Estonia has the most advanced digital society of our time. Let us have a closer look at their e-Residency program that allows to launch and run a borderless business.
This a continuation of the series on Flag Theory.
|Basic education quality||Excellent|
|Average violent crime rate||Low|
|Average life expectancy||76 years|
Cost of living estimates
|Single student||USD 857|
|Digital Nomad||USD 1,183|
|Single retired person||USD 1,684|
|Retired couple||USD 2,240|
|Single entrepreneur||USD 2,082|
|Entrepreneur with family of 4||USD 3,922|
Advantages And Disadvantages
|e-Residency program||Cold climate|
|Simple taxation system|
|Fully developed technology platform|
|Ease of doing business|
|Nearly perfect banking rules|
e-Residency – an introduction
e-Residency is a phenomenon where a person can easily become a digital resident. Nevertheless it is important to mention here that this does not lead to a "regular" citizenship in Estonia.
Regular residencies allow you to physically live in a country and deal and trade with people of society. You can also acquire valuable assets in such residencies. You can even obtain a second passport by living there and fulfilling their requirements of a passport if you are from another country.
On the other hand, Estonia’s e-Residency program allows you to be a citizen of Estonia in the digital sense only. Your physical citizenship is not considered within the program and you will have to follow the common legal procedure if you wish to obtain actual citizenship instead.
So what are the abilities of the e-Residency program then?
When you obtain a profile in e-Estonia, you can use government services immediately and the internet will be your mode of commuting those. Also things like opening an online banking account is rather simple since you are already validated by the government of e-Estonia. Furthermore currently, any e-Resident can set up and manage an online business company without a lot of painful procedural steps.
In a nutshell you have the ability to:
- Establish and administer your Estonian company online
- Open & conduct online banking
- Engage with payment service providers online
- File Estonian taxes digitally
- Transfer money remotely
- Encrypt and send documents
- Verify documents for their authenticity
- Digitally sign contracts and documents
Grow your business
As Estonia has no corporate taxes planned for reinvested profits, you can accumulate the profits without any tax (eg. you can also distribute the profits to shareholders with a 20% corporate tax rate described later on)
A hypothetical example how good this actually is to make your business grow:
A business has an annual income of one million USD. If we consider the federal corporate tax in the US (35%) and compare it with no tax in Estonia, the following figures will be generated.
|1st year||2nd year||3rd year||4th year||5th year|
|Estonia based company||USD 1,000,000||USD 2,000,000||USD 3,000,000||USD 4,000,000|
|US based company||USD 650,000||USD 1,300,000||USD 1,950,000||USD 2,600,000|
|Difference||USD 350,000||USD 700,000||USD 1,050,000||USD 1,400,000|
If you observe, you will be able to save a lot of money through maximum tax efficiency during a growth phase.
Estonian taxation in further detail
The International Tax Competitiveness Index mentions Estonia to have a taxation system that is the most competitive among any OECD country. As I said before – compared to the US, Estonia only has a meager 20% tax and that too is for distributed profits. In simple words, any corporate income will be taxed once with no individual taxes for dividends in Estonia. No corporate tax is going to be imposed if a company doesn’t plan to pay its profit as dividends to its owner.
Most countries have a system that taxes corporate profits twice. The first tax is on the corporate level whereas the second comes in for individual dividends. 56.6% of integrated tax is imposed in America on corporate profits. Therefore eg. citizens of the UK, Canada, and America can enjoy double tax treaties from the extensive network of Estonian taxation.
Another – more complex – example.
An Estonian company has decided to distribute €10,000 from its profit to a German resident, here is a breakdown of the tax.
- €2,000 to be paid in taxes (corporate tax for distributed profits)
- 25% tax paid on the left behind €8,000 by the German on capital gains and on €2,000 also
- €6,000 will be available for the individual after taxes.
But if the resident is from a nowhere country or from a country having a territorial tax system like Panama, then only 20% of Estonian corporate tax is going to be paid. An additional benefit is that an Estonian company also enables you to have a presence in the European Union through your company.
Applying for e-Residency
You need to be 18 years old or above with zero criminal background. The background check will be performed by the Estonian police so you can sit back and relax. With an application fee of €100, you can click here and apply.
You then can get your personal Estonian Digital ID card in any Estonian consulate. The approval process is supposed to take around 2 months (although this might happen way faster). With a reasonable coverage in North America and complete coverage for Europe, you can use your ID card easily in those.
How to set-up an Estonia based company and open a bank account
Any foreigner can avail a legal entity by paying roughly €2,500 and own a private limited company immediately. All the obligations are automatically removed from liabilities once the amount is paid. The Estonian government will assist in helping understand the rules and regulations.
