For an Estonian company not to pay taxes, several key conditions must be met:
- The share capital is fully paid and registered in the Commercial Register.
- The annual report is prepared, approved and filed on time.
- The financial year ended with a profit or accumulated profits from previous years.
- Dividends are not distributed to shareholders; profit remains in the company’s accounts.
- The company strictly complies with the requirements of Estonian and EU legislation, including AML and tax transparency.
When do tax liabilities on dividends arise?
Tax optimization for business in Estonia requires a clear understanding of events that lead to tax liabilities:
- Distribution of dividends: tax 22/78 of the amount + 2% to the security fund (from 2025). Payment is possible only after approval of the annual report and provided solvency is maintained.
- Salary payment: social tax 33%, income tax 22%, pension tax 2%, insurance contributions — in total the tax burden on salary reaches 59.4% in 2025.
- Representative expenses: the limit has been increased to 50 euros per month from 2025; anything above is taxed at 2% of the amount.
- Cross-border transactions: subject to price control, require special reporting and may entail additional assessments if transfer pricing rules are not followed.
| Scenario | Tax rate | Payer | Conditions |
|---|---|---|---|
| Profit in the company (without dividends) | 0% | Compliance with all conditions | |
| Distribution of dividends | 22/78 + 2% | Company | After approval of the annual report |
| Salary payment | 59.40% (2025) | Employer + employee | Mandatory for employees |
| Representative expenses (above the limit) | 2% of gross | Company | Over 50 euros/month (2025) |
Registration of a company in Estonia: step-by-step guide
Company registration in Estonia: a step-by-step guide for foreign entrepreneurs opens quick access to European markets and allows doing business fully online thanks to the e-Residency program. Before starting the registration, it is important to know the basic requirements for share capital and the set of documents for registering an LLC (OÜ) so that the process goes as transparently and efficiently as possible.
Requirements for share capital and documents for registering an LLC
The minimum share capital in Estonia is symbolic, only €0.01. On the other hand, COREDO’s practice shows: to increase trust from banks and business partners it is optimal to declare capital from €2,500. This reduces the risk of account blocking and makes KYC procedures easier. The capital must be paid before the first dividend distribution and entered in the Commercial Register, and also reflected in the TSD form (tax reporting).
To register a company you will need:
- Founder’s passport (or passports of all founders)
- Document proving payment of share capital
- Company articles (a standard template can be used)
- Decision to register (Minutes of Incorporation)
Registration stages: e-residency and account
The Estonian electronic company management system allows you to register a business completely remotely. The step-by-step process is as follows:
Step 1: Obtaining e-residency
For foreign founders, e-residency is a convenient tool for remote company management. The application is submitted online, verification takes 3–5 days, and the e-resident card is delivered by mail. Cost – €100–120.
Step 2: Online company registration
Access to the business register is via the e-resident card. The application is completed online, the state fee – €350 (since 2025). All documents are signed with a digital signature, registration takes 1 business day.
Step 3: opening a bank account
Banks (LHV, Wise, Revolut, etc.) require a full set of documents, completion of AML procedures and confirmation of sources of funds. Opening an account takes 3–10 days.
| Service | Cost | Note |
|————————-|—————|————————————|
| E-residency | €100–120 | Optional for foreigners |
| State fee (OÜ) | €350 | Mandatory |
| Legal address | €200–400/year | If the management is abroad |
| Accounting services | €500+/year | Depends on transaction volume |
| Total minimum | €850–1050 | Without accounting |
Nominee shareholders: risks and legality
Estonia follows civil law, and nominee services (nominee shareholder, director) are not enshrined in legislation. Using such schemes is associated with a number of risks:
- Loss of control over the company: a nominee shareholder may change the structure or block operations.
- Tax authorities may challenge the structure and require proof of real control and beneficial ownership.
- Banks require transparency of the structure, and when nominee schemes are detected they may refuse to open an account.
- Violation of AML/KYC requirements leads to account blocking and investigations.
Tax changes in Estonia 2025: how they affect businesses
Tax changes in Estonia for 2025 are one of the most notable events for entrepreneurs, as they affect several key areas of business tax regulation at once. The increase in the tax burden and changes in rates impact operating expenses, pricing strategy, and companies’ financial planning. Below we consider the most significant changes and their consequences for your business.
Increase in VAT from 22% to 24% from July 1, 2025
From July 1, 2025, the standard VAT rate in Estonia increases from 22% to 24%. This is the first increase in the last 10 years, and it affects all companies dealing with VAT. The increase will lead to a price rise for goods and services of approximately 1.6%. Companies must recalculate prices in advance, notify customers, and make changes to accounting systems.
Changes in taxation of dividends and social taxes
From 2025, the tax on dividends increases: the base rate 22/78 is supplemented by an additional 2% security fund levy. Social tax on wages remains at 33%, income tax at 22%, pension tax at 2%, insurance contributions 1.6% (employer) and 0.8% (employee). In total, the tax burden on wages amounts to 59.4%.
| Tax | Rate 2024 | Rate 2025 | Change |
|————————-|————-|————-|———–|
| VAT (standard) | 22% | 24% | +2% |
| Dividend tax | 22/78 | 22/78+2% | +2% |
| Social tax | 33% | 33% | |
| Income tax | 22% | 22% | |
| State fee (OÜ) | €265 | €350 | +€85 |
New tax regimes for small businesses: which to choose?
