Investing as a business in Estonia: How to

Since I’m been moving my P2P investments under my company I’ve had some people ask for a few details about creating a business in Estonia and the limits of what you’re able to do with one. So, a master post on some relevant details about starting a business in Estonia and things to keep in mind if you wish to use it for investing.

business

What do you need to start a business?

For Estonian citizens there are no requirements for starting a business other than being of age (though you can start one with the help of your parents while underage as well.)

For someone who isn’t Estonian,  but wants to start a business in Estonia, the easiest way of going about starting a business would be to firstly gain e-residency. E-residency allows you to register an Estonian company online and sign documents digitally. For more info about e-residency you can read on the official state page about it. (For taxation check with an expert, just in case!)

The process of starting a business itself is rather easy and takes less than 20 minutes, you can do the whole process online, and it generates all the necessary documents for you. You need to pay the <200 euro state fee for it, create a bank account for the business and the official registration takes just a few days.

The two main options for starting a business are creating a public limited company (AS) or a private limited company (). Nowadays pretty much anything you would want to do as a business in Estonia is possible with an OÜ (unless you plan to IPO one day). OÜ does have a capital requirement of 2500€, but you are allowed to start a business without it (which is what I did a couple of years ago); however, you cannot pay yourself dividends until the requirement has been met. Other details you might need to know about starting a business are explained rather well on the eesti.ee page.

Important things to keep in mind

Firstly, once you start a business you need to know bookkeeping. If you start a business that doesn’t pay out a salary and doesn’t need to pay VAT then you mostly only need to just report your finances once a year. If you plan to have other business activity (will explain later why), you might need to declare more documents on a monthly basis, so it’s good to look into it. I’ve used a bookkeeper from the start (because I’m lazy), but it’s useful to know how the paperwork works. I switched bookkeepers when I started moving P2P investments under my business since it’s a bit more complicated than some other processes but my current bookkeeper is great (and can do bookkeeping in English, if anyone needs a recommendation!)

Secondly, once you start a business then you cannot use it for only P2P investments. If your main income is from giving out loans, then you will become subject to the Credit Institutions Act, and another law, which will go live in March, the Creditors and Credit Intermediaries Act. Now, there is still a lot of confusion about the second act, and I actually wrote to the Financial Supervision Authority to make sure the new law doesn’t force me to register my business or get any kind of permit. The main key point being – your main income must come from something else, otherwise you will be forced to follow the Money Laundering and Terrorism Financing Prevention Act, which as you can imagine is impossible if you invest through P2P to private individuals.

What all those scary-named acts mean in the end, is that you need to have some other kind of main income for your company. This means a long term plan about your business – do you want to sell a product or a service? Would you want to buy stocks, or have rental apartments under the business? Sell counselling services? For me this wasn’t an issue since my company has multiple sources of income. If you don’t have that though, then you need to think through your plan.

Benefits of investing as a company

However, if you do have alternative income, then there are multiple benefits to having your investments, mainly P2P (but also real estate) under your company account.

Firstly, Estonia has 0% company income tax until distributions are made. This means that you can keep the money growing for years and postpone tax obligations until you pay yourself dividends. This means no matter how much interest you make via investments, you start paying tax on the money only once you make distributions, the only thing you need to do is report it like the other income that your business has.

Secondly, you are allowed to discount defaulted loans from your portfolio. Now, since you aren’t taxed on the interest,  this is kind of a moot point, but overall, once a loan becomes unlikely to ever pay, you are allowed to count it as a loss (and deal with the unrealistic interest claims in your bookkeeping). Some P2P portals have buybacks anyways, then it’s irrelevant, but for example, for Bondora doing it once every couple of years should be enough.

Thirdly, since you must have some type of main income you get to invest pre-tax money, this means overall bigger growth in the long run, Whether you’re selling something or providing a service for clients, the difference in numbers when investing residual income from your main income versus investing as a retail investor is immense. (The difference depends on the country, in Estonian otherwise it’s a flat 20% tax on P2P income every year, without being able to discount any losses; I know in some other European countries the tax code is a bit more forgiving.)

