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The Estonian OÜ (Osaühing) is often promoted as an attractive option for entrepreneurs looking to benefit from low taxes and a modern digital infrastructure. However, especially for individuals residing in Germany, establishing such a company involves several tax pitfalls. In this blog post, we’ll cover the key points you need to understand before taking this step.
What is an OÜ?
An Estonian OÜ is comparable to a German GmbH. It offers limited liability and can be fully established online, one of the many benefits of Estonia’s e-Residency program. With low setup costs and corporate taxes only applied to distributed profits, it initially seems like the perfect solution for entrepreneurs.
However, the devil is in the details — especially regarding international tax law.
Tax Reality: Why an OÜ may be exposed to German tax
If you reside in Germany and act as a director or shareholder of an OÜ, specific tax rules apply. The key question is: Where is the effective place of the company’s management?
- Permanent Establishment: If a company’s appointed managing director is operating the daily business of the entity from German soil, a so-called permanent management establishment is at hand. This results in the fact, that the foreign entity (here: OÜ) becomes exposed to German corporate tax liabilities.
- Salary and Income Tax: Even if the OÜ is formally established in Estonia, your salary as adirector is subject to German income tax if you perform your duties from Germany. Undeclared income can quickly lead to allegations of tax evasion.
- Double Taxation: While Germany and Estonia have a double taxation agreement (DTA), this does not exempt you from taxation in Germany if no substance can be proven in Estonia.
VAT: An Often Overlooked Trap
Value-addedtax (VAT) poses another significant risk if the sole shareholder resides in Germany. In these scenarios, the business operations (in terms of the European VAT directive) are effectively only rendered out of Germany.
As a result:
- The OÜ needs to register for VAT purposes in Germany.
- The Estonian VAT registration must be reversed.
- Failure to register can result in severe penalties.
While Estonia might be recognized as the company’s formal seat, Germany disregards this if there is no physical presence or genuine substance in Estonia.
Substance Requirements: What Does This Mean?
For the OÜ to be recognized as an Estonian company, it must meet certain substance requirements, including:
- Having a physical office in Estonia.
- Employing staff locally.
- Making regular business decisions within Estonia.
Without these, the OÜ may be classified as a mere shell company being disregarded for German tax purposes.
When Does an OÜ make sense?
Establishing a foreign entity (e.g. an Estonian OÜ) can make sense in specific situations:
- If fund raising shall happen within the Estonian capital markets.
- If the shareholder/s relocate personal residence to Estonia.
- If the genuine business structure is in Estonia.
- If the entity serves international clients and fulfils substance requirements.
Conclusion: Think Twice Before Setting Up an OÜ
Starting an Estonian OÜ may seem simple and appealing, but for individuals residing in Germany, it’s rarely the best solution. Without meeting the necessaryrequirements, you risk not only material taxes but also legal repercussions.
Before founding an OÜ, seek comprehensive advice. We are here to help you find the best solution for your specific needs—compliant and tax-optimized.
Do you have further questions about Estonian OÜs or need tax consultation? Contact ustoday! Our team of experts is ready to help you make the right decision.
