Many entrepreneurs believe that registering an Estonian company is enough to be treated as an Estonian company for taxation purposes.
In reality, this is not the case.
If you live in Germany, France, Spain or another country, your home country's tax office may ask you one very simple question:
Where is this company actually run and is it actually operating?
If this question cannot be answered convincingly, the tax authorities of the home country may treat the company as a local company and tax it according to the rules of its own country.
The good news is that this situation can be prevented.
This does not require creating a sham operation, but rather documenting the actual operations and management of the company.
Many entrepreneurs believe that registering an Estonian company is enough to be treated as an Estonian company for taxation purposes.
In reality, this is not the case.
If you live in Germany, France, Spain or another country, your home country's tax office may ask you one very simple question:
Where is this company actually run and is it actually operating?
If this question cannot be answered convincingly, the tax authorities of the home country may treat the company as a local company and tax it according to the rules of its own country.
The good news is that this situation can be prevented.
This does not require creating a sham operation, but rather documenting the actual operations and management of the company.
Three questions you need to be able to answer
Before collecting documents, ask yourself three questions.
✔ Does the company have actual operations?
✔ Are the company's management decisions documented?
✔ Are there any documents about the company that confirm this?
yes to all three questions, you're on the right track.
These three questions form the basis, or substance, of a company's actual existence.
The three pillars on which the actual existence of a company rests
1. The company must actually exist
A register entry alone does not prove the actual existence of a company.
To do this, the company should have, for example:
- valid registered address;
- contact person (if necessary);
- a functioning bank or payment account;
- accounting organization;
- the company's own email address, domain, and other official communication channels.
None of these documents is of decisive importance in isolation.
Together, they provide a believable picture that the company is actually operating.
2. Management decisions must be verifiable
This is often the most important part.
When the tax authorities of the home country want to assess where a company is actually managed, they primarily look at where and how important management decisions are made.
For this, it is worth maintaining:
- board decisions;
- minutes of major decisions;
- decision diary;
- calendar entries;
- travel documents;
- other evidence confirming the time and place of decision-making.
The number of documents is not important.
It is important that they reflect actual events.
3. The company must actually do business
The third pillar proves that the company does not exist only in the register.
This is shown, for example:
- customer contracts;
- supplier and partner contracts;
- invoices and payments;
- projects;
- work results;
- other standard business documentation.
In the case of an operating company, these documents arise in the natural course of business.
It's important to simply maintain them.
How to start?
In the first year of operation, it is worth building up all the documentation right from the beginning.
First month
- registered address;
- contact person;
- accounting organization;
- the company's official email and domain.
The next months
- a functioning payment account;
- documenting board decisions;
- keeping a decision diary;
- documenting trips and meetings.
At the end of the year
Create a brief summary of the company's operations, management, and major decisions and keep it with the rest of your documents.
Later, it can become one of the most important documents in the entire company file.
What do we not recommend at Business Hub?
We never recommend creating documents after the fact just to give an impression of the company's activities.
Such documents are often easily recognizable and can raise more questions than answers.
Our principle is simple:
Documents are not created to hide reality. Documents prove reality.
If the actual operations of a company need to be changed, the company's operations need to be changed, not the documents.
What if the business is run from your home?
This doesn't automatically mean there's a problem either.
It is important to assess the situation honestly.
In some cases it may be reasonable to:
- to strengthen the company's actual operations in Estonia;
- take into account the tax rules of the home country;
- or assess whether an Estonian company is a suitable solution for you.
The worst solution is to try to hide the real situation with documents.
Can you handle it yourself?
Probably yes, if:
- the company's operations are simple;
- you are ready to document your activities on an ongoing basis;
- you want to prevent possible issues in the future.
It is worth seeking the help of an expert if:
- the company operates in several countries;
- you are the sole owner and the only employee;
- you are not sure how the tax authorities in your home country may value the company;
- You want to systematically build your company's documentation.
Need help?
If you want to assess whether the activities and management of your Estonian company are sufficiently documented, we will help you review it together.
During a free 15-minute consultation, we will determine which parts of the company's substance are already well organized and which should be paid more attention to.