[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.
Estonia E-Residency
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:
https://www.riigiteataja.ee/en/eli/513042015004/consolide/current
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:
http://www.koda.ee/en/services/taxation-of-corporations/
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.
The Price:
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.
Julius
Without E-Residency but also without taxes.
Interested in becoming a tax free digital nomad? Go here…
Not about this article, but you may want to update your expired SSL cert …
Thanks. Issue has been solved.
Hi,
Thanks for this article. Helpful and to the point.
VAT and corporate tax at 20% are outrageous considering it is a second world country.
You forget to mention your reputation as an Estonia company. I would think two times to do business with companies from Estonia, just because they are Soviet era countries.
For the amount of Tax, better to open in Bulgaria or Malta.
Keep up the good work and sharing the info.
Hi Rudy,
Thanks for the comment. Glad someone is still reading this 😛
I should actually update this article with some practical examples some of my clients gave me.
Like going there all hyped up and getting the E-residency and then asking themselves… “Now what…”
Like this guy:
“Its more funny to me because I was a person who firmly believed in all “E-Stonia” PR stunt until I went there and tried to do business there… and saw that everything what actually exists from that “tech-savy” and “hyper-modern” society is 1. Free pubic wifi in the center of Tallinn that barely works; 2. And something on what Estonians are especially proud: possibility to book a parking via sms.
wink emoticon”
Or the Estonians from Russian descent who ask me how to get out to get out because of the bureaucracy and racism.
Or refer to one article from someone who actually tried to open a bank account as a foreigner with an E-residency and found it very difficult.
But as mentioned, there might be use for some people and I am sure this is developing. They apparently offer a monthly salary tax-exemption of about 1200 Euro (I did not mention in this article) which might be interesting for entrepreneurs starting out.
Although I would never advice people to start out that way, since businesses grow and at one point you will realize have to pay a lot of taxes.
Like a Dutch guy from a famous forum I shall not name who started his business in a Dutch sole proprietorship which basically means that he pays up to 52% on salary tax and will first have to pay 52% on the entire value of his websites (fictive sale) if he wants to move his business offshore. Ouch!
Another argument in favor would be that it is becoming harder to setup the no-tax options and low-tax options that work are good alternatives for people who want to get up and running.
But…
OOOooooowwwwww. I just don’t like taxes.
Cheers!
Article I referred to. Opening a bank account IS possible, but it requires some work:
“The challenge of opening a bank account in Estonia, even for e-residents
If you just get on a plane to Tallinn, walk into a bank branch and expect them to open an account for you without any fuss, you are bound to be disappointed. The e-residency does not give you a right to open an account with any bank in Estonia. You read that right. As long as you are not an actual legal resident of Estonia, no bank has any obligation to open an account for you whatsoever.
Due to fairly strict Anti-Money Laundering (AML) rules, it is unlikely that you will be able to open an account if you can not demonstrate a strong connection to Estonia. Basically you need to demonstrate why you want to bank in Estonia, and most of the reasons listed above will not cut it.
However, the following reasons are considered valid by most banks in most cases:
* You live in Estonia long-term
* You are Estonian (but may currently live elsewhere)
* Your parents are Estonian
* You’re employed by an Estonian company
* You own or manage one or more businesses that are physically located in Estonia
* You own property in Estonia
In short, unless you’re part of the lucky sperm club or have strong investment or business ties with Estonia it will be a bit more challenging to open a bank account, no matter if you’re an e-resident or not.”
“Still, the biggest plus with LHV and the definite deciding factor for me for which bank to open an account with was that they allowed me to open one. With SEB and Swedbank, if you do not meet any of the criteria listed above (or potentially deposit a huge amount of money), they will not open an account for you. If you have already managed to register a business in Estonia, at least Swedbank and maybe even SEB will consider opening an account for the business (but not necessarily for you).
LHV, on the other hand, accepted one more reason for opening an account in addition to the above list. Critically it’s a reason anyone can give. It does not require having any prior ties to Estonia at all, nor does it require any huge investments of time or money.
“I wish to invest in the Estonian and Baltic stock market.”
That’s it.”
https://medium.com/nomad-gate/estonian-e-residency-ultimate-guide-banking-taxes-cc27fe39c368
(not sure what is happening to these comments).
The picture is even worst. After confirmation from a lawyer, the distributed tax are not taxed at 20% but it is taxed at 25%. Here is the link to the Estonian tax authority
https://www.emta.ee/eng/business-client/income-expenses-supply-profits/taxation-profits-estonia
If you want to pay yourself 10000 euros, you have to pay 2500 euros. So, 2500 is 25% of 10000 euros.
