Use of Estonia in U.S. International Tax Planning

• Author: Jeffrey L. Rubinger
• Law Firm: Bilzin Sumberg
• Publication Date: 24 Aug 2015

According to recent estimates, Estonia, which is situated halfway between Stockholm and St. Petersburg, currently has more than 350 start-up technology companies – one for every 3,700 citizens – and the government expects this number to reach 1,000 by the year 2020. This makes Estonia the number one start-up technology country in Europe and one of the top in the world. The most recognizable technology company with Estonian roots is Skype, which was acquired by Microsoft in 2011 for $8.5 billion.

There are a number of reasons why a country as small as Estonia is producing this many technology companies, including a stable economic environment (i.e., Estonia’s economic freedom is regarded as one of the highest in the world and the best in the Central and Eastern European (CEE) region); the population of Estonia has the highest average level of education in the CEE region; and the country is supported by a tech-savvy government (an example of this is Estonia’s “e-residency” program, which allows non-residents to establish local businesses and bank accounts, and operate them remotely after only a single visit to Estonia).

Another significant advantage offered to companies doing business in Estonia is its unique corporate income tax system. Estonia is the only country in the EU where corporate profits are not subject to current income tax. Instead a corporate income tax is imposed only upon the payment of a dividend to the company’s shareholders (and upon payments deemed equivalent to dividends, such as certain gifts and donations, fringe benefits to employees, etc.) This allows companies to defer paying corporate income tax indefinitely so long as the profits are retained or reinvested. Once a dividend payment is made, a flat corporate income tax will be imposed at the rate of 21/79, which is equal to 21 percent of gross profit (or an effective tax rate of approximately 26.6 percent).

It is important to note that, while the corporate income tax is triggered upon the payment of a dividend, the tax is imposed on the corporation itself, not the shareholder. Therefore, it cannot be reduced pursuant to the EU parent-subsidiary directive or an income tax treaty that Estonia is a party to (although the corporate income tax can be reduced by any income tax withheld on payments received by an Estonian entity). Profits can, however, be repatriated without triggering corporate income tax if the amounts are paid in the form of interest, royalties or other types of payments, so long as they are not actual or deemed dividends. Profits also may be loaned to third parties or within corporate groups without triggering corporate income tax, which allows for tax efficient opportunities for intra-group finance activities.

Other notable tax benefits available in Estonia include the lack of thin capitalization rules (i.e., no debt to equity requirements); no withholding tax on interest¹ or dividends to non-residents (or on royalties paid to EU residents or Switzerland); and a wide network of income tax treaties with countries around the world. As discussed below, these tax benefits provide for a number of interesting tax planning opportunities in both the outbound and inbound U.S. tax context.²

Use in Outbound U.S. Tax Planning

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