In our practice, a question that comes up fairly regularly is what is the most suitable place to set up an investment vehicle?
Although every investor’s tax and financial situation is different, we’re here to share some general thoughts that can guide you through those issues as you discuss them with your tax lawyers, family members and trusted financial advisors.
As an investor, you need to know the answers to the following important questions:
- What structure suits you best? A Limited Liability Company or Limited Partnership? A Trust or Private Foundation? A Private Investment or Limited Partnership Fund? Should it be taxed as a company (opaque) or be tax transparent? The answer largely depends on your tax residency, age, family situation, estate planning goals, the level of asset protection required, as well as investment strategy.
- What jurisdiction suits your investment vehicle best? Estonia or Malta? Singapore or Hong Kong? Switzerland or Liechtenstein? US or UK? All of these jurisdictions have a lot to offer in terms of tax-favoured solutions, efficient corporate structuring, as well as other benefits.
- Which brokerage accounts should you use for stock picks and other financial instruments?
Although there is no one-size-fits-all solution here, one of the best set up is an Estonian Limited Liability Company (Estonia Co. or “OÜ” in Estonian), with a brokerage account at one of the global trading platforms with transparent rates and low commission, like Interactive Brokers (IBKR).
Here are eleven reasons why an Estonia Co. is the best solution for you:
- No corporate tax, until profit distribution
- Power of Compound Interest
- Participation exemption on foreign dividends
- Foreign tax relief
- A simple tax system and an easy reporting process
- Digital Company Registrar
- The e-Residency program
- Wide tax treaty network including with the US
- Low maintenance costs
- A well-developed corporate services industry
- No audit requirements
Now let’s go through the 11 reasons in more detail.
1. No corporate tax, until profit distribution
No dividends, no tax, or no tax until dividends.
Taxes do matter while choosing your investment vehicle. Estonia has a unique tax system, whereby no corporate tax is due until profit distribution. Think of it as a tax incentive to promote reinvestment of profits. It thus stimulates growth of your wealth, making it an excellent vehicle for holding your investment portfolio. It’s perfect if you have a long-term investment horizon and your investment strategy is to reinvest dividends, interests, and other income. Just one of the many reasons Estonia has been #1 in the OECD’s annual Tax Competitiveness Index for eight years running.
As a wealth management and investment holding entity, it generates passive income, and thus constitutes a passive company rather than active. Passive companies usually do not trigger a permanent establishment tax risk the way active companies do. This limits the tax risk revolving around effective place of management for active foreign companies. Having said that, we urge customers to always seek local legal and tax advice before setting up a company abroad.
2. Power of Compound Interest
The power of compound interest is your tailwind powered by the Estonian corporate tax system.
Albert Einstein once described compound interest as the “eighth wonder of the world,” saying, “he who understands it, earns it; he who doesn’t, pays for it.”
Legendary investor Warren Buffett once said that compound interest is an investor’s best friend and compared building wealth through interest to rolling a snowball down a hill. “Start early,” Buffett said. We couldn’t agree more. The Estonian corporate tax system clearly boosts the power of compound interest.
3. Participation exemption on foreign dividends*
Estonia sports full participation exemption on foreign dividends if your holding in a foreign entity is at least 10%. Participation exemption means no tax on foreign dividends, subject to certain conditions.
* What is the participation exemption?
Dividends paid by Estonian companies are generally subject to 20/80 corporate income tax at the level of the distributing company. A lower corporate income tax at the rate of 14% is available for those companies making regular profit distributions. This constitutes a deferred corporate tax that kicks in when profits are distributed. However, dividends distributed by Estonian companies are exempt from corporate income tax if the distributions are paid out of dividends received from Estonian, EU, European Economic Area (EEA), and Swiss tax resident companies in which the Estonian company has at least a 10% shareholding, and dividends received from all other foreign companies in which the Estonian company has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or if foreign income tax was withheld from dividends received. It is known as the participation exemption. This tax exemption is a huge benefit to private equity investors using Estonia as a holding company.
4. Foreign tax relief**
If your holding is less than 10%, a foreign tax relief kicks in, and nicely in your favour. You are allowed to credit foreign income tax against your Estonian income tax liability if certain conditions are met. The tax credit is generally limited to 20% of foreign taxable income and is computed separately for each foreign country.
