Estonian Company – Tax Implications of Profit Reinvestment

Question:

Hi, I’m considering establishing a company in Estonia to trade electronic gadgets, similar to dropshipping, where I’d purchase from suppliers and deliver directly to clients. Can I loan the profits to another company instead of distributing them? What are the tax implications?

Answer:

Companies in Estonia do not pay tax on undistributed profits. This means that any profit that is reinvested or remains within the company is not subject to corporate income tax. Only distributed profits (in the form of dividends, for example) are taxed.

It’s possible for an Estonian company to loan money to another company. However, there are some considerations. The loan should be given at market conditions. This means that if you’re loaning money to another company, especially if it’s related to yours (e.g., another company you own), the interest rate and terms should be similar to what would be available from an unrelated third party. This is to avoid tax evasion or profit shifting.

You should also ensure you have proper documentation for the loan, including loan agreements. This is important for tax and legal reasons. Remember that interest received by your Estonian company on the loan could be considered taxable income. However, as mentioned earlier, if this income remains undistributed in the company, it’s not immediately taxable. Furthermore, if the company receiving the loan is based in a different country and pays interest to your Estonian company, there may be withholding tax implications in that country. Treaties between Estonia and that particular country might reduce or eliminate the withholding tax. Importantly, the interest rate on a loan from another company should not be less than the interest rate on a loan from the Central Bank of Estonia, multiplied by 2, at the moment it is 6.34% * 2 = 12.68% and an agreement with a payment schedule should be compiled.

If you need further advice, you can reach out to one of our legal and tax professionals in Estonia. Do not forget to check out our country guide on doing business in Estonia. Finally, the government website of Estonia also offers a lot of useful information on this and similar topics.

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