Sole proprietor (FIE) in Estonia

How do I register as a sole proprietor?

A sole proprietor must „enne tegevuse alustamist esitama avalduse enda kandmiseks äriregistrisse“ – apply to be entered in the commercial register before starting business (ÄS § 3 lg 2) [1]. The register records, among other things, the business name, the address and e-mail address of the business, the start and end of the financial year, and the entrepreneur's name and personal identification code (ÄS § 75 lg 2) [7]. On registration the planned main area of activity is also notified, using the Estonian classification of economic activities (ÄS § 4 lg 5) [8].

• Business name. A sole proprietor's business name must contain the entrepreneur's first name and surname and may not contain an addition or abbreviation referring to a company (ÄS § 8 lg 1) [9]. It must be clearly distinguishable from other business names entered or reserved in the commercial register (ÄS § 11 lg 1) [10].
• Area of activity. You may operate in any area not prohibited by law; the law may require an activity licence for some areas (ÄS § 4 lg 1 and 2) [8].
• State fee. Under the State Fees Act (riigilõivuseadus, RLS), the state fee for entering a sole proprietor in the commercial register is 20 euros (RLS § 62 lg 1) [11].

Is a sole proprietor liable with all of their assets?

Yes. A sole proprietor is liable for their obligations with all of their assets (ÄS § 78) [2]. A private limited company (osaühing) is different: a shareholder is not personally liable for the company's obligations (ÄS § 135 lg 2) [12]. If your business carries a significant financial risk, take this into account when choosing the legal form.

A sole proprietor organises their accounting under the Accounting Act (ÄS § 77) [13]. For tax purposes they must keep records of income and expenses and keep the related documents (TuMS § 36 lg 2) [14].

How is a sole proprietor's income taxed?

Under the Income Tax Act (tulumaksuseadus, TuMS), income from business is subject to income tax (TuMS § 14 lg 1) [3]. A sole proprietor entered in the commercial register may make deductions from business income (TuMS § 14 lg 5) [3]:

• all „dokumentaalselt tõendatud ettevõtlusega seotud kulud“ – documented business-related expenses – incurred during the tax period may be deducted (TuMS § 32 lg 1) [15]; an expense only partly related to the business may be deducted only to that extent (TuMS § 32 lg 3) [15];
• expenses incurred before registration may be deducted if they relate to the registration or to obtaining the activity licences and registrations needed to start the business (TuMS § 14 lg 5) [3];
• if expenses exceed income, the excess may be deducted from business income of up to ten following tax periods (TuMS § 35 lg 1) [16].

Income is taken into account in the tax period in which it was received, and expenses in the period in which they were paid (TuMS § 36 lg 1) [14].

Income tax. The income tax rate is 22% (TuMS § 4 lg 1) [17]. A sole proprietor's business income after deductions „jagatakse enne maksumääraga korrutamist 1,33-ga“ – is divided by 1,33 before applying the tax rate, where the Social Tax Act applies to the business income (TuMS § 14 lg 5³) [3]. The division is not made if the amount so obtained multiplied by 0,33 is less than the (minimum) social tax calculated under SMS § 2 lg 5 or more than the (capped) social tax calculated under SMS § 2 lg 1 p 5; income tax is then calculated on the business income after deductions, reduced by that social tax (TuMS § 14 lg 5⁴ and 5⁵) [3].

Social tax. Under the Social Tax Act (sotsiaalmaksuseadus, SMS), the rate is 33 percent (SMS § 7 lg 1) [18]. A sole proprietor pays it on business income after the permitted deductions, but not on more than „maksustamisperioodi kuude töötasu alammäära 10-kordselt summalt aastas“ (SMS § 2 lg 1 p 5) [4]. At the same time, a sole proprietor pays social tax each year on at least 12 times the monthly rate (SMS § 2 lg 5) [4]; the monthly rate is set for each budget year by the state budget (SMS § 2¹) [19]. This minimum does not apply, among others, to a sole proprietor who throughout the tax period received a state pension or had partial or no work ability (SMS § 2 lg 5 p 2) [4]. If a sole proprietor is entered in or deleted from the register during the year, social tax is paid in proportion to the number of registered days (SMS § 2 lg 6 p 1) [4].