For companies with an annual turnover of up to €100,000 in the EU, the SME scheme and the special EX regime apply. The essence of the scheme is exemption from the need to register as a VAT payer in other EU countries provided thresholds are met. This reduces administrative costs and simplifies reporting: it’s sufficient to file an OSS declaration quarterly.
Conditions for application:
- Annual turnover in the EU does not exceed €100,000
- In any given country the turnover does not exceed the local VAT threshold
- Quarterly reporting is mandatory
Withdrawing dividends without tax: reality?
The question of whether it’s possible to withdraw dividends without tax remains controversial for many and gives rise to a lot of misconceptions. Understanding the current tax rates, the specifics of the 22/78 calculation scheme, and additional mandatory payments helps to tell where the myth ends and reality begins.
How the dividend tax works: the 22/78 rate
The myth of withdrawing dividends without tax in Estonia does not withstand practical scrutiny. The tax on distributed profit is calculated by the formula 22/78 of the dividend amount, and from 2025 an additional 2% for the security fund is added. For example, when paying €1000 in dividends the tax will be €280.77 (22/78 × 1000) plus €20 (2%).
Payment is possible only if the following conditions are met:
- Share capital is paid up and registered
- Annual report approved
- Financial year ended with a profit
- Equity is not below the minimum threshold
- The payment does not impair the company’s solvency
Dividends vs. profit in the company: how to minimize taxes
There are two main approaches to tax optimization:
| Criterion | Retaining profit | Distributing dividends |
|---|---|---|
| Taxes | 0% | 22/78 + 2% |
| Capital in the company | Grows | Decreases |
| Flexibility | High | Medium |
| Suitable for | Startups, growth | Mature companies |
| Risk of tax audits | Low | Medium |
Restrictions on transferring capital abroad
Placing capital outside Estonia requires permissive documentation and strict compliance with cross-border taxation rules. All operations must be documented, and the transaction structure must be transparent to tax authorities. Special attention is paid to transfer pricing control and reporting on international transactions.
AML and KYC: how to avoid tax risks
In the current environment AML requirements, KYC and legal support are becoming fundamental for any company striving to avoid tax risks and successfully conduct business in the chosen jurisdiction. Proper compliance with these standards not only minimizes the likelihood of financial and legal sanctions, but also ensures the company’s legitimacy and transparency of its activities at the registration stage and thereafter.
AML and KYC requirements for company registration
Estonia: one of the most transparent EU jurisdictions in terms of AML (Anti-Money Laundering) and KYC (Know Your Customer). When registering and conducting business it is necessary to:
- Identify all founders and beneficial owners
- Confirm sources of funds
- Document all transactions
- Annually reassess risks and update information
- File reports with the tax authorities
Tax risks and liability for violations of the law
Violation of Estonia’s tax legislation can lead to serious consequences:
- Fines for late reporting: from €500 to €5,000 and higher
- Inspections and audits by tax authorities
- Freezing of bank accounts
- Criminal liability for tax crimes
- Reputational damage and loss of partner trust
How to choose a legal partner for your business?
Choosing a legal partner is a key success factor. Criteria:
- At least 5 years of experience registering companies in Estonia
- Deep knowledge of EU and Estonian tax law
- License and registration with the relevant authorities
- Transparency of terms and pricing
- Positive reviews and recommendations
- Willingness to provide guarantees
Step-by-step action plan for the entrepreneur
Practical recommendations: this is your guide at every stage of launching a business. By following this step-by-step action plan for the entrepreneur, you will avoid common mistakes and resolve all organizational issues in advance. Before proceeding to company registration, check yourself against the checklist and make sure everything is prepared for a confident start.
Checklist before registering a company
Stage 1: Planning (1–2 weeks)
- Define the purpose of registration: tax optimization, scaling, localization
- Choose the form of company (OÜ)
- Calculate the minimum share capital (recommended €2500)
- Determine a tax optimization strategy (retaining profits vs. dividends)
Stage 2: Document preparation (1–2 weeks)
- Prepare passports of all founders
- Collect documents on sources of funds (AML)
- Prepare the company’s articles of association
- Determine the legal address
Stage 3: Choosing partners (1 week)
- Choose a law firm
- Choose a bank
- Choose an accountant
Stage 4: Registration (1–2 days)
- Submit an application to the business register
- Pay the state fee (€350)
- Sign documents with a digital signature
- Receive an extract from the register
Stage 5: Opening a bank account (3–10 days)
- Prepare documents for the bank
- Pass the AML check
- Get access to internet banking
Tax optimization strategy: how to maximize ROI
- Leave profits in the company (0% tax)
- Use funds for development and investments
- Minimize dividend payments
- Apply the SME scheme for low turnover
For mature companies:
- Distribute dividends gradually
- Use representation expenses (up to €50/month tax-free)
- Plan payments several years in advance
For companies operating in the EU:
- Use OSS for VAT payment
- Apply the EX regime for turnover up to €100 000
- Avoid double taxation through treaties
- Document all transactions for transfer pricing control
| Scenario | Investment | Tax savings (year 1) | ROI |
|---|---|---|---|
| Startup (retaining profit) | €1000 | €2000 | 200% |
| Mature business (staggered dividends) | €1000 | €1200 | 120% |
| Digital company (OSS, EX) | €1200 | €1800 | 150% |
If you are planning to register a company in Estonia or already run a business in this jurisdiction, I recommend using this guide as a strategic roadmap. The COREDO team is always ready to share experience, offer individual solutions, and support your business at all stages: from registration to scaling and tax optimization.