Goodbye Estonia: How a popular jurisdiction for entrepreneurs has self-destructed

In today’s article we are going to explain the specific tax changes in Estonia that will affect you from 2025. We will also tell you what they mean for your Estonian e-residency and what alternatives you have around the world.

Recent years have seen major tax changes in Estonia: dividend tax, income tax, VAT, road tax, alcohol tax, petrol tax and even a “rocket tax”, to name but a few! A real creative feast for all politicians, who come up with all sorts of things to increase the tax burden on “decent citizens”. We wrote about how Estonia is shooting itself in the foot back in 2023. But back then it was mainly about the disadvantages of the e-residency and the crazy data you have to provide to get it.

What was or is good about Estonia and e-residency

Before we talk about Estonia and clarify the things that have changed in 2025 (and will change in the near future), we would like to summarize once again why Estonia and, in particular, the OÜ (acronym for Estonian limited company), was useful and what advantages it brought. All the advantages are detailed in this blog article.

Estonia was particularly attractive to Perpetual Tourists and online entrepreneurs because of several advantages:

1. Easy company registration: e-residency allowed anyone in the world to register and manage an Estonian company completely online without having to be physically present in Estonia. This simplified and digitalized administration.
2. Favorable tax regime: Estonia was a world pioneer in deferred taxation, where profits that remain in the company and are reinvested are exempt from tax. Only dividends to shareholders were subject to a 20% corporate tax at the time of distribution. However, this was not a withholding tax, so dividends could always be transferred tax-free. In the meantime, countries such as Georgia and Latvia have copied this model.
3. Tax-free salary for non-residents: Non-resident partners in Estonia did not have to pay income tax on the salaries paid to themselves (provided they were properly structured), which was particularly advantageous for digital nomads. This was probably the main reason why the OÜ was so attractive to global entrepreneurs.
4. Attractive for holding structures: Estonia was also attractive as a location for holding companies thanks to its double taxation treaties and the waiver of withholding tax. Profits could be transferred to subsidiaries tax-free and sales could be capitalized tax-free.
5. Low start-up capital: The share capital of the OÜ was only 2,500 euros, which made it affordable to set up a capital company. It didn’t even have to be paid in, as liability was limited to this amount.

What wasn’t so good in Estonia

Estonia has always promoted itself as a pioneer in the digital business world and in e-residencies. Yes, it may have been that it was the first country in the world to allow everything to be done digitally, that e-residency was the first of its kind. But the problem was that it was basically good marketing that made entrepreneurs and digital nomads invest in Estonia and set up their companies there.

Estonia boasted that it was one of the fastest countries in the world to start a business. This may be the case if only the time taken to set up the company is taken into account. It is relatively quick, but unfortunately only after obtaining an electronic residency. And that can take four to six weeks. It was also possible to set up a company in the traditional way through a notary in the country, but here the waiting time for registration was six weeks. By way of comparison: in some states in the US or in the UK, registration takes 24 hours.

Estonia has also gone overboard with the information required when applying for or renewing e-residency. We wrote a detailed article about this subject some time ago. In our opinion, it is one thing to try to be transparent and quite another to ask for the information you need for this e-residence.

The biggest marketing trick, however, was that many saw the e-residency (the name includes the word “residence”) as a “real residence permit”. Unfortunately, this was never the case. E-residency only allowed its holders to use Estonia’s digital tax system and to own a digitally managed company. This has nothing to do with a residence permit (especially for non-Europeans)!

This misunderstanding has led many to believe that with e-residency and the Estonian company they now have a residence permit or tax domicile in Europe or Estonia. Of course, this is not the case. On the one hand, a distinction must always be made between a natural person and a legal entity. On the other hand, a tax domicile is only required for a natural person. We would like to clarify the differences between a tax domicile and a tax residence again here.

Clarifying the situation: The difference between a tax domicile and a regulatory compliance domicile

For people who have a fixed address and permanent residence in a country where they live and work, a tax domicile and a regulatory compliance domicile are the same. For people who do not fall into this category, the situation is slightly different.

A legal address is only used to identify you as a “real person” to banks and stockbrokers. Banks do this by asking you for utility bills or a tax identification number. A utility bill could be, for example, the electricity bill for your house or your internet contract. Any document issued by “other sources” that has your name as the address and shows that you “live” in that house is considered a utility bill. If you have a tax identification number from a country, this is also used by banks to prove that you live there. Tax identification numbers or tax certificates are not handed out so easily at tax offices. It is, therefore,  very important (especially for the Perpetual Tourist) to have an address of compliance in order to comply with the KYC (Know Your Customer) requirements of the banks.

