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Running a Estonian Company as remote (Hiring)

Running a Estonian Company as remote (Salaries)

How can I receive funds from my company?

Last updated: March 29, 2018

If you (as an individual) are a tax resident outside Estonia and you own and run a company which is a tax resident in Estonia, there are 3 options for receiving funds from your company:

  • receive dividends

  • receive management board member salary

  • receive employee salary

According to the existing law in Estonia, there’s no obligation to pay any management board member salary, employee salary or take dividends. It’s up to you how you combine them, taking into account your actual contribution to the business activities:

  • keep all the money in the company and reinvest to boost your business or

  • receive dividends + board member salary or

  • receive dividends + board member salary + employee salary

  • receive board member salary + employee salary

Can I pay regular salary while doing business?

Yes, you can.

If you’re the single owner-manager-employee of the company, you’re allowed to carry multiple roles simultaneously. As your business is a professional service and you don’t hire subcontractors to any large extent, it’s reasonable to claim that you actually deliver all the output to the customers and can be considered as a professional employee.

Apart from taking out dividends, there is also a complementary option to pay a board member salary and an employee salary. While the board member salary is taxed in Estonia independent to your actual location, in contrast, the employee salary is not taxed in Estonia if you perform professional duties outside Estonia (e.g in your country of residence).

It’s your own responsibility to pay the relevant personal taxes in your actual location in your country of residence. So, you can pay out the net sum from your Estonian business and cover the relevant personal taxes in your country of residence.

When, and how often can I pay myself a salary?

The two types of salaries (board member or employee) can be paid any time, regularly per month or as once-off performance bonuses. It’s up to you how you decide to do it.

How can I pay myself a salary as a digital nomad?

Board member salary

If you operate as a digital nomad without a permanent location, and you pay yourself a board member salary from your Estonian company, both the relevant personal income tax (20%) and social tax (33%) are declared and paid in Estonia, according to Estonian rules and regulations.

For example, if you receive €100 net, almost €66 on top of it are paid in taxes in Estonia. You can use a standard calculator (untick tax deductions) to measure the total tax amount your company has to cover, depending on the actual salary payments.

We register you in the official Employment Registry in Estonia. It’s optional to have a board member agreement (between you and your company) signed digitally, and we can send the relevant draft if you’d like. Once you make actual payments from your company’s bank account to your personal one, we’ll see this on your bank statement, declare the relevant taxes (income + social tax) in Estonia, and let you know how much and when to pay.

Employee salary

By default, all salary payments you receive from your own company are considered as a board member salary. If you have sufficient grounds and decide to register some of the salary as an employee salary, you can. But please keep in mind that if you decide to pay yourself an employee salary, you must also pay a board member salary. This cannot be €0 or any very small amount compared to the sums paid as an employee salary.

It’s good to know, the employee salary and board member salary have different conditions. While the board member salary for you is taxed with income + social tax in Estonia, in contrast, the employee salary is not taxed in Estonia if you perform your employee duties outside Estonia (e.g in your home country). This means it’s your responsibility to pay all the relevant personal taxes (e.g. income, social) in your actual location (home country). Unfortunately LeapIN can’t assist you with this yet.

There’s no official registration needed for the employee salary in Estonia. However, you could collect and store some time-sheets or records as sufficient evidence you actually delivered value to the company as a professional as well.

You then have to decide how much to pay as board member salary and how much as employee salary.

It’s mostly down to common sense – how much time you actually spend on administrative tasks vs services. It’s logical to keep the board member salary fixed at a certain rate (assuming the volume of admin tasks is stable) and have the employee salary fluctuating if needed.

In our opinion the viable option would be to pay 30% of the salary as the board member and 70% as an employee. It’s our standard suggestion to our clients.

But taking into account disparity between our customers, we’d advise you to pay €250 net per month minimum (as a board member salary) if the 30/70 ratio isn’t acceptable.

Also, please make separate transfers mentioning ‘Board member fee’ and ‘Employee salary’.

In this case we can see all the necessary information on your bank statement, make the relevant calculations in the background, and notify you about the taxes to be paid (e.g. If you pay the board member fee in June, the relevant taxes will be declared and taxes paid by July 10th).

How can I pay myself a board member salary and is it mandatory?

You’re registered in Estonia as the single management board member of your company. This means you’re expected to fulfil the official duties of a board member (manage the company) and be paid accordingly. National authorities have a reasonable assumption that even in the case of a micro-business, the effort to manage the company is greater than zero, and this must be reflected in the salary the company pays to you as a board member.

On one hand, there’s no legal requirement to pay any board member a salary. It’s reasonable to argue that when a business is still in its infancy, the company can’t afford to pay out anything. So you can start operating your company without receiving any board member salary. On the other hand, if the company does then start paying you a salary (the single board member of the company) the amount should reflect the actual responsibilities, efforts, and contribution to the business.