But in fact, the Estonian investment board tells you that 2500 euros is 20% of 12500 euros. So that’s the second trick.
https://www.riigiteataja.ee/en/eli/530012014003/consolide
In the Estonian law, everything is clear, they tell you to divide by 0.8 before multiplying by 20%, in other words, it is like multiplying by 25%.
The real tax rate is 25% not 20%
Hi Bernard,
Thank you for your comment. And well spotted.
“Estonian investment board tells you that 2500 euros is 20% of 12500 euros. So that’s the second trick.”
Haha. Sneaky bastards.
that is 20%, how can you not see that it’s 2500 is 20% of 12500? same as any country.
Can you at least read/think before commenting?
12.500 is a fictional number, created for the purpose of calculating the tax.
No it is not a fictional number. We’re talking about corporate income tax (CIT) here. If you make a profit distribution of 12500 EUR, of course the CIT (20%) is 2500 EUR. (To pay 10000 in _dividend_ you need 12500 in _profits_ to account for 20% CIT)
That’s the same as in any country. You pay CIT before you pay out dividends. In any other country with a CIT of 20% the calculation would be the same. The only difference is that in most other countries you are forced to pay the CIT when you make the profit, not when it is distributed.
Yes, this can be confusing if you have little or no experience dealing with taxes (distinguishing between CIT and personal tax on dividends, especially when CIT apply on profit distributions). But I’ve subscribed to your newsletter for long enough to know you are smart enough to see this, Julian.
[…] P.S. I didn’t even receive a thank you note. Usually, if you’re the first to break someone’s bubble they just blame you and look for reassurance elsewhere. I had the same with the useless Estonian E-Residency program. […]
[…] P.S. I didn’t even receive a thank you note. Usually, if you’re the first to break someone’s bubble they just blame you and look for reassurance elsewhere. I had the same with the useless Estonian E-Residency program. […]
Hi Julius,
I’m glad you bring up this topic, as you are definitely correct in pointing out that there’s a lot of misinformation and misunderstandings regarding the Estonian E-residency program. Even the name is a bit misleading, which you have covered. (Even worse when I see it referred to as an “E-citizenship” program… *CRINGE*).
Anyway, even though you make some good and mostly accurate points, I’d like to point out a few inaccuracies in what you write.
1) You write that there’s no way of getting money out of the company tax free. That is not true. And as a digital nomad it is quite easy to do so, especially if you have organized your affairs so you’re a PT (which I know you’re advocating for). As long as you are not a tax resident anywhere, or a tax resident somewhere with a territorial tax system and make sure your income from the Estonian company is not counted as local source income where you’re tax resident, you can pay yourself a salary tax free. Don’t bother with dividends. I know you read my article on the Estonian E-residency (you quoted it in the comments above), where I explain that this is the case.
2) Yes, banking is not as straight forward as people thought at first (or at least that was the case). But as I demonstrated in my article, all you need to do to open a personal account with LHV is to drop the “I-word” (invest in the local stock market), and as long as you have a local company also Swedbank will as a general rule open an account for you. Recently, however, the Estonians have passed a law dismissing the “connection with Estonia” requirement for E-residents, and also allowing remote account opening via video calls.
3) Costs are actually quite low in Estonia. It’ll cost you around 2-300 EUR to set up a limited company, and then a monthly maintenance cost of just 60-100 EUR depending on your business. That’s including mail handling, registered address services, accounting and dealing with all regulatory requirements in Estonia. The cost of compliance in most countries that you refer to (including Delaware & Wyoming) will be far higher than that, especially when including accounting etc. And just getting a decent bank account for companies incorporated in less reputable jurisdictions (the ones you generally refer to when you mention “ZERO percent taxes and reporting requirements”), has become an increasingly expensive and time consuming affair.
4) One benefit (especially for digital nomads who might still technically have tax residency in a high tax country) is Estonia’s tax treaties. If you read article 4 in most of their treaties, in particular the part about tie-breakers for corporate tax residency, you see that they don’t have a “mind and management” test as a tie-breaker. Although it’s no guarantee that your Estonian company won’t be considered a tax resident in any country you might be spending a lot of time, it definitely puts you in a way better situation than if you incorporate somewhere without a tax treaty with your country of tax residency or with a regular treaty that have a “mind and management” tie-breaker. In any case consult a tax professional where you are tax resident before incorporating any offshore company.
5) Yes, what counts as deductible business expenses is quite limited, especially compared to jurisdictions like HK (but those come with a lot of other downsides). However, if you have set up your personal tax affairs in a way where you pay low or no income tax on salary from the Estonian company, that’s not really relevant. But for many this might still be a drawback.
