As a digital nomad and internet entrepreneur I love talking about the intersection of location independence, taxes, residence status, visas, and more. One thing that often comes up in these discussions is how the world just isn’t ready for us. Try telling an immigration officer that you “work online” and “make money on the go” and you might find yourself back on the next plane home. Or, try convincing your bank that they should mail your replacement credit card to an international address where you currently happen to be traveling. Good luck with that!
However, there is a place that at least understands the needs of the digital age and is trying to come up with solutions that cater to people like us. Enter Estonian e-Residency. Now, with everything government related anywhere in the world there is accounting, compliance, etc. But capitalism incentivises solutions to problems and even in this respect LeapIN has literally leaped in to solve this for you. For a small monthly fee, these guys will handle all your business day-to-day so that you can focus on working remotely around the world. They speak English and are well acquainted with Estonian legal and compliance requirements.
In this post, I’m going to explain what Estonian e-Residency really is and what it really isn’t. We’ll also get into some detail about how Estonian taxes work and how being incorporated in Estonia could be really profitable for your business.
What is Estonia’s e-Residency program?
Before we get caught up in some smart Estonian marketing, let’s be clear on what e-Residency really is. e-Residency at the moment is just your ability to setup a company and bank account in Estonia. It does not grant you the right to live and work in Estonia. If you are an EU citizen you already have that right, and for the rest of us, e-Residency will not get us the right to live in Estonia.
However, e-Residency is definitely a promise. A promise that Estonia wants to do things the internet way. They have an ID card system that lets you digitally sign documents to carry out bank and government transactions. They have also changed their laws recently so that bank accounts can finally be opened remotely with just a Skype interview.
Well, the fact that Estonia is gearing up to welcome location independent companies is already a big deal. However, one of the big draws that Estonia has is an incredibly favorable tax system. Companies in