Taking the guidelines above into account, you (as the shareholder) are free to determine how much, when, and how often the company pays you a board member salary (as the management board member). You can decide to increase or decrease the amount anytime you like. Since company management duties tend to be stable over time, the relevant payments could be fixed every month, but an alternative approach could also be justified. It’s only optional to sign a management board member service agreement to determine the board member fee.

Board member salary payments are taxed with income tax in Estonia, independent of whether the actual duties were performed in Estonia or abroad. Double taxation can be avoided if there are relevant agreements between Estonia and your country of residence (see the list of countries here). However, the relevant social tax payments depend where you operate.

Why do I have to pay a board member salary?

There’s no legal requirement to pay a board member salary. This is because, for instance, when a business is in its infancy it just can’t afford to pay out anything.

On the other hand, if one day the company does start paying out a salary to the single member of the company (you), it signals that the company is compensating for efforts/contribution to the business.

And this means the time and effort spent on managing the company (as a contribution to the business) should be paid for in the form of a board member salary. This is why it’s not fair to pay out an employee salary alone, skipping the board member salary part i.e. paying for one contribution, but not the other, even if both actually occurred. Estonian tax authorities would also question this approach.

We suggest keeping the salaries at a 30/70 ratio at least (30% as board member salary, 70% as the employee salary).

According to the law, the ratio has to reflect the actual contribution as a board member vs as an employee (professional). There’s no 30/70 mentioned in the law because the ratio differs in different companies.

It’s reasonable to argue that the company management functions are more stable per month i.e. even if there are no revenues, the company still has to be taken care of. In contrast, the actual contribution as an employee (professional) is likely to fluctuate, much in correlation with revenues as well. In the setup phase of the business the management duties tend to take the majority of the time, but once the business is operational and there are revenues, it’s reasonable to expect the functions as an employee (professional) to exceed the management aspect, in many cases even significantly.

So, the board member salary could be a fixed amount and stable, while the employee salary can be different each month (but doesn’t have to be). And that means the ratio is likely to be different each month.

In order to have an anchor point though, we recommend the 30/70 rule and set €250 as the reasonable minimum to pay as the board member salary, taking into account the nature of our customers. If we assume the proportion has to look reasonable and justified for tax authorities as well, and if you decide to pay €100 as the total salary, paying €30 as the board member salary does seem somewhat odd, and questionable to tax authorities. But if you pay €10 000 as the total salary, €3 000 would seem too much for the management activities. There has to be a reasonable balance, which would reflect the actual contribution as the board member vs employee.

We can only share our subjective recommendations, but as the official representative of your company, you’ll decide your salaries and take full responsibility accordingly.

Our experience shows that if your company starts earning profit and you decide to distribute the profit as dividends later on, and you haven’t paid any board member salary before, preferring to pay an employee salary only, Estonian tax authorities are likely to have a closer look at this and question the practice.

How can I pay myself salary when operating in Estonia?

If you operate in Estonia, and if you pay yourself a board member salary from your Estonian company, the relevant personal income tax (20%), local pension insurance (2%), and social tax (33%) are declared and paid in Estonia, according to Estonian rules and regulations.

For example, if you receive €100 net, almost €69 on top of it are paid in taxes in Estonia. You can use a standard calculator (untick tax deductions, except “Funded pension”) to measure the total tax amount your company has to cover, depending on the actual salary payments.

There’s no required minimum or maximum for the board member salary, and you can change the sums you pay whenever you like in future – it’s your agreement with your company (you’re sitting in both chairs).

We register you in the official Employment Registry in Estonia. It’s optional to have a board member agreement (between you and your company) signed digitally, and we can send the relevant draft if you’d like. Once you make actual payments from your company’s bank account to your personal one, we’ll see this on your bank statement, declare the relevant taxes (income + social tax) in Estonia, and let you know how much and when to pay.

Instructions on how to pay yourself salary (in the EU, AUS, CAN, SUI, UKR)

Board member salary

If you operate in one country within the European Economic Area (outside Estonia), or in Australia, Canada, Switzerland or Ukraine, and if you pay yourself a board member salary from your Estonian company –

  • The relevant personal income tax (20% from the gross sum) is paid in Estonia, according to Estonian rules and regulations.

  • In contrast, the relevant social tax is not paid in Estonia. Instead, it’s declared and paid in the country where you operate, following the local rules and regulations, and granting the social benefits there as well.

For example, if you receive €100 net, €25 on top of it are paid in taxes in Estonia, but the sum of the applicable social tax depends on where exactly you operate.

There’s no required minimum or maximum on the board member salary, and you can change the sums you pay whenever you like in future – it’s your agreement with your company (you’re sitting in both chairs).

We register you in the official Employment Registry in Estonia. It’s optional to have a board member agreement (between you and your company) signed digitally, and we can send the relevant draft if you’d like. Once you make actual payments from your company’s bank account to your personal one, we’ll see this on your bank statement, declare the relevant taxes (income tax) in Estonia, and let you know how much and when to pay.

