Steps to Create a Company in Estonia

Estonia’s advanced digital infrastructure and business-friendly environment make it an attractive destination for entrepreneurs. Below is an overview of the steps involved in establishing a company in Estonia, highlighting the key procedures and requirements.

Company Registration

Choosing the Company Name

The first step in forming a company in Estonia is selecting a unique business name. The name must comply with the standards set by the Estonian Business Register. It cannot resemble an existing business name and must include the designation "OÜ" (Osaühing), which indicates a private limited company. We offer a name availability check to ensure the name you choose complies with these requirements.

Legal Status and Registered Address

In Estonia, every company is required to have a legal registered address within the country. This is where all legal correspondence will be sent. If you are a foreign entrepreneur without a physical presence in Estonia, we offer virtual office and domiciliation services, providing you with a registered address to meet this legal requirement​.

In terms of legal status, most entrepreneurs opt for the Private Limited Company (OÜ), which offers the benefits of limited liability, meaning shareholders are only responsible for the company's debts to the extent of their share capital contribution.

Information Required for Registration

To register a company in Estonia, you will need to provide several key details:

• Shareholders’ information: Including names, addresses, and the proportion of ownership.
• Directors’ details: Names, personal addresses, and nationalities of the directors.
• Company's registered office address: This can be the address we provide through our domiciliation services.
• Share capital: For an OÜ, the minimum share capital requirement is €2,500, although this does not need to be paid up immediately​.

Our platform allows you to streamline the submission of all required information electronically. Once we have the necessary details, we prepare and file the relevant documents, such as the Memorandum of Association and the Articles of Association, which outline the company's purpose, governance structure, and internal operations​.

Documents We Prepare and Submit

We take care of drafting and submitting all the essential documents, including:

• Memorandum of Association: Confirms the intention of the company's founders to establish the company.
• Articles of Association: Establishes the company's governance rules and internal procedures. You may use standard articles, but we can customize these if your business requires specific terms​.

Timeframe for Setting Up a Company

Company formation in Estonia is a quick and efficient process. Once all documents are submitted, registration typically takes 1-5 business days, depending on the complexity of the business structure and the availability of required information. After the registration is complete, you will receive a Certificate of Incorporation, which serves as proof of your company’s legal existence.

Post-Registration Procedures

After your company is incorporated, several additional steps are required to ensure full compliance with Estonian regulations:

Opening a Business Bank Account

To conduct business transactions, you will need to open a corporate bank account. Estonia offers multiple banking options, from traditional banks to fintech solutions like Wise and Revolut. Some banks may require a physical presence for account opening, while others allow for online setup.

VAT Registration

If your company’s annual turnover exceeds €40,000, you are required to register for VAT with the Estonian Tax and Customs Board. Once registered, you will receive a VAT number and will be required to submit regular VAT returns.

Corporate Tax Registration

Although Estonia offers a 0% corporate tax on undistributed profits, you must register for corporate tax purposes. Tax is only payable when profits are distributed, offering a significant advantage for reinvestment​.

National Insurance and Payroll Setup

If you plan to hire employees, including yourself as a director, you must register for payroll with the Estonian tax authorities. This includes handling income tax and social contributions such as unemployment insurance.

By managing these procedures, we ensure your company in Estonia is fully compliant with all regulatory requirements, enabling you to focus on growing your business.

Corporate Taxation in Estonia

Estonia is renowned for its highly competitive and transparent corporate tax system, which has been a major draw for both local entrepreneurs and international investors. The key characteristic of Estonia’s tax regime is that profits are only taxed when distributed, providing companies with greater flexibility in reinvesting earnings. Here’s an overview of how the system works as of 2024:

Corporate Income Tax

Estonia’s corporate tax system continues to stand out in 2024 for its simplicity:

• No Tax on Retained Earnings: Companies are not taxed on profits that are reinvested within the business. This allows companies to grow and reinvest in operations without an immediate tax burden.
• Tax on Distributed Profits (22%): When profits are distributed as dividends to shareholders, they are subject to a 22% corporate tax, a slight increase from the previous rate of 20%. This ensures that companies can delay taxation until profits are extracted from the business.

Value Added Tax (VAT)

• Standard VAT Rate (22%): Starting from January 1, 2024, Estonia raised its standard VAT rate from 20% to 22%. This applies to most goods and services, making it an important consideration for businesses trading within Estonia.
• Reduced Rates and Exemptions: Estonia maintains lower VAT rates for certain sectors, including a reduced rate for accommodation services and VAT-exempt services such as healthcare and education​.

Social and Employment Taxes

Employers in Estonia are required to contribute to social tax at a rate of 33% on gross salaries. This tax covers employee benefits such as pensions, health insurance, and unemployment insurance. Social tax is a significant component of the overall tax burden for employers in Estonia​.

Other Taxes and Fiscal Responsibilities

• Dividend Tax: In addition to corporate tax, dividends paid to shareholders may be subject to further personal income taxes, depending on the recipient's residency.
• Transfer Pricing: Companies engaged in international trade must comply with Estonia’s transfer pricing regulations, ensuring that intra-company transactions are conducted at arm’s length.
• Customs and Import Taxes: Companies importing goods into Estonia from outside the EU are subject to customs duties and VAT​.

Compliance and Reporting

Estonian companies must submit annual financial statements and tax returns, with distributed profits being taxed only at the point of distribution. This system aligns with Estonia’s broader strategy of fostering a business-friendly environment that encourages reinvestment and growth.

In summary, Estonia's corporate tax system offers a favorable environment for business growth and reinvestment, thanks to the deferral of corporate income tax on retained earnings and competitive tax rates on distributed profits.

