# How Taxes and VAT Works for Estonian Companies ![rw-book-cover](https://readwise-assets.s3.amazonaws.com/static/images/article2.74d541386bbf.png) URL:: https://yourcompanyinestonia.com/how-taxes-and-vat-works-for-estonian-companies/ Author:: Tu Empresa En Estonia ## Highlights > Your company needs an intra-community VAT number if any of these conditions apply: > First, if your company offers services such as development, design, consulting, marketing, etc., to European clients, and earns more than 40,000 euros per year. > Next, if you offer digital services or products (software or digital content) to European B2C customers (final consumers) from the first sale. > Finally, if you offer digital services or products (software or digital content) to European B2B clients (company to company) and you earn more than 40,000 euros per year. > If your services require your direct intervention (such as software development, consulting, marketing, design…), then: > If your client is B2B (a company) in Europe, with a VAT number, you do not add VAT to the invoice (0%). Instead, add a clause to your bill like this: “The purchase is liable to Intra-Community supply 0%, Reverse charge”. Here is a link where you can check if the VAT of one of your customers is valid or not. > If your customer is B2C (an individual), or B2B without a VAT number, you add the Estonian VAT (20%) to the invoice. > Finally, if your client is outside of Europe (such as in the United States), you don’t add VAT (0%). > On the contrary, if your services do not require your intervention, that is, they are automated (such as a SaaS or automated application like Netflix, or an e-Book download from your e-Commerce or website), these rules apply: > If your customer is B2B (a company) European with a valid VAT number, you add VAT (0%) and specify the same clause as above. > On the other hand, if your client is a European business that does not have a VAT number or an individual, you add the VAT from the country of origin of your customer. For a Spanish customer, that would be 21%, for example. > Finally, if your client is outside of Europe, you do not add VAT (0%). > you will not pay any taxes for the money your company earns or re-invests. > You will pay taxes when you distribute dividends or salaries. > Annual dividends > At the beginning of each fiscal year, you can pay dividends to the shareholders of your company. These dividends are subject to a 25% tax (20% of gross, which means 20/80 = 25%). > These taxes are paid by your company the following month > your salary is divided into two parts: your board member salary (salary manager) and your employee salary ( employee salary ). > If you live outside Estonia, your employee salary is not subject to taxes there. Only the board member’s salary. Therefore, the less board member salary, the fewer taxes you will pay in Estonia. > Your board member salary pays 25% income tax, plus 33% social tax (applied to the salary plus the income tax). > Important to note, if you can certify that you contribute social security taxes in another European country (form A1), then your board member salary does not need to pay social tax. > So is the employee salary tax-free? > Not quite. You will not pay taxes in Estonia. This salary pays taxes in the country where you are a tax resident (if any) > For simplicity, Ana applies the standard salary distribution, 30/70. So 300 euros of her salary form their board member salary, and 700 are for her employee job, since she is the one doing the design work. > As Ana lives outside of Estonia, her employee salary is not taxed there. So of those 300 euros, Ana’s company will pay the following taxes: > Income tax : 25% of 300€ = 75€. > Social tax (Social tax) : 33% of salary + previous tax (i.e: 33% of 375€) = 123,75€ > So in total, for her 1000€ salary, Ana’s company will pay 198,75€ (slightly less than 20%). At the end of the year, Ana will have 21650 euros re-invested in her company. > If Ana had opted for the 20/80 distribution, justifying that most of her time is dedicated to designing duties (which is quite realistic), her company would have had to pay a lot fewer taxes, specifically, 132,50€ in Estonia (around 13%). > In 2019, Estonia has approved new legislation that allows solopreneurs and freelancers to assign themselves an employee salary only, without the need of appointing a board member salary. This is suitable for one-member companies only. In this scenario, you only pay yourself employee salary, as it’s considered that your administrative duties -especially as a customer of Your Company In Estonia– are negligible. > Ana can pay that expense with her personal credit card, or even in cash, but ask for an invoice for her company, and then tell us that she paid that with her personal money. We will declare that expense as “out of pocket expenses”, and Ana can refund that money back into her personal bank account without paying taxes for it. --- Title: How Taxes and VAT Works for Estonian Companies Author: Tu Empresa En