*If anything seems confusing or you see any errors in details, please let me know!

 

41 thoughts on “Investing as a business in Estonia: How to

  1. Useful reading, thank you.
    A question about the distributions – is it similar to priv.pers. stock account where you’ll have to consider paying taxes only if you exceed the sum you’ve paid up yourself during the time?

    1. No, it doesn’t work like that. The only tax-free money you can take out of the business is if you are returning an owner’s loan (for example if at start you lent your business money to get started).
      Otherwise every cent you take out of the business follows the same tax rate (1000€ gross dividends means 800 net for you). Keep in mind, to pay out dividends in addition to having fulfilled the 2500€ capital requirement, you actually have to have profit (as stated in your financial report), paying out dividends can’t make the company’s financial situation worse :)

      1. Correction:
        “Ettevõtte tulumaksu määr 2016. aastal on 20/80.”
        i.e. 25% for business instead of 20% as for private person.
        Therefore, €1,000 gross div means for business €750 net.

        1. That isn’t how the math works. 1000 gross is 800 net. (Meaning 20:80, 200 tax: 800 paid dividends.)
          If you look at it from the business’s side, then its 20% tax off total amount, if you look at it from the dividend receiver’s side it’s 25% off the paid out dividends. No matter from which POV you look at it though, the numbers are still that for 800 net dividends total expense is 1000. (Feel free to test: http://www.kalkulaator.ee/?lang=1&page=47)

  2. Hi Kristi,

    “The main key point being – your main income must come from something else, otherwise you will be forced to follow the Money Laundering and Terrorism Financing Prevention Act, which as you can imagine is impossible if you invest through P2P to private individuals.”

    In terms of the Money Laundering and Terrorism Financing Prevention Act:
    Do you know whether there is any difference, legally, when mainly giving out loans to COMPANIES (as is the case with Investly and Estateguru) as opposed to private individuals?

    1. Yes, if you are investing into Estateguru, CrowdEstate, Investly (giving loans to companies) then the identification thing becomes a non-issue, since a person has been identified already to start the business, and has to be verified before doing anything in the business’s name. This is why most people have moved those investments under their business accounts long ago.

    1. Yes, FI actually responded rather quickly (though with a copy-paste response). Main point being – as long as P2P investments aren’t your main income, keep going. (Though you must check whether the P2P portal you use has the license necessary to keep giving out loans.)

  3. Hey.
    very nice reading.

    So if I start business and I have 10 000 on my private account, then only reasonable way to get this money in your business is to lent it to my own business ?
    so what are other options ? Can I just give this money to my business ? And if I do so and want to get this amount out I have to pay taxes, because my business is basically giving dividends ?

    1. Yes, lending it to your business is the most reasonable option. As the owner the loan is 0% and you don’t have to have a payback deadline. You can add the money in as capital as well, and then under certain conditions pay it out as well (without tax), but that seems like it would be much more complicated to handle later on. The only issue with lending money to your business is of course the issue that it shows your business being in the red unless you’re making other income. (The tax office has some info on withdrawing capital, but it seems like a hassle: http://www.emta.ee/index.php?id=30193#5 )

      1. Thank you.
        But what about apartments, i can’t lend my apartment to my buisness and start renting it out or can I ?

        1. If you already own it you can use it as payment (to fill the capital requirement), or you can have a free to use contract (tasuta kasutamise leping) between yourself and your business – in exchange for the business taking care of the real estate it takes the rental income. A lot of people start off with their first apartment like that. (You’ll have to look into that, I personally haven’t used that option).

  4. Kristi,

    I don’t think this is correct. Under the new origination model, Bondora originates the loan and separately assigns the loan receivable to the investor. Bondora disburses funds to the borrower and is thereby required to perform AML checks versus such borrower. You as an investor are paying funds to Bondora as a secondary purchase of a loan therefore as investor you must perform AML checks against Bondora who is your financial counterparty, not the customer. Note under the new contracts Bondora provides legal representations to the investor that they are not envolved in terrorism and money laundering. Please also revisit the Bondora newsletter where they said the changes to the origination process were being introduced to facilitate participation from institutional investors (who always invest via companies). Other P2P players are following this origination process.

