5 Deadly Sins With Your Estonian Company (2021)
Maybe these sins are not as deadly as the click-bait headline of this article suggests.
But you’re creating a considerable risk to the wellbeing of your Estonian company if you’re committing any of the mistakes I am going to outline below.
Estonian e-Residency has brought many foreign entrepreneurs to Estonia. At least digitally – operating and managing an Estonian entity.
And like in any jurisdiction, there are regulations and best practices to follow. And mistakes (or “deadly sins) to avoid.
And because Estonia has streamlined the process of setting up the company, managing the company, and taking care of the fiscal obligations, it’s also important to do things how they have to be done.
Meaning, if you have digital systems and processes in place, it’s also easier for the tax office and authorities to monitor that laws are being followed.
That’s why we advise all clients to ask before they act.
As a result of wanting best for you, we’re going to outline 5 sins to avoid with your Estonian company.
Company’s Wallet Isn’t Your Personal Wallet
This is one of the most common “mistakes” that happen. I added quotation marks because it’s often intentional, knowing perfectly well that it’s not fine to buy personal stuff with the company’s card.
For Estonian entrepreneurs, it’s sometimes a national sport to test and see how many personal expenses you can cover with your company. Less nowadays, but it has always been a thing, and will always be a thing. As long as there are savings to be had, there are always people who will try to avoid paying taxes.
But it’s not a good thing to do. If the tax office inspects your company, and you need to pay tax on the amount you’ve spent on your personal needs, you’re also going to have to pay the interest accrued over time. And this will add a considerable amount to the total sum.
There are expenses your company can pay for, but if you’re not sure, reach out to your accountant first. This way, you’ll avoid potential problems. Assuming you will listen to the accountant…
Take Money Out From The ATM
Yes, of course, you can take money out of the ATM if you have cash invoices to pay. It’s rather rare these days, but it can happen.
But sometimes, entrepreneurs just take money out from the ATM and that’s that. Without any documents, no purchase receipts, nothing.
If that happens, then the money has to be in the cash registers of the company. You can hold cash, this is not forbidden. But this cash actually has to be there. If it’s not there, then it’s considered to be taxable money, because there are no documents proving the money is used for company expenses.
This is an age-old tactic used to take money out from the company and claim that it’s in the company’s cash registers. So tax office is usually quite sceptical about it – unless you are operating in an industry where paying in cash is a standard.
And if you can’t show the money nor show any documents, it’s time to pay tax.
And one more thing – if you already run into trouble with the tax office once, then it’s likely you’re being watched closely going forward.
Ignoring your tax obligations
This is a wide topic. There are different types of taxes in Estonia, as there are everywhere.
For one, make sure you’re charging VAT in a correct way. There are different VAT rules for digital services, consulting services, and whether you’re invoicing EU clients or non-EU clients.
As if you’re doing it wrong, you need to correct it. And it can paint a very wrong picture of your company finances when taxes aren’t paid properly.
It’s something where your accountant needs to provide proper and valid advice. You shouldn’t have to guess or operate in the dark. And don’t forget to add your accountant to submit declarations in the e-tax office!
After getting your VAT right, you also have to look into permanent establishment rules. There are international tax treaties which clarify how companies are taxed if they’re managed by foreigners. And while it can be a complex topic, there are some main principles to follow.
This, again, is something your services provider must be able to advise you about. And often, an input from a local tax advisor in your country of residence should be counselled.
Starting A Company Without A Plan
This isn’t only related to Estonia. It’s logical, yet, a common mistake. Many people start their companies because it seems like a real and tangible first step.
But in reality, it would make a lot more sense to go out and talk to the customers first. To see if there are people who are interested in buying what you have to offer.
And only when you have validated your idea, you should set up a company. And not only validated the idea but also mapped out how you’re going to grow and what’s your competitive advantage.
Because there are always expenses involved in setting up a company. And liquidating a company later isn’t a one-day work. It takes time.
Choosing A Wrong Service Provider
Your choice of a service provider can end up being a major mistake. Your books are done in the wrong way, you’re not getting proper advice, and it’s all-around a stressful experience.
And today, I would say that having a company management software is another “must-have”. It makes handling your company a lot easier and having one place where you can oversee everything is just a better way to manage the business.
Don’t be fooled by the extremely cheap entry prices. If it’s too good to be true, it usually is. And if you validate your idea first, then you will have clients who bring in revenue, which in turn enables you to pay for proper support services.
These were 5 deadly sins that you can do with your Estonian company. While sometimes there are no consequences and everything will work out fine, the risk is too big to take (knowingly).
Take care of your Estonian company in a way that you can sleep peacefully and build the business without unnecessary threats lurking in the shadows.
Because running a business is already hard without them.