These basic steps will help you understand how to register a company as an e-Resident.
- Get an address in Estonia for your company. The numerous service providers will assist in doing that.
- Get your company registered online using the Company Registration Portal (easy method without any notaries) or use again a service provider.
You can open a bank account after you have successfully registered your company. Currently, an e-resident can meet a banker through a secure video-chat and apply to get a bank account while there are still some banks like LHV who demand you to be on site for once. Nevertheless this has some advantages that you can compare here.
Requirements for administration rights of the company
In order to have the right to administer your company, you will need to fulfill the following requirements and present these reports.
- Changes in equity in statement form
- Cash flows statement
- Income statement
- Financial position in statement form
Every accountant in a company knows how to make these statements and reports and even if your company doesn’t have an accountant, the Estonian government will assist you through their e-financials software that has been developed for tax filing. The software will also assist you in managing your books and creating quick financial statements required.
Comparison of business entities
All business entities can be differentiated basically by these characteristics:
- Share, extent, and principle of shareholder liabilities
- Requirements for the audit of the company
- The required amount of share capital along with contribution means
- Right of presentation of the company
- Decision-making processes and management bodies of the company
- Simplicities of organizing everyday activities
|Form of business||Minimum required startup capital (EUR)||Minimum required number of founders||Financial liability||Management|
|Sole proprietor (FIE)||none||1||Unlimited liability||No management bodies|
|Private limited company (OÜ)||EUR 2.500; none if the share capital is not bigger than EUR 25.000||at least 1||Partners are not personally liable for the private limited companies obligations||The obligatory management body of the private limited company is the management board; a supervisory board is mandatory only if specified in the articles of association.|
|Public limited company (AS) or||EUR 25.000||at least 1||Shareholders are not personally liable for the public limited companies obligations||The supreme management body of the public limited company is the general meeting of shareholders; a public limited company must have a management board and supervisory board.|
|General partnership (TÜ)||none; amount of the contribution is stipulated in the partnership agreement||at least 2||Unlimited liability for the partnerships obligations is shared equally by the partners||No obligatory management bodies|
|Limited partnership (UÜ)||none; amount of the contribution is stipulated in the partnership agreement||at least 2||At least one general partner has unlimited liability for the partnerships obligations; at least one limited partner has limited liability to the extent of their contribution||No obligatory management bodies|
|Commercial association (ühistu)||EUR 2.500||at least 2||Partners are not personally liable for the commercial associations obligations unless agreed otherwise||The general meeting is the associations supreme body, decision are made by voting, where every member of the association has one vote. The management board is the associations management body|
Services and goods of a foreign company can also be offered in Estonia by a branch. The branch of the company has to be registered in the e-Business Register. Nevertheless it should be considered that a branch is not a business entity and the foreign enterprise is liable for obligations arising from the activities of the branch.
Procedures Required To Register OÜ Or AS
- Determine legal entity form and company name
- Select and appoint board members, owners, and founders of the company
- Authorized capital to be determined
- Drawing of the company charter
- Defining e-mail, phone and address
- Constituent documents to be signed in the office of the notary
- Opening of a bank account in the company name
- Issue of B-card (registration certificate) of the company by the Commercial Register of Estonia.
- Signing the contract for the use of electronic services of Tax and Customs Board.
- If necessary, obtain a license to perform special activities by registering in the e-Business Register
Current state of banking
As you learned, as an e-Resident you can create a company in Estonia after receiving your DigitalID, but also pay taxes and do remote bookkeeping from anywhere in the world.
Since January 2019, you can choose to pay your company’s share capital from anywhere in the world through any e-payment method that is acceptable including TransferWise Borderless. So you are not bound to make the transaction from a real bank account in Estonia anymore. This step from the Estonian government has made it very easy to enter the e-Residency promoting ease of doing business even further.
For a PSP account (IBAN) which enables receiving and sending money, using TransferWise Borderless is a seamless solution plus you can open the account remotely. I will follow-up with another article which will give you further information about the institution.
According to Tax Foundation the taxaxtion system of Estonia is declared to be the most competitive globally. You can grow your business through the profit earn as – in its most extreme form – there are no taxes so your business will increase unopposed.
With literally no bureaucracy, you can do business easily from any part of the world. Your digital presence and signature are the enabler to build, run and grow a company while giving you access to the European market all for a shared capital liability of roughly €2,500.
- The e-Residency Program Of Estonia: Launch and run a location independent business 100% online; Ignacio Nieto Carvajal (Self-Published)
- Daylight Robbery. How Tax Shaped Our Past and Will Change Our Future; Dominic Frisby (Penguin)
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