Director Responsibilities in Estonia

As a director of a company in the UK, there are several important legal duties and responsibilities that you must adhere to. These responsibilities ensure the smooth operation of the company and compliance with UK laws. Failure to meet these obligations can result in severe penalties, including personal liability. Below is an overview of the key responsibilities, sanctions, and the procedures related to the appointment and resignation of directors.

Legal Duties

Directors of UK companies are expected to fulfill a range of legal obligations as set out by the Companies Act 2006. These duties focus on ensuring that directors act in the best interests of the company, its shareholders, and other stakeholders. The core duties include:

• Loyalty and acting in the company’s best interests: Directors must act in good faith and prioritize the interests of the company over their personal interests. This means making decisions that benefit the company as a whole, even if it may not align with their personal goals.
• Compliance with the law: Directors are legally required to ensure that the company complies with all relevant legislation and regulations. This includes adhering to tax laws, employment regulations, health and safety standards, and filing requirements with Companies House.
• Exercise of reasonable care, skill, and diligence: Directors are expected to apply their knowledge and experience in managing the company. While there is some leeway for directors with less experience, they must still demonstrate that they are making informed decisions in the best interest of the company.
• Avoid conflicts of interest: Directors must avoid situations where their personal interests might conflict with the interests of the company. If a potential conflict arises, it must be disclosed to the board of directors, and the director must not participate in any decision related to the conflict.
• Protecting company assets: Directors must safeguard the company’s assets, ensuring that they are used appropriately and in a manner that benefits the company. This includes ensuring that the company remains solvent and is not engaging in fraudulent trading.

Sanctions for Non-Compliance

Failure to comply with the legal duties can lead to serious consequences for directors. Depending on the severity of the violation, the following sanctions may be imposed:

• Disqualification: Directors who consistently fail to meet their obligations or engage in misconduct can be disqualified from serving as a director for up to 15 years. Disqualification orders are typically issued for offenses like wrongful trading or failing to keep adequate accounting records.
• Fines: Directors can face significant fines for failing to meet statutory obligations, such as filing annual accounts or maintaining accurate records. Penalties increase the longer these obligations are neglected.
• Personal liability: In cases of severe negligence or misconduct, directors can be held personally liable for the company’s debts, especially in cases of wrongful trading or fraud. This means that the director’s personal assets may be used to repay creditors if the company goes insolvent due to mismanagement.
• Criminal charges: In extreme cases, directors can face criminal prosecution for offenses such as fraud, insider trading, or other forms of misconduct.

These penalties serve as strong deterrents, encouraging directors to fulfill their duties diligently and in accordance with UK law.

Appointment and Resignation of Directors

Appointment of Directors

The process for appointing a new director is typically straightforward but must follow the procedures outlined in the company’s Articles of Association and comply with the Companies Act 2006. Here are the key steps involved:

1. Board approval: The appointment of a director is usually approved by the existing board of directors. In some cases, shareholder approval may also be required, depending on the company’s internal rules.
2. Filing with Companies House: Once a new director is appointed, the company must notify Companies House within 14 days. The notification includes the director’s full name, address, date of birth, and any other relevant details. This information becomes part of the public record.
3. Director’s consent: The individual being appointed must formally agree to take on the role and the associated responsibilities. This typically involves signing a consent form stating that they accept the position and are aware of their legal duties.

Resignation of Directors

The process for a director’s resignation must also follow the rules set by the company’s Articles of Association. Here are the key steps:

1. Notice of resignation: A director wishing to resign must provide written notice to the company. The resignation takes effect as soon as the notice is received, or on a specified date if mentioned.
2. Update to Companies House: The company is required to notify Companies House of the director’s resignation within 14 days. The company’s public records are updated to reflect the change.
3. Responsibilities post-resignation: Even after resigning, a director may still be held accountable for decisions made during their tenure. For example, if a company goes into insolvency due to actions taken while the director was in charge, they could still face consequences.

The role of a director in the UK comes with significant responsibilities, both legal and ethical. It is essential to understand these duties fully and to ensure compliance to avoid personal and financial consequences. Directors must act with care, integrity, and in the best interest of the company, while also ensuring that all legal obligations are met.

Employment and Human Resources Management in Estonia

When hiring and managing employees in Estonia, it is important to understand the local regulations concerning employment contracts, working conditions, and international recruitment. Here is an overview of the key areas every employer should be aware of:

Employment Contracts

In Estonia, employment contracts must be provided in written form. These contracts define key terms such as job duties, salary, working hours, and leave entitlements. Contracts can be open-ended or fixed-term (with a maximum duration of five years), and a probationary period of up to four months is allowed. Employers are required to clearly outline the employee's role, pay structure, and benefits, ensuring both parties' rights are protected.

Labour Regulations

Estonian labour law enforces strict regulations to safeguard employee rights. The standard workweek is 40 hours, and overtime must be compensated at 1.5 times the regular wage or with paid time off. Employees are entitled to a minimum of 28 days of paid annual leave. Key employee rights include sick leave, maternity and paternity leave, and various protections against discrimination and harassment. Employers must also ensure compliance with health and safety standards​.

• Minimum Wage: In 2024, the national minimum wage is set at €820 per month or €4.86 per hour.
• Sick Leave: Employers pay for sick leave from days 4 to 8, with the Health Insurance Fund covering the rest at 70% of the employee's average salary​.

Recruitment and International Talent

For businesses recruiting internationally, Estonia’s e-Residency program allows non-residents to manage Estonian companies remotely, including hiring employees. Non-EU nationals require a work permit, but once employed, they are entitled to the same rights as Estonian citizens. Estonia’s flexible visa policies and competitive tax environment make it an attractive destination for skilled foreign talent.

By understanding these regulations and leveraging Estonia's business-friendly policies, companies can effectively manage their workforce while staying compliant with national laws.