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.
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 (OÜ). 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!