The difference with a tax domicile is that a compliance domicile does not necessarily imply an obligation to pay taxes in that country. This is precisely the big question for perpetual travelers, who on the one hand need a compliance domicile, but need (or want) to avoid a tax domicile to avoid being taxed. Of course, there is also the possibility that you are deliberately creating a tax domicile on purpose to protect yourself from other countries. If you can prove that you have your tax residency in a low-tax country (even at 0%), it will be difficult for other countries to tax you. Having a tax residence is not a bad thing in itself, you just need to have the right one (for example in Thailand, Georgia or Paraguay). Tax residency is determined by where your center of life is, that is, where you have private or business connections in a country. It also depends on where you actually live. In the end, the facts determine whether and where you can prove a tax domicile.

On paper, Estonia is not a particularly interesting country for maintaining a compliance residence. As is the case in Austria or Germany, for example, simply having access to a home there you could end up making you a tax resident. (We recently published an article looking at the countries where you can own a home at your disposal without becoming a tax resident).

Specific tax changes for 2025

As mentioned above, there have been significant tax changes in Estonia. Tax increases are always fun to watch (at least if they don’t affect you). All you see is that they are random percentage changes, and that’s all that happens. Random. Here’s an overview of everything that changes:

1. VAT: standard VAT increased from 20% to 22% from 2024 and to 24% from 2026. Reduced VAT on accommodation increases from 9% to 13% from 2025 and for press products from 5% to 9%.
2. Income tax: Income tax for companies and individuals increased from 20% to 22% from 2025.
3. “Missile tax”: In order to acquire defense weapons against Russia, an additional 2% will be taxed directly from each OÜ from 2026. This is not a deferred tax, but a corporation tax that will be applied directly, in the year in which the profit is obtained. The total tax from January 2026 will therefore be 24% (22% is paid at the time of distribution and 2% in the year in which the profit is obtained).
4. Taxation of dividends: The reduced 14% corporation tax on regularly distributed dividends will be abolished in 2025, as will the 7% withholding tax. This means that dividends will be considered as ordinary income and will be subject to ordinary income tax rate. Having a holding company will not protect against the total tax burden of 24% at the time of distribution.
5. Basic exemption: From 2024, a single basic exemption of 8,400 euros will apply to all individuals, replacing the previous graduated exemptions. The exemption for child benefit and the unused tax-free income of a spouse will be abolished, as will the tax deduction for interest on housing loans.
6. Excise duties: Excise duties on alcohol and tobacco will increase by 5% per year between 2024 and 2026. Of course, the state also wants to participate in people’s enjoyment.
7. Gambling tax: The tax on online gambling will increase from 5% to 7% until 2026, while the tax on lotteries will increase from 18% to 22% from 2024.
8. Hybrid mismatches (ATAD2): Rules against hybrid mismatches are specified and a carve-out for collective investment vehicles is applied retroactively from 2023.
9. Payment service providers: From 2024, payment service providers will have to report cross-border payments exceeding €25,000 per quarter.
10. Road tax: From mid-2024 a road tax will be introduced with a registration fee and an annual fee based on CO2 emissions. A classic case of: “Where can we take more money out of people’s pockets?” Oh, sorry, we meant steal, of course.
11. Tax representatives for non-residents: It will no longer be compulsory to appoint a fiscal representative for VAT registration.

But that’s not all, other things are also getting worse in Estonia too

In the last paragraph we have only considered the tax changes. These are, of course, due to pressure from other countries and the EU. After all, we have to adapt in order to ensure a common minimum level of taxation in all countries. In recent years, Estonia has had more and more problems, because the EU has not been unaware of the country’s plans to present itself as a low-tax country. In particular, many banks, have had increasing problems with Estonian companies and have canceled or stopped opening company accounts.

But there are other things that have nothing to do with the tax burden. For example, salaries now have to be “adequate”. In Estonia, a salary of €10,000 is no longer considered adequate. It is questionable who has set this limit once again. The problem is that due to these “imaginary” and absolutely arbitrary limits make it more difficult to take money out of the company tax-free in Estonia. Firstly, the salary is already limited in terms of what can be paid and, secondly, the CEO’s salary is subject to a 33% tax, because it is considered purely administrative work and is therefore subject to Estonian social tax.