VAT. Under the Value Added Tax Act (käibemaksuseadus, KMS), once your calendar-year turnover with its place of supply in Estonia exceeds 40 000 euros from the start of the calendar year, you must register as a VAT payer (KMS § 19 lg 1) [20].

When must taxes be paid?

• Social tax advances. By the 15th day of the third month of each quarter, a sole proprietor pays for the current quarter an amount calculated on three times the monthly rate (SMS § 9 lg 3 p 1) [21]. No advances are paid, among others, by a person who throughout the quarter received a state pension or had partial or no work ability (SMS § 9 lg 3 p 1) [21].
• Income tax advances. A sole proprietor who had business income in the previous tax period pays advance payments; each is 1/4 of the income tax calculated on the previous period's business income, paid „võrdsete summadena 15. septembriks ja 15. detsembriks“ – in equal amounts by 15 September and 15 December (TuMS § 47 lg 1 and 2) [22]. No advances are due in the first tax period, nor if a quarter's payment does not exceed 300 euros (TuMS § 47 lg 2 and 3) [22].
• Tax return. A sole proprietor always files an income tax return (TuMS § 44 lg 6¹ p 1) [23], by 30 April of the year following the tax period (TuMS § 44 lg 1) [23].
• Additional payment. Any additional income tax must be paid by 1 October of the calendar year following the tax period (TuMS § 46 lg 3) [24]; additional social tax is also due by 1 October (SMS § 9 lg 3 p 2) [21].

What is a business account and is it right for you?

Under the Simplified Business Income Taxation Act (ettevõtlustulu lihtsustatud maksustamise seadus, ELMS), a business account is an account opened in a natural person's name at a credit institution, and a business income tax is paid on the amounts received on it (ELMS § 1 lg 1 and 2) [5]. Paid into it is „üksnes teenuse osutamisest ja kauba müügist saadud summa eurodes“ – only amounts in euros received for services and sales of goods (ELMS § 1 lg 3) [5].

• The rate is 20 percent of the amount received on the account (ELMS § 4 lg 1) [6]; if you are an obligated person under the Funded Pensions Act (kogumispensionide seadus), the rate increases by the rate set in § 9 of that Act (ELMS § 4 lg 2) [6].
• The contract for opening the account must be concluded before the first amount is received (ELMS § 5 lg 1) [25].
• The bank reserves the tax amount on the account and transfers it to the Tax and Customs Board by the 10th day of the calendar month following the tax period (ELMS § 6 lg 2 and 3) [26].
• The account holder may not be a VAT payer or operate as a sole proprietor in the same or a similar area of activity (ELMS § 2 lg 2) [27].
• Of the tax, 22/55 is the income tax share and 33/55 the social tax share (ELMS § 8 lg 2) [28].

The main difference: on a business account the tax is calculated on the amount received (ELMS § 4 lg 1) [6], while a sole proprietor is taxed on business income from which business-related expenses have been deducted (TuMS § 32 lg 1) [15].

What the law says

• „Füüsilisest isikust ettevõtjaks võib olla iga füüsiline isik.“ (ÄS § 3 lg 1) [1] – anyone can become a sole proprietor, but must apply to the commercial register before starting business (ÄS § 3 lg 2) [1].
• „Füüsilisest isikust ettevõtja vastutab oma kohustuste eest kogu oma varaga.“ (ÄS § 78) [2] – a sole proprietor is liable for business debts with their personal assets too.
• „Maksumaksja ettevõtlustulust võib maha arvata kõik maksustamisperioodi jooksul maksumaksja poolt tehtud dokumentaalselt tõendatud ettevõtlusega seotud kulud.“ (TuMS § 32 lg 1) [15] – keep the documents for your expenses.
• „Füüsilisest isikust ettevõtja maksab sotsiaalmaksu aastas vähemalt käesoleva seaduse §-s 2¹ nimetatud kuumäära 12-kordselt summalt“ (SMS § 2 lg 5) [4] – the minimum social tax is due even with low income, unless an exception applies.
• „Ettevõtlustulu maksu määr on 20 protsenti ettevõtluskontole laekunud summast.“ (ELMS § 4 lg 1) [6] – on a business account the tax is calculated on the whole amount received.

