Disclaimer: This material is for general information only and does not constitute tax or employment law advice. Tax consequences depend on the type of contract, the employee’s tax residency and where the work is performed. We review each specific situation individually.
Estonia is the home of Skype, Wise and Bolt, but for a founder, it’s not the history that matters, but the mechanics. An Estonian OÜ does not tax profits that you reinvest in growth. It allows you to grant options to employees tax-free, provided a three-year holding period is observed. And it’s all managed online — from registration to signing the agreement with an investor.
But a start-up doesn’t fall at the registration stage; it fails later: because of share options granted without taking tax rules into account; because of capitalised development costs that unexpectedly block dividends; or because of accounting practices that don’t stand up to the first fund’s due diligence. It is precisely these factors that determine how much your next deal will be worth.
We set up the company for the investment track from day one: an equity structure that a fund will understand, an option plan free of tax pitfalls, and accounts that you won’t be ashamed to disclose in the data room. And we’ll be honest with you about where an Estonian structure isn’t necessary — for example, if the core team and revenue are in another country, but the investor requires a Delaware structure.
| Topic | Practical explanation |
|---|---|
| Form | OÜ – a private company, 100% foreign-owned, with a share capital of €0.01 or more |
| Classes of shares | An OÜ may issue different types of shares — with varying voting rights and entitlement to profits |
| Income tax | 0% on reinvested profits; 22/78 on distribution |
| Employee share options | Not subject to tax on benefits if at least 3 years have elapsed between grant and exercise |
| Options exercised early | The company pays tax on the benefit: 22/78 + 33% social security contribution — approximately 70.5% of the benefit amount |
| Transfer of shares in an OÜ | A notarised agreement; e-residents can arrange this remotely |
| Development costs on the balance sheet | Unamortised development costs reduce the amount available for dividends |
| Startup Visa | Subject to a positive decision by the Start-up Committee: a D visa for up to 12 months or a start-up residence permit for up to 5 years |
| Employees | Income tax 22%, social security contributions 33%, tax-free allowance of €700 per month |
| VAT | 24% standard rate; registration threshold of €40,000 of taxable supplies in Estonia per year |
| Annual return | Mandatory from the first year, including years with no turnover; deadline – 6 months after the end of the financial year |
If you have any questions, our managers are always on hand. If you’re not sure whether you need an Estonian company or a holding company, please submit an enquiry: we’ll carry out an initial assessment free of charge.
The three-year rule sounds simple, but in practice, founders lose their tax relief for three reasons.
Practical conclusion: an option scheme is not a template downloaded from the internet, but a document that must first be checked against tax regulations and then signed. The three-year period refers to the time between grant and exercise, not between recruitment and grant.
Many start-ups capitalise product development costs — this improves the balance sheet in the eyes of investors. But there is a downside to this that is rarely discussed.
Under the Commercial Code, the unamortised portion of development costs is deducted from the profit available for distribution. Example: retained earnings of €75,000, with €25,000 of unamortised development costs on the balance sheet — only €50,000 can be distributed.
For an early-stage start-up, this is rarely a problem. For a profitable company planning to pay dividends or buy back shares from an outgoing founder, however, it is a real problem. The decision on capitalisation is made once and affects the years ahead, so we consider both scenarios before the end of the first year.
Having everything managed by a single provider means that the articles of association, share option scheme, tax regime and accounting are all aligned — so you won’t have to restructure before your first transaction. If your product is SaaS, please also see the IT and SaaS page.
For the vast majority of start-ups, an OÜ is sufficient: a minimum share capital of €0.01, simple management, and various types of shares. An AS (public limited company) is required when a public offering of shares is needed, a share register must be maintained with Nasdaq CSD, or a specific investor’s requirements must be met. It is possible to convert from an OÜ to an AS at a later stage — through reorganisation, without changing the company.
The list of shareholders in an OÜ is available in the Commercial Register. The transfer of a share is formalised by a notarised agreement; e-residents can have this notarised remotely. A new investor joins via a capital increase — a resolution by the shareholders, the payment of the contribution and an entry in the register. We manage these changes so that the register always matches your share table.
In the early stages, funding often takes the form of a convertible loan. For accounting purposes, this is treated as a liability rather than equity until conversion takes place. Errors in the accounting treatment of such loans are a common finding during due diligence, which is why we record them from the moment they are received. Upon conversion, the share capital, shareholder structure and entries in the register all change — all of this is handled via a single set of documents.
A founder based outside the EU first obtains approval from the Start-up Committee, then applies for a D visa valid for up to 12 months or, if the company is already registered, for a start-up residence permit valid for up to five years. The same programme simplifies the process of hiring foreign staff for a start-up. e-Residency does not grant entry or residence rights – it is solely a digital identity for managing a company.
| Tax | How it applies |
|---|---|
| Corporate income tax | 0% on reinvested profits; 22/78 upon distribution |
| Share options after 3 years | No tax is payable on the benefits; the employee pays tax upon the sale of shares |
| Options before 3 years | Tax on benefits paid by the company: 22/78 + 33% social security contribution |
| Salary | Income tax 22%, social security contributions 33%, tax-free allowance of €700 per month |
| Board remuneration | Income tax 22% and social security contributions 33%, excluding unemployment insurance |
| VAT | 24%; threshold €40,000; B2B within the EU — reverse charge; export of services — VAT-exempt |
If the entire team and revenue are based in a single EU country, and the lead investor requires the company to be incorporated in their own jurisdiction or in Delaware, an Estonian OÜ will add an unnecessary layer of complexity. If the founders live and manage the company from another country, the company may become tax resident there or be deemed to have a permanent establishment. We’ll discuss this before registration — see also ‘economic presence in Estonia’.
Please describe the project: the founding team and their countries of origin, plans regarding investment, staff and share options, and where your clients are based. Within one working day, we will propose a structure, tax regime and a fixed-price service package.
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