Until now, the CEO could also receive a tax-free employee salary if the service was not provided in Estonia. Previously, this was linked to a certain ratio: the CEO had to ensure a balance between the taxable CEO salary and the tax-free employee salary and actually perform activities that generate added value. When this was abolished in 2019, the Estonian OÜ suddenly became an extremely interesting tax-saving model. However, legal certainty was always a critical issue: some of our clients even filed lawsuits (which were successful at the time) against the tax administration to enforce the model. However, we do not believe in the sustainability of the tax-free salary (at least as managing director, which is what you tend to be in single-person OÜs) and we expect that in the future there will be greater restrictions will be imposed on the amount that can actually be paid tax-free. The exact limits are yet to be determined, but at the time of writing, five figure sums could be deducted tax-free from a single-person company. The tax exemption of only 8,400 euros per year for tax residents shows where the journey could go.

In the future, there will be an expensive dividends distribution and, at best, a lower tax-free salary! The liquidation of third country companies or loans without regular amortization will also be curbed by stricter transfer pricing and other laws. Since accounting will eventually be required, hidden profit distributions will come to light sooner or later, even if small OÜs are not subject to audit.

Another point to consider in mind for those who actually living in Estonia is the sharp rise in the cost of living. Since imports of raw materials and energy from Russia were stopped, the prices of everyday products have risen rapidly. Many Estonians would rather arm themselves against Russia rather than think about their own welfare. Now they are being rewarded with the 2% “rocket tax”.

What are the alternatives to companies in Estonia and e-residency?

The OÜ in Estonia was good while it lasted. Those days are definitely over. There are simply better alternatives with less headaches, taxes and expenses. In fact, they have always existed, but clever advertising, which we have always warned against, has led to tens of thousands of digital nomads settling in Estonia.

As mentioned above, e-residency was very well marketed, it was a pioneer in the digital management of corporate structures and, if done well, it was a tax haven in the center of Europe. Although some of these advantages still exist in part, the current changes raise the question of whether it is still worth establishing a company in Estonia, emigrating to Estonia or even using the Estonian system.

One of the best alternatives is the LLC in the United States. The LLC offers more advantages from the outset in most American states: by definition, it is better known and more internationally recognized (Estonia is simply a small country compared to the USA). The LLC is also exempt from accounting requirements in the US. The OÜ was, and still is, required to keep accounts and to have an audit done after a certain turnover. This takes time, effort and money. With the LLC, you can basically do whatever you want. You don’t have to prove your solvency and there’s no such thing as an “inadequate salary”. There are no limits on turnover or profits: scalability depends solely on your ability to hire your employees remotely. Overnight millionaire profits in your personal account are commonplace in the LLC.

What Estonia promotes with electronic residency has been commonplace for years in most US states and also in places like the UK for years. It is not unusual to set up a company online, and there is no need for a complicated application to obtain a smart card that is issued weeks later. If you want to, you can register their LLC with us within two weeks and all you need to do is scan your passport.

Conclusion

Estonia and the Estonian OÜ have been good for certain things and, above all, they have given non-Europeans the opportunity to register an EU company online that is easy to manage. For some people, this has already meant that they have been able to take advantage of this; after all, setting up a company elsewhere is much more complicated. Deferred taxation was also a pioneer in this sense, bringing with it many benefits that increased the overall wealth of the company. The combination of dividend distributions and special tax rules for non-residents was an advantage. Estonia was an interesting location, especially for remote teams, as the salary for services provided outside Estonia is not subject to limited tax liability as in other EU countries.

Given the complexity, the huge tax changes in 2024 and 2025 and the pressure that Estonia is under from the EU, for most cases, it no longer makes sense in most cases to apply for e-residency to set up a company in Estonia. If you want to live in Estonia because you like the country, you can do so. However, there are also many disadvantages here and the situation is becoming increasingly tense, especially with regard to the cost of living and the tax burden.

If you have applied for e-residency just for the tax reasons only, as we have explained today, you have many more options to do this more efficiently, easily and with less stress with other structures such as the LLC mentioned above in the United States. And most importantly, in a sustainable way, without having to change your configuration after a few years. We have helped thousands of people to live more freely, whether through changing residence, setting up companies or investing in a wide variety of areas.

To find out more, book a consultation or contact us and we will help you.