Estonia Tags: readwise, articles date: 2024-01-30 --- # How Taxes and VAT Works for Estonian Companies ![rw-book-cover](https://readwise-assets.s3.amazonaws.com/static/images/article2.74d541386bbf.png) URL:: https://yourcompanyinestonia.com/how-taxes-and-vat-works-for-estonian-companies/ Author:: Tu Empresa En Estonia ## AI-Generated Summary None ## Highlights > Your company needs an intra-community VAT number if any of these conditions apply: > First, if your company offers services such as development, design, consulting, marketing, etc., to European clients, and earns more than 40,000 euros per year. > Next, if you offer digital services or products (software or digital content) to European B2C customers (final consumers) from the first sale. > Finally, if you offer digital services or products (software or digital content) to European B2B clients (company to company) and you earn more than 40,000 euros per year. > If your services require your direct intervention (such as software development, consulting, marketing, design…), then: > If your client is B2B (a company) in Europe, with a VAT number, you do not add VAT to the invoice (0%). Instead, add a clause to your bill like this: “The purchase is liable to Intra-Community supply 0%, Reverse charge”. Here is a link where you can check if the VAT of one of your customers is valid or not. > If your customer is B2C (an individual), or B2B without a VAT number, you add the Estonian VAT (20%) to the invoice. > Finally, if your client is outside of Europe (such as in the United States), you don’t add VAT (0%). > On the contrary, if your services do not require your intervention, that is, they are automated (such as a SaaS or automated application like Netflix, or an e-Book download from your e-Commerce or website), these rules apply: > If your customer is B2B (a company) European with a valid VAT number, you add VAT (0%) and specify the same clause as above. > On the other hand, if your client is a European business that does not have a VAT number or an individual, you add the VAT from the country of origin of your customer. For a Spanish customer, that would be 21%, for example. > Finally, if your client is outside of Europe, you do not add VAT (0%). > you will not pay any taxes for the money your company earns or re-invests. > You will pay taxes when you distribute dividends or salaries. > Annual dividends > At the beginning of each fiscal year, you can pay dividends to the shareholders of your company. These dividends are subject to a 25% tax (20% of gross, which means 20/80 = 25%). > These taxes are paid by your company the following month > your salary is divided into two parts: your board member salary (salary manager) and your employee salary ( employee salary ). > If you live outside Estonia, your employee salary is not subject to taxes there. Only the board member’s salary. Therefore, the less board member salary, the fewer taxes you will pay in Estonia. > Your board member salary pays 25% income tax, plus 33% social tax (applied to the salary plus the income tax). > Important to note, if you can certify that you contribute social security taxes in another European country (form A1), then your board member salary does not need to pay social tax. > So is the employee salary tax-free? > Not quite. You will not pay taxes in Estonia. This salary pays taxes in the country where you are a tax resident (if any) > For simplicity, Ana applies the standard salary distribution, 30/70. So 300 euros of her salary form their board member salary, and 700 are for her employee job, since she is the one doing the design work. > As Ana lives outside of Estonia, her employee salary is not taxed there. So of those 300 euros, Ana’s company will pay the following taxes: > Income tax : 25% of 300€ = 75€. > Social tax (Social tax) : 33% of salary + previous tax (i.e: 33% of 375€) = 123,75€ > So in total, for her 1000€ salary, Ana’s company will pay 198,75€ (slightly less than 20%). At the end of the year, Ana will have 21650 euros re-invested in her company. > If Ana had opted for the 20/80 distribution, justifying that most of her time is dedicated to designing duties (which is quite realistic), her company would have had to pay a lot fewer taxes, specifically, 132,50€ in Estonia (around 13%). > In 2019, Estonia has approved new legislation that allows solopreneurs and freelancers to assign themselves an employee salary only, without the need of appointing a board member salary. This is suitable for one-member companies only. In this scenario, you only pay yourself employee salary, as it’s considered that your administrative duties -especially as a customer of Your Company In Estonia– are negligible. > Ana can pay that expense with her personal credit card, or even in cash, but ask for an invoice for her company, and then tell us that she paid that with her personal money. We will declare that expense as “out of pocket expenses”, and Ana can refund that money back into her personal bank account without paying taxes for it.