** How does foreign tax relief work?
Foreign taxes are creditable against the corporate income tax under domestic law or an applicable tax treaty. To illustrate, let’s look at an example. On December 9th, Microsoft Corporation paid cash dividends of $0.62 per share. As Estonia has a tax treaty with the US, dividend withholding tax rate is reduced to 15%.
2021-12-09 Microsoft Corporation Cash Dividend USD 0.62 per Share (Ordinary Dividend) $310
2021-12-09 Microsoft Corporation Cash Dividend USD 0.62 per Share – US Tax -$46.5
An Estonian company shareholder must declare it and is entitled to $263.5 tax exempt dividend.
The Estonian company shareholder would be entitled to a $310 cash dividend from Microsoft Corporation. The tax amount withheld in the US is $46.5 (15%). The tax amount of $46.5 works as a tax credit against corporate tax charge payable in Estonia when the Estonian company distributes the same dividend to its shareholder.
Foreign tax relief calculation formula may vary slightly depending on jurisdiction from where dividend is paid, and the terms of a tax treaty. The online tax declaration calculates it automatically after relevant data is inserted.
5. A simple tax system and an easy reporting process
Add to this that Estonia has an incredibly simple tax system. Smart tax planning can boost the size of your assets dramatically, so it’s definitely worth doing.
6. Wide tax treaty network
Estonia has signed tax treaties with over 60 countries from around the world, including with Germany, Ukraine, UK and US. View the full list and the treaties.
But don’t let taxes drive your entire decision-making process.
7. Digital Company Register
On top of its many tax advantages, Estonia boasts a fully digital company register. Create your company, submit annual reports, and notify of changes to your business – 100% online, super-simple, and in English, Estonian or Russian.
8. The e-Residency program
Estonian e-Residency allows you to:
- Establish an EU-based company, 100% online
- Manage your Estonian company online from anywhere in the world
- Pay and receive payments using convenient online banking tools
- Submit accounts and financial statements online
- Access a wide range of Estonian public and private e-services
- Digitally sign documents
- Encrypt and send documents securely
- Automate or delegate business administration.
- Network with like-minded e-resident entrepreneurs
9. Low maintenance costs
If you’re interested in Estonian e-Residency, take the first step and get in touch with us today to book your free 15-minute consultation.
The costs of running and maintaining your company in Estonia are relatively low due to minimal bureaucracy, efficient online bookkeeping and reporting procedures, and low regulation.
That said, it’s strongly recommended to use the services of a professional accountant to make sure that your company’s book keeping and accounting comply with local rules. An accountant can also help you to prepare and submit an annual report, which is mandatory for all Estonian companies (even if they have not been active). Other company costs will depend on additional services that your company might need such as legal or tax consulting, business advice, sales and marketing, etc.
You can find indications of our pricing on the e-Residency Marketplace.
10. A well-developed corporate services industry
To top it all, Estonia has a highly developed corporate services providers’ industry and marketplace. So no matter your budget or needs, you’ll find experts to help you grow and scale your business
11. No audit requirements (in most circumstances)
You should always be aware of audit requirements in some countries. While in some holding company jurisdictions (Hong Kong, Malta) all companies must be audited, this is not the case with Estonia, which saves you time and money.
If you’re looking to establish a company in Estonia, InCorpora is ready and waiting to help.
Estonia is the best option for investors
To summarise, under the currently available options, the best option for investors is Estonia. This is especially the case for long-term investors focusing on reinvesting their income.
With an Estonia Co., you don’t have to pay taxes on dividends or capital gains when earnings stay inside the company. Even better, as long as certain conditions are met, dividend withdrawals from Estonian companies aren’t subject to tax, either. That potentially makes it possible to zero out your tax liability no matter how well your investments do.
In the end, it’s important to focus on making the most from your investments. Make good choices, and happy investing!
Let us help you get started
Setting up an Estonian entity couldn’t be more straightforward, thanks to our dedicated team. Our tailored package covers all aspects of company establishment in Estonia, including:
- Setting up an IBAN for borderless banking;
- Setting up a brokerage account;
- Applying for LEI Number;
- Giving you limited liability;
- Producing a tax residence certificate within 2 days;
- Introduction to private banking;
- Introduction to asset management firms;
- Accounting, tax and legal advice;
- Local support services.
Company registration takes as little as one week. The Legal Entity Identifier (LEI) number is required of legal entities participating in financial transactions and portfolio management. It takes a couple of days to get it.
If you’re interested in setting up an Estonian investment company, take the first step and get in touch with us today to book your free 15-minute consultation.