So yes, I agree that Estonia is a medium tax country (so touting it as “low tax” is definitely inaccurate, at least without qualifying that statement). I agree that it is not the best option for many people, but I think you underestimate the number of digital nomads it is actually a good choice for.
Yes, there’s a 20% VAT rate, so if you are mostly selling services to consumers in the EU, Estonia is probably not the best alternative for you. But if you’re selling mostly B2B services VAT becomes irrelevant. I think that’s the case for a lot of DNs.
But what’s nice about the Estonian setup is that it can serve as a wealth accumulation vehicle, and you can always take a few years and then set up your personal tax affairs in such a way that you can take out a lot of wealth from the Estonian company without owing a penny in tax (maybe combining with a non-dom residency in Malta, which is easy for EEA citizens to do, or go full PT). You of course need to look out for potential exit tax if you currently are a tax resident of a high tax country, but that would be the same no matter where you incorporated.
So let me sum up why I think you underestimate Estonia as a jurisdiction for many digital nomads in a few bullet points:
* It’s actually quite easy to pay no tax with an Estonian company (assuming you’re a PT and don’t sell much to EU consumers)
* Maintenance and compliance costs are relatively low, more so than most pure 0% tax jurisdictions and US states.
* Beneficial tax treaties if you do have a tax residency somewhere. In the case of personal tax residency in high tax country, incorporating in a typical 0% tax haven w/o tax treaties is often the worst thing you can do (due to CFC laws etc)
* Access to high quality banking and merchant accounts (e.g. Braintree) is a non-issue (unlike many pure low/no tax jurisdictions).
This is not to say Estonia is automatically the best option for someone. Bulgaria is another decent option if you want to be in the EU, especially combined with a personal tax residency there. And you are right that there might be many other suitable options. But I think you are too quick to dismiss Estonia altogether. For many DNs it’s definitely a legit and low hassle option.
Just my two (very long) cents.
Hi T, thanks for the comments! Great to receive some feedback from someone who has researched it as much as you did :).
I will go through it sometime soon and write my feedback.
It is good to make this article a resource with information so that people can make a well informed decision. It already prevented some people from going that route and I spoke to some others who wished they’d saw it sooner.
I have to admit that I did not look closely at this since I wrote this almost 1 1/2 years ago and it looks like you pointed out my carelessness. I am not afraid to admit it, if I was wrong somewhere. The point of this article is to inform about the Program, and that is what you contributed to. For which I’m thankful. Cheers!
Hi,
Just to address some of your points:
1. Getting a tax free salary:
You refer to your article. It says: “As far as I have understood the social taxes will not apply to someone living outside of Estonia and not performing any actual work within Estonia.”
I took a look at the worldwide corporate tax guide and personal tax guides of Ernst & Young.
“Nonresident individuals are taxed on the following types of income derived from Estonian sources:…
• Salary, wages and other employment income for work performed in Estonia if more than 183 days are spent in Estonia >>OR<< if the payments are made by a >>resident<< or a nonresident registered in Estonia." You mentioned in your article as well that companies incorporated in Estonia or considered resident. Confirmed by E&Y: "Resident companies are companies registered (effectively the same as incorporated) in Estonia." So unless there are some other arrangements I don't know about (possible), I don't see how you can get a tax free salary from an Estonian company, which is the core of your argument. It would be great though. I read on a blog that 1230 € can be paid out per month tax-free as salary. The argument was made that this is good for a lot of DN to be able to live in a place like Thailand. Couldn't find anything a bit more formal about it but if it is true the argument makes sense. 2. Being a PT. I have discussed being a PT, but reality is catching up. At least in the sense of not being a resident. If I were getting my salary from an Estonian company (especially if the case would be that I wouldn't have to pay taxes there), I would want to be able to actually proof that I am not a resident there (=really being resident somewhere else)... 3. Banking and Financial Services. Good to know that it is getting easier to open a bank account. This is indeed a good thing and an additional argument for Estonia (and the E-residency, let's not forget this is what this article is about). The same with availability of merchant accounts is a MAJOR pre for a place like Estonia (as you mentioned, becoming almost impossible offshore). 4. Wealth accumulation. I don't see why anyone would want to accumulate wealth on an Estonian bank in a taxed Estonian company doing active business. Maybe accumulate funds until you have a good amount. And then start invoicing from another company and keep paying the salary until the account is empty and deregister the company? Lol. 5. Cost. Another good argument. But there is a point where a thousand bucks in maintenance costs becomes small compared to the taxes you pay. I don't know what the minimum account balances required by banks are in Estonia but I'm assuming that it is more affordable than in some of the offshre jurisdictions. 6. In reaction to your point 4 about tax treaties. I understand the point. I can see scenarios where this can be used. In theory. But those people still living in a high taxed country in Europe would still pay income taxes there anyway. 7. Corporate Tax: "Resident companies and permanent establishments of nonresident companies are not subject to tax on their income. They are subject only to tax at a rate of 20% on the gross amount of distributed profits and certain payments made. The tax rate is applied to the gross taxable amount divided by a specified percentage." Interesting arrangement. You were right and I was wrong to go along above. Conclusion: I can see for beginning DN who just want to get started there are options in Estonia if you need to accept credit cards and are attracted by the low costs and some of the tax advantages. Although this is mainly because we're running out of options to start a business elsewhere with all these regulations. I also like the fact that at least some part of the Estonian government is trying to make business easier (although some local clients of mine told me they are a nightmare). Guys! Estonia has an E-residency program!
