As an e-resident, you want to understand how your Estonian company is taxed before incorporating one, so read further.
The Estonian tax system is highly competitive, and it can be a great place for example to establish your next startup or holding company. As a foreigner you should however understand the tax exposure your company might have outside of Estonia. Double taxation is a complex issue that often arises when individuals or legal entities become tax residents in multiple countries simultaneously. This situation is especially relevant for foreign nationals who manage Estonian companies from abroad. Understanding the intricacies of double taxation and the legal repercussions of attempting to avoid taxes is crucial for anyone involved in international business.
How your Estonian company is taxed in case of Double Residency
Double residency occurs when there is a conflict of tax residency between two or more countries. Essentially, one person or entity is considered a tax resident in several jurisdictions at the same time. This creates a scenario where multiple countries claim the right to tax the individual’s or entity’s worldwide income.
Countries generally favor tax residency because it allows them to tax their residents’ global income. While becoming a resident of a country might be straightforward, extricating oneself from such a status can be significantly more challenging.
In Estonia, double residency is a common issue for e-resident companies. For instance, if an Estonian e-resident manages a private limited company (OÜ) from their home country, such as Spain, the company may be deemed a tax resident in both Estonia and Spain. This dual residency means both countries want to tax the company’s entire business income.
Case Study: The Estonian E-Resident – How your Estonian company is taxed abroad
Consider an Estonian e-resident who manages an OÜ from Spain. According to Spanish tax laws, any company managed from Spain is a tax resident there. Thus, the OÜ becomes a tax resident in both Estonia and Spain. Estonia continues to apply its deferred income tax regime, which has been beneficial for many Estonian companies. However, Spain imposes an annual income tax of 25% on the company’s global profits, irrespective of the Estonian tax rules. Consequently, the company faces the burden of double taxation, where both Estonia and Spain seek to tax the same income.
Targeted Scrutiny: The Swedish Example
Adding to the complexity, certain countries have started to specifically target e-residents. For example, the Swedish Tax Agency has decided to carry out a general check on individuals holding digital identity, or e-residency, in Estonia. The rationale behind this scrutiny is that these individuals or the companies they own might have unreported taxes and fees. This move underscores the increasing vigilance of tax authorities in ensuring compliance and uncovering potential tax evasion schemes.
Reference: Skatteverket.se
Legal Repercussions of Tax Avoidance
While navigating tax residency conflicts can be legally complex; it is imperative to understand that attempting to avoid taxes through fraudulent means can lead to severe consequences.
Under many jurisdictions, tax avoidance schemes can be classified as tax evasion, which is a criminal offence. In certain countries, the repercussions of tax evasion are particularly severe. For instance, in Bulgaria, tax evasion exceeding 3000 BGN (approximately 1534 EUR) is regarded as a criminal act. This classification highlights the strict stance that some jurisdictions take against tax evasion and underscores the importance of adhering to tax laws to avoid severe penalties, including criminal charges and imprisonment.
Conclusion
The issue of double taxation, particularly for Estonian e-residents managing associations from abroad, highlights the complexity of international tax laws. While navigating these laws can be challenging, meaning to understand how your Estonian company is taxed and comply accordingly, it is truly essential to comply with all legal requirements to avoid severe penalties. Tax avoidance can lead to criminal charges, including imprisonment and accusations of money laundering. Therefore, it is crucial for individuals and businesses to seek legitimate and legal solutions to manage their tax obligations across multiple jurisdictions.
By understanding and adhering to the tax laws of all relevant countries, individuals and entities can avoid the pitfalls of double taxation and the severe consequences of tax evasion and money laundering. The increased scrutiny by tax authorities, such as the Swedish Tax Agency’s checks on Estonian e-residents, serves as a reminder of the importance of transparency and compliance in international business practices.