August 22, 2018
Estonia has developed the e-resident digi-ID which will give foreigners the ability to apply for e-credentials in Estonia.
We would like to mention that e-residency is not the same as residency for taxation purposes.
E-residency does not have any direct influence on the tax residency. Being an Estonian e-resident does not mean that you become the Estonian tax resident.
An individual is a tax resident in Estonia
if his or her place of residence is in Estonia or
he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months.
It is enough of only one of the abovementioned conditions to be a tax resident in Estonia (§ 6 (1) of the Estonian Income Tax Act).
A legal person is a tax resident if it is established pursuant to Estonian law (§ 6 (2) of the Estonian Income Tax Act).
If a person is regarded to be an Estonian tax resident, it should also be taken into account whether the same person is a tax resident of any other country under the law of the foreign country.
In such case the tax residency in Estonia will depend upon the tax treaty between Estonia and the foreign country.
If these conditions of tax residency are not met, an individual or a legal person is not regarded to be an Estonian tax resident, even if the natural person has e-residency in Estonia.
Basically, e-residency enables to use different e-services Estonia has, including the submission of a tax return via the internet if there is such an obligation, but it does not change the tax residency for tax purposes.
If e-resident has established the Estonian company, the latter is regarded to be the Estonian resident. The profit of the Estonian resident company derived from all countries is taxable in Estonia, but in Estonia the profit is taxable at the moment of payment out, for example as dividends. Still, double taxation is avoided, which means if the actual activity of the Estonian resident company is only in foreign countries, the profit paid out as dividends in Estonia from profit taxable abroad, may be exempted in Estonia.
If dividends are paid to the e-resident owner of the Estonian resident company, there will be no income tax withheld on dividend income of the recipient. Only the Estonian company pays corporate income tax at the moment of dividend payment. An e-resident natural person has to pay income tax on dividends received from the Estonian company in their resident country and usually cannot take into account the corporate income tax paid in Estonia to avoid double taxation.
If an e-resident natural person receives employment income from an Estonian resident company, from work done while staying in Estonia, the income will be taxable by employment taxes in Estonia. If and when the work is done outside Estonia, employment income of an e-resident as a non-resident will not be taxable in Estonia. In case of fees to a member of the management or controlling body, income is taxable to the recipient, no matter if the work is done in Estonia or outside.
The resident country of an e-resident will also tax the same income, but the Estonian income tax shall usually be taken into account.
Indian Citizen and E-resident of Estonia has established the Estonian company, which has received profit of
1000 for year 2017 and
500 for 2018.
There will be no corporate income tax in 2017 and 2018, since the profit is not taken out.
In 2020, dividends in the amount of 1200 are paid out to the e-resident owner.
Corporate income tax of 300, calculated as 1200 × 20 ÷ 80 has to be paid by the company in the month following the dividend payment in 2017.
E-resident receives dividends in the amount of 1200, no income tax will be withheld.
From Indian tax perspective - Place of Effective management , GAAR and other provisions needs to be considered before taking decision of creating virtual presences which might be eading to multiple tax obligations if not planned carefully.
If e-resident receives income of 100 every month for performing activity of the member of the board of the Estonian company,
income tax at a rate of 20% will be withheld and
social tax of 33%
paid by the Estonian resident company in Estonia.
The cost of the company is 133, the e-resident receives 80.
If profit of the Estonian resident company is derived in a foreign country through a permanent establishment there, dividends paid out in Estonia may be exempted in full from corporate income tax in Estonia.
If an e-resident manages the Estonian company from abroad, it is quite obvious the foreign income tax has to be paid from profit derived outside Estonia.
Avoidance of double taxation
Latvia as a country of the place of management of the Estonian resident company of an e-resident (Latvian resident), applies the income taxation rules of Latvia to the profit of the permanent establishment of the Estonian company in Latvia.
If the profit of the permanent establishment of the Estonian company in Latvia is 100 and corporate income tax paid by the Estonian company in Latvia is 15% and the Estonian company pays dividends of 85, there will be no additional income tax in Estonia assessed to the dividends paid from the Estonian company to the e-resident owner.
The profit of the Latvian permanent establishment must still be declared on form TSD Annex 7 when received and dividends declared on form INF 1, when paid out without income tax.
Source : Republic of Estonia Tax and Custom Board's publications
CA. Harsh Patel
##This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice
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