What to do

1. Choose the form: a sole proprietor is liable with all of their assets (ÄS § 78) [2], a shareholder of an osaühing is not personally liable (ÄS § 135 lg 2) [12]; a business account is not available if you are a VAT payer or a sole proprietor in the same or a similar area (ELMS § 2 lg 2) [27].
2. Check whether your area of activity requires an activity licence (ÄS § 4 lg 2) [8].
3. Choose a business name containing your first name and surname (ÄS § 8 lg 1) [9] and apply to the commercial register before starting business (ÄS § 3 lg 2; ÄS § 75 lg 2) [1] [7]. Pay the state fee of 20 euros (RLS § 62 lg 1) [11].
4. Keep records of income and expenses and keep the documents (TuMS § 36 lg 2) [14]; only documented expenses can be deducted (TuMS § 32 lg 1) [15].
5. Pay social tax advances by the 15th day of the third month of each quarter (SMS § 9 lg 3 p 1) [21] and, if you had business income the previous year, income tax advances by 15 September and 15 December (TuMS § 47 lg 1 and 2) [22].
6. File the tax return by 30 April of the following year (TuMS § 44 lg 1) [23] and pay any additional tax by 1 October (TuMS § 46 lg 3; SMS § 9 lg 3 p 2) [24] [21].
7. Watch your turnover: once it exceeds 40 000 euros from the start of the calendar year, register as a VAT payer (KMS § 19 lg 1) [20].

Frequently asked questions

Can I suspend my business temporarily?

Yes. A sole proprietor may notify the registrar of the commercial register in advance that the business is suspended, stating the period during which they will not operate; for seasonal or temporary activity the start and end dates may be notified (ÄS § 3 lg 3) [1]. Social tax is then paid in proportion to the number of days of business activity (SMS § 2 lg 8) [4], and no income tax advances are due (TuMS § 47 lg 4) [22]. If the business has been suspended for more than 12 months, assets whose acquisition cost the sole proprietor deducted from business income are deemed taken into personal use, and their market value is added to business income (TuMS § 37 lg 2, 4 and 6) [29].

Do I have to pay social tax if I had no income?

As a rule, yes: a sole proprietor pays social tax each year on at least 12 times the monthly rate (SMS § 2 lg 5) [4]. Exceptions include a recipient of a state pension and a person with partial or no work ability (SMS § 2 lg 5 p 2) [4], as well as suspended or seasonal activity (SMS § 2 lg 8) [4] and the case where an employer also pays social tax for you (SMS § 2 lg 7) [4].

What if I am also employed?

If an employer also pays social tax for you and your business income is less than 12 times the monthly rate, the social tax on your business income may be less than the tax calculated on that amount, provided that the social tax paid by the employer and by you together is at least the tax calculated on that amount (SMS § 2 lg 7) [4]. If an employer also pays social tax for the sole proprietor, the sole proprietor's own advance payments may be smaller, provided that the social tax paid by the employer and the sole proprietor's advances together equal the amount calculated on three times the monthly rate (SMS § 9 lg 4) [21].

Can a sole proprietor also use a business account?

Only in another area: the account holder may not operate as a sole proprietor in the same or a similar area of activity (ELMS § 2 lg 2) [27].

Can a sole proprietor authorise someone to represent the business?

Yes, a sole proprietor entered in the commercial register may grant a procuration (prokuura) (ÄS § 17 lg 1) [30]. Procuration may be granted only to a natural person (ÄS § 17 lg 2) [30].