as soon as you get an E Resident Card you are liable to social tax as an individual 257 euros every 3 months ( More as a company) regardless , after you have paid the 100 euros to get the card . the 20% tax is also an issue . Colin Bowen
I was given a social tax bill of 257 euros then given 2 days to pay now its marked as a debt on my government record and adding 67 cents a day in interest until i pay it colin bowen
why would that have happened? Social tax is paid by employers. I presume you employ people in Estonia? reference: https://home.kpmg.com/xx/en/home/insights/2014/04/estonia-thinking-beyond-borders.html#3
Interesting comment, thanks.
Hey there Global Citizen,
Thank you for this great article even though I’m now in shock.
Just received the confirmation from the Estonian embassy in Tokyo that my E-resident card is ready for pick-up. I’m selling Ebooks on Amazon.com and Amazon.de, living in Taiwan (which has no tax treaty with US) and my plan is to incorporate a holding company in Estonia.
Now I’m insecure tbh… May I know where else do you recommend to incorporate businesses instead for this case?
Hi Marco,
Glad you find it interesting and I’m sorry about the shock.
I assume you want to use Estonia to avoid source taxes in the US, which in itself doesn’t seem like a bad idea.
But I guess the main question is: what next. How will you pay yourself, amounts, etc.
It’s a bit to much work to give a definitive answer on that.
https://theglobalcitizen.co/consult/
Wow Marco, I’m in the exact same situation as you are/were? I’m an American living in Taiwan about to start the e resident scenario for an online business. Do you know if you have to pay any taxes in Taiwan asa digital nomad living here? Did you go through with registering a business in Estonia? How’s it going?
Jon
Hi guys,
I’m launching a new website selling a digital product .. I’m not a US or Eu citizen, and incorporating in my own country will be a nightmare ..
So I’ve done some research and now basically between Delaware and Estonia …
I like the legitimacy a US address / registered company will give (especially if the wesbite is meant for US and French audiences), and I’m willing to take the 30 per cent tax hit for that ..
However, this estonian e-residency seems very interesting, especially when you factor in the leapin.eu , that work with the e-residency and seem to handle every aspect that I don’t really want to waste time with …
Any tips / advice ?
And GlobalCitizen, your “consult” link didn’t work for me for some reason ..
Thank you.
Thank you. Fixed the link.
What you are asking it is difficult to answer based on the information provided. If you setup a LLC in Delaware it is fiscally transparent. So no 30% withholding tax. The most important aspect for individuals in terms of taxation is residency.
Finally, reached this article which states facts. I was sold on the idea of e-residency also, applied for the e-residency card, and was about to set up a company. When I started to research tax implications, including asking EMTA about certain clauses, it dawned on me that it is just not worth it. Living in the UK means that even if distributed profits are taxes at 25%, double tax treaty doesn’t mean I won’t have to pay any more tax in the UK. On top of that, there is income tax and social tax as a Board Member in Estonia even if you are an e-resident. So you sign up for all the taxes, and no residency benefits from Estonia.
I am now investigating Malta as a potential option. At least the corporate tax rate is far better, so more funds to retain as profit. The tax position in the UK in relation to dividends still need to be evaluated and I am reaching out to tax specialists for advice. But Estonia e-residency has proven to be a disappointment indeed.
Same as @Shehryar Khan – I was sold on the idea and before researching everything in depth (especially tax wise) applied for the ID card. And then it’s not that beneficial. I’d have to pay additional corporate tax and then income tax in my home country, which doesn’t make much sense (basically 20% + 19%). On top of that I’d have to pay social security on my own just as well so no escaping that..
Unfortunately e-residency has brilliant marketing and it *could* work in some cases, but I’d say they are few and far between…