[August 2018 edit: I see I have still a lot of traffic on this page; time for a small update.
I started hearing about the E-residency scheme in 2014. It did not have to do anything with residency, starting a company in Estonia was a nightmare and taxes are much higher than other jurisdictions. And to my horror, this stuff really went viral. People talked about this program as if it was a solution to everything. The Estonian E-residency made the blind see and the cripple walk!
However, a few things have changed – rather quickly. First of all, the business environment in Estonia has opened up. Processes streamlined. Regulations polished. All sorts of service agents popped up providing very complete service packages. Banks become more familiar with foreigners.
Secondly, the corporate services world is changing rapidly. All the “Anti Money Laundering” and “Know Your Customer” shit has gotten out of control, and in a lot of countries it has now become very hard to do even the most basic things with your business, like accepting credit-cards or opening a bank account. Estonia has been working on providing alternatives, while the rest of the world is closing their doors.
If anything, I find that I must compliment the Estonian government – not only on their successful marketing – but also for creating one of the few environments that is currently trying to make it easier for business and not harder. And they are again repeating this process by providing a framework for my beloved crypto-currencies.
Having said that, the below article (and comments) still has some important criticism of the E-Residency program. It remains unedited]
I get a lot of questions from digital nomads about the Estonia E-residency program.
For those who do not know what I am talking about, here is Wikipedia:
“E-residency of Estonia (or virtual residency) is a status by which non-residents can gain a secure digital identity issued by Estonia, similar to those that are provided to permanent residents and citizens of Estonia by their ID card. This enables them to use the services provided by Estonian state agencies and private sector connected usually to the ID card. Estonia established e-residency on December 1, 2014.”
I always appreciate governments that implement policies that make it easier for business. And in the case of Estonia, one has to admire the buzz that they have been able to create.
However, the E-residence is all but useless for most digital nomads and there are better places to set up your business.
The Estonian E-residency is just a marketing gimmick.
It has NOTHING to do with obtaining the status of resident in the country.
“But Julius, what is it then?”
Look at the actual law:
It states “Identity Documents Act”. It is just an ID card that you can use to obtain certain services from the government. Of course the only reason when you would need services from the government is when you have something going in the country. Since you cannot become a resident, the only other benefit is when you set up a company in Estonia.
So unless you are about to incorporate a company in Estonia, the E-residency is pretty much useless.
Setting Up A Business In Estonia
I already mentioned that the Estonia E-residency is a marketing trick. And it works.
I spoke to multiple people that now actually are looking at Estonia for setting up their company. Because it supposedly is cheap and “low tax”.
What I think about this?
I took a look at the tax aspects of an Estonian company. I got this information from the Estonian Chamber if Commerce and Industry. The website is this:
There were a number of things I noted:
“distributed profits are generally subject to a 20% corporate income tax”.
As soon as you pay out a dividend you pay 20% tax. Note that there are a number of places where this is ZERO.
“dividends, share buy-backs, capital reductions, liquidation proceeds or deemed profit distributions”
If you ever sell or liquidate your business you will also pay that 20%. This is not so strange, but this is to indicate that there is no way around it.
“this tax is regarded as a corporate income tax and not a withholding tax, so the tax rate is not affected by double tax treaties”.
This is not standard. It shows again that the 20% is final. Note that in addition you could also have tax requirements in the country you live in.
“The standard VAT rate is 20% from 1 July 2009”.
So your clients will have to pay 20% more for your product for no particular reason. As mentioned before, there are places where this is ZERO.
“A flat 20% income tax applies to taxable income of individuals.””Non-resident individuals are subject to taxation on the listed Estonian source income.”
I am not sure how “Estonian sourced income” is defined. But given the fact that they consider Estonian companies tax resident it looks to me like you will always pay taxes if you get your money out of the company.
“The period of taxation is a calendar month.”
I am not sure what kind of paperwork this will bring but it does not sound good at all.
Also, very few of your company expenses are deductible. http://www.koda.ee/en/services/taxation-of-corporations/deductibility-of-expenses/
Let’s Do Some Math…
If you sell a product of 100 Euro. You clients will pay 120. You will end up with 80 after taxes. Of that transaction, (120-80)/120 = 33.33% of your turnover will be paid to a government of which you have ZERO benefits.
This is 4 months every year of the value you create down the drain.
In exchange, you will have to do extensive and time consuming bookkeeping and reporting.
I would argue that this will be worth somewhere between 2 to 4 weeks of your productive working hours that go up in smoke.
One individual made the argument that Estonia is cheaper than other jurisdictions. Which is important when “bootstrapping”.
I hold nothing against the argument, especially for those starting a business. But I did a (quick) search for service providers. You can get a company plus bank account for 900 Euro.
This means that there are two problems with the bootstrapping argument:
1. If you want a cheap company you could go to the UK or the US (Delaware). That is where the cheapest legal entities are. You can get them for a few hundred bucks.
You will also have a company in a well known jurisdiction, where Estonia as of the moment mostly seems popular with circle jerking digital nomads.
2. Let me tell you that for 1000 Euro more you can set up a structure that can have ZERO percent taxes and reporting requirements. I already told that you will lose 20% taxes (let’s just only take income tax) to get this money and spend it freely. So of every 5000 Euro you make you will lose 1000. So if you make more than 5000 Euro a year (which I hope you do), the cost argument is not valid.
Are there good reasons to set up a company in Estonia?
I can think of a few:
– You will do business in Estonia or the region.
– You need a company in the European Union for some sort of client, regulatory or tax planning requirement.
– There is a very good financial system that provides access to merchant accounts that I am not aware of.
Estonia E-Residency – Conclusion
The Estonia E-residency program is useless for 99% of international business owners.
For setting up a company there are easier, better and cheaper places.
There you have it.
Without E-Residency but also without taxes.
Interested in becoming a tax free digital nomad? Go here…