    If you want to assess this subject independently, please google AML requirements on secondary assignments of syndicated loans.
    Cheers,
    P

    1. Hey, which part are you disagreeing with specifically? Yes, with Bondora, the AML requirements are probably not there due to they legal changes to how a loan piece is now essentially a right to the claim (but the issue clearly remains for Omaraha and Moneyzen), but the main point remains that if your main business income is P2P lending then you would qualify as a financial institution and unable to fill the requirements of the law (KAVS in this case is secondary to the Credit Institutions Act). This isn’t an issue of the sites mishandling the AML requirements, but an issue of not very clearly written law. Multiple people have written about this to FI, and received similar answers that unless you want to follow all the regulations P2P cannot be your main income.

      1. Hi Kristi,

        Sorry for the delay in getting back to you.

        It may be argued that the credit institution act regulations should not apply even if the company were to make most of its revenue off Bondora.

        By way of background, if you have a company that lends money to retail borrowers on behalf of third parties, it is fair to expect this to be a regulated lending activity.

        Two matters arise here:
        – the semantics around the term ”lending” are important – Say a third party originates and grants a loan. If your company acquires from the third party the rights over the receivables arising under such loan, this is not lending. The fact that the seller continues to make loan collections, no borrower notification takes place on the assignment and you are not informed of the borrower’s physical identity further underpins the argument that this should be considered a financial transaction rather than lending
        – even if this is considered a financial transaction, that is not sufficient. If the company is entering into a financial transaction on a fiduciary basis on behalf of third parties, that would be a regulated activity. If the company is acquiring the loan on its own behalf, then this should not apply.

        Getting into the legalese, please check clause 5 and 6 of the credit institutions act:

        § 5.  Financial institution
          For the purposes of this Act, a financial institution is a company other than a credit institution, the principal and permanent activity of which is to acquire holdings or conclude one or more of the transactions specified in clauses 6 (1) 2)-12) of this Act.
        [RT I 2001, 102, 672 – entry into force 01.01.2002]

        (credit institution is an entity with a deposit taking license, therefore this places us into the financial institution camp)

        § 6.  Financial services
         (1) For the purposes of this Act, financial services are services to third parties rendered by a person in the course of professional or economic activities which consist of the conclusion of the following transactions and acts:
        [RT I 2004, 86, 582 – entry into force 01.01.2005]
         2) borrowing and lending operations, including consumer credit, mortgage credit, factoring and other transactions for financing business transactions;
         
        So to cut a long story short, as long as the origination process follows the new format implemented by bondora and the company is investing on its own name, there are good grounds to say the investing company would be exempt from the regulations under the credit institutions act as well as AML requirements vis-a-vis the end borrower.

        Cheers,

        P

  5. Hi. Although you covered p2p lending as a business in Estonia, I have a question about investing as a private person after 1. of March 2016. Have you got any idea how KAVS will affect private investors(citizens/residents of Estonia) who are investing through bondora, crowdestate etc. And does it affect investing in non-Estonian platforms like TWINO and Mintos
    Best Regards

    1. Realistically there is no way they would ever be able to manage private persons’ investments. KAVS as such allows you to invest into P2P loans, as long as it’s not your main activity and there is no way you can apply that rule to private persons the way you can to companies :)

  6. Hi Kristi,

    I`m a little bit confused here.

    You mention that my main income must come from other activities than giving out loans, but giving out money is not my income?

    Anyways, giving out loans and getting them back is not turnover, revenue or cost in my sense. The interest is a revenue and writing off a loan is a cost.

    So in my sense, the danger that giving out loans would be my main activity would materialize, when I receive more interest back than I offer goods/services to others (how its valuated, monthly, yearly?).

    Thanks

    1. I’m confused at what you’re confused at. The comparison at the moment seems to run sales revenue vs interest. Meaning if you sell 1000€ worth of services vs earn 999€ of interest you’re safe. The valuation should work on a yearly basis. Meaning, if you have other income you’re fine, but people who want to start a business just to invest into P2P cannot do it.