While LeapIN handles the tax reporting for personal income tax in Estonia, we can’t currently help you with the social tax declarations or payments in the mentioned countries. Please contact the local authorities in the country to learn about the social tax rules, and the procedures for declaring and making the payments properly. In parallel, we’re in the process of collecting the relevant knowledge ourselves, but it takes time, and due to the complex nature of the task we can’t promise a specific deadline for it yet.

Employee salary

By default, all salary payments you receive from your own company are considered as a board member salary. If you have sufficient grounds and decide to register some of the salary as an employee salary, you can. But please keep in mind that if you decide to pay yourself an employee salary, you must also pay a board member salary. This can’t be €0 or any very small amount compared to the sums paid as an employee salary.

It’s good to know the employee salary and board member salary have different conditions. While the board member salary for you is taxed with income tax in Estonia regardless of your actual location, in contrast, the employee salary is not taxed in Estonia if you perform your employee duties outside Estonia (e.g in your home country). This means it’s your responsibility to pay all the relevant personal taxes (income, social, and others) in your actual location (home country). Unfortunately LeapIN can’t yet assist here.

There’s no official registration needed for the employee salary in Estonia. However, you could collect and store some time-sheets or records as sufficient evidence you actually delivered value to the company as a professional as well.

You then have to decide how much to pay as board member salary and how much as employee salary.

It’s mostly down to common sense – how much time you actually spend on administrative tasks vs services. It’s logical to keep the board member salary fixed at a certain rate (assuming the volume of admin tasks is stable) and have the employee salary fluctuating if needed.

In our opinion the viable option would be to pay 30% of the salary as the board member and 70% as an employee. It’s our standard suggestion to our clients.

But taking into account disparity between our customers, we’d advise you to pay €250 net per month minimum (as a board member salary) if the 30/70 ratio isn’t acceptable.

Also, please make separate transfers mentioning ‘Board member fee’ and ‘Employee salary’.

In this case we can see all the necessary information on your bank statement, make the relevant calculations in the background, and notify you about the taxes to be paid (e.g. If you pay your board member fee in June, the relevant taxes will be declared and paid by July 10th).

Instructions on how to pay yourself salary (outside the EU, AUS, CAN, SUI, UKR)?

Board member salary

If you operate outside the European Economic Area, excluding Australia, Canada, Switzerland and Ukraine, and if you pay yourself a board member salary from your Estonian company, both the relevant personal income tax (20%) and social tax (33%) are declared and paid in Estonia, according to Estonian rules and regulations.

For example, if you receive €100 net, almost €66 on top of it are paid in taxes in Estonia. You can use a standard calculator (untick tax deductions) to measure the total tax amount your company has to cover, depending on the actual salary payments.

We register you in the official Employment Registry in Estonia. It’s optional to have a board member agreement (between you and your company) signed digitally, and we can send the relevant draft if you’d like. Once you make actual payments from your company’s bank account to your personal one, we’ll see this on your bank statement, declare the relevant taxes (income + social tax) in Estonia, and let you know how much and when to pay.

Employee salary

By default, all salary payments you receive from your own company are considered as board member salary. If you have sufficient grounds and decide to register some of the salary as an employee salary, you can. But please keep in mind that if you decide to pay yourself an employee salary, you must also pay a board member salary. This cannot be €0 or a very small amount compared to the sums paid as an employee salary.

It’s good to know the employee salary and board member salary have different conditions. While the board member salary for you is taxed with income + social tax in Estonia, in contrast, the employee salary is not taxed in Estonia if you perform your employee duties outside Estonia (e.g in your home country). This means it’s your responsibility to pay all the relevant personal taxes (e.g. income, social) in your actual location (home country). Unfortunately LeapIN can’t assist with this yet.

There’s no official registration needed for the employee salary in Estonia. However, you could collect and store some time-sheets or records as sufficient evidence you actually delivered value to the company as a professional as well.

You then have to decide how much to pay as board member salary and how much as employee salary.

It’s mostly down to common sense – how much time you actually spend on administrative tasks vs services. It’s logical to keep the board member salary fixed at a certain rate (assuming the volume of admin tasks is stable) and have the employee salary fluctuating if needed.

In our opinion the viable option would be to pay 30% of the salary as the board member and 70% as an employee. It’s our standard suggestion to our clients.

But taking into account disparity between our customers, we’d advise you to pay €250 net per month minimum (as a board member salary) if the 30/70 ratio isn’t acceptable.

Also, please make separate transfers mentioning ‘Board member fee’ and ‘Employee salary’.

In this case we can see all the necessary information on your bank statement, make the relevant calculations in the background, and notify you about the taxes to be paid (e.g. If you pay board member fee in June, the relevant taxes will be declared and paid by July 10th).

Which bank account should I pay my salary into?

The net salary amount should be transferred to your personal bank account. There is no requirement about the location of the bank, as long as your bank can accept the payment.

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