Having recently held its flagship Latitude59 tech conference, then setting a world record for the fastest time to incorporate a company at London Tech Week last month, a mere 15 minutes 33 seconds, Estonia continues its inexorable ascent to digital powerhouse status, Tim Lai writes in Forbes.
No corporate income tax on reinvested profits
According to the Tax Foundation, Estonia has the best tax system in the OECD and so it has been for eight years in a row. Estonia has a 20 per cent tax rate on corporate income that is only applied to distributed profits. Estonia’s corporate income tax system allows companies to reinvest their profits tax-free.
“If profits are reinvested within the company, then no corporation tax is due until you finally pay out dividends,” Tim Lai explains Estonia’s corporate taxation system.
“The Government is essentially a 20% investor in you too,” says Luukas Ilves, Chief Information Officer for the Ministry of Economic Affairs and Communication, referencing the corporation tax rate.
20 minutes to complete the company’s annual income tax report
This isn’t all that different from most other nations in the world, which provide countless credits, tax deductions or capital allowances that require specialist knowledge to keep track. Estonia is extremely easy. There are no exceptions and deductions.
“The whole of the Estonian tax code is something like 36 pages, that’s it. You could almost memorize it — everything is simple,” says Lauri Haav, Managing Director of the e-Residency program.
All government filings can be performed in English, should someone be less inclined to learn business Estonian, one of only a handful of non-English native countries that allow you to do so. Individual tax filings are mostly pre-filled and a year’s corporate tax accounts take around twenty minutes to complete.
Minimum share capital €2,500 (and €0.01 from 2023)
Estonia has 93,000 e-Residents, over 36,000 of them are EU citizens with a further 4,000 from the United Kingdom. Why do so many foreigners open companies in Estonia? According to Lauri Haav, one of the biggest barriers for entrepreneurs-to-be is the share capital required to get a company going.
Take Germany for instance, whose e-Residents form the highest number of companies formed by other EU country’s citizens, the minimum share capital is €25,000. France has an even higher requirement of €37,500.
The current rules of Estonia require €2500 but from 1st February 2023, this is slashed to just €0.01. For bootstrapped founders whose businesses require no physical presence, it is a huge advantage to incorporate in Estonia instead of Germany or France instead. And even if physical substance and workforce are needed, Estonia ranks as one of the most IT literate nations in the whole EU.
Unicorns breeding unicorns
It seems part of Estonia’s close-knit cultural values that the favours are paid forwards. After Skype earned its spot in the annals of history as Estonia’s first unicorn, the founders continued to invest and grow the companies around it.
As a country of just 1.3 million citizens, it punches well above its weight in the digital economy. Having minted its tenth unicorn in Glia this year, it now boasts more unicorns per capita than anywhere else in the world, save for the sunny shores of Silicon Valley.
Estonia helps you focus on growing your business
As Estonia continues its adaptations to make business administration even more efficient, and with the aforementioned share capital decimation, all signs point to a government that really wants the seeds to be sewn into this digitally fertile land.
“We are probably the only country in the world where people compete on how fast they can submit their tax returns,” jokes Kaja Kallas, the Prime Minister of Estonia. “We want Estonia to continue to be seen as an innovative, forward-looking country.”
And quite rightly, the less someone can be distracted by administrative burdens, the greater one can focus on growing their own business. It appears for the most part Estonia has done it right.