      1. Thanks, that explanation makes is much more clear. Earning interest vs sales turnover. If the first is larger than latter, then you have a problem.

        It`s still unclear what happens after 1st of March, if even someone earns a 10€ worth of interest from some loans and doesn`t have anybody to invoice, will he/she needs to get a banking license? :)

  7. Whole story about how to start a business bot not as sayd on title, how to invest. How I can invest my money to some local buiness? Is there some portal for that? Stocks?

    1. Hey, Hannes!
      The goal of this blog is not to give investment advice (not legal to do so either 😉 ).
      Investing into local businesses – Fundwise is an Estonian crowdfunding site that’s equity based. Otherwise yes, stocks are your best bet. Angel investing if you’re very into it. Otherwise just networking to find interesting deals.

  8. Hi, Kristy!

    I have a question about the “you cannot use it for only P2P investments” part. What if I start a consulting company, so that selling my services would be the main income. Then I start investing company money. Then I stop selling services (say, after 2 years), but continue to reinvest the income from interest. Will this put me into the danger zone?

  9. Hi!

    I have a question about the capital requirement. I plan on giving my rental property income under my company with the ‘free to use’ contract. Can I start investing that income into P2P loans right away or do I need to first collect the 2500 eur capital requirement and keep it on my account and only start investing in p2p after i have the 2500 eur in my account.

    Also, let’s say that if I can invest it right away, can I start paying dividend to myself if I have the 2500 invested in stocks, p2p etc or does that capital need to always sit on my company bank account?

    thanks a lot!!

    1. Hey!
      You can start investing straight away, the 2500€ requirement is necessary only if you want to start paying dividends.
      Technically that money doesn’t have to sit on your bank account all the time, it can be used to purchase assets as well (investments for example, this 2,5K can also be paid into the business as an asset – for example as an apartment), as far as I know it’s all fine unless your capital value drops into negatives.

      1. Also don`t forget, that you can only pay dividends if you have submitted your first annual report which features profit.

        Capital value can drop into negatives, but if you end your year with that kind of situation, you must include confirmation in the annual report, that currently the capital value is within the legal limits again.

      2. The €2500 requirement – can it be the result of the first few businesses performed, and thus pay 0% of the income to meet the requirement? Or does this income have to be paid out as dividend to the owner in order for the owner to put that money back into the OÜ as stock capital, thus paying taxes before it becomes stock capital?

        1. The thing being – you cannot pay out dividends before you have fulfilled the capital requirement. Theoretically this should be doable (paying the tax on it as if it were dividends), however I have yet to meet anyone who has done this.

  10. Can someone outside the EU create an Estonian company to lend money using Bondora?

    I understand that tax is only applicable on dividends but what if I pay myself a salary instead?

    1. Look into e-residency for that.
      If you pay yourself a salary you will be taxed at a much much higher rate than if you paid dividends.

  11. Thanks for the interesting blog. I see that there are several questions about dividend payments, and this subject also interests me. I own an Estonian company but I am a non-resident. Are there any exceptions to the 20/80 CIT rule on dividend payouts? Or is this the cheapest possible way to extract funds from your company?

    1. Hey, John!
      Sadly you don’t have other options. The only money you can extract from your business without any tax is paying back loans to the owner (if you have financed the business with a loan from yourself). Otherwise it’s dividend payments with the 20/80 rule.

  12. Hello Kristi. Do you know if making an Estonian company I will be covered by estonian health care system or how does it work? what about pensions?

    1. Hello!

      You will not be eligible for healthcare unless you receive a (minimum) salary, which means paying social tax + retirement. Being a salaried worker means access to healthcare, and that also starts building up retirement benefits. I suggest looking into this more thoroughly though, since residency may influence this aspect.

      1. Thank you Kristi. I will consider other places also like Bulgaria or Ireland. Estonia seemed pretty good for the 0% corporate tax but once you take out dividents or a salary the 20% tax leaves me in the same position as before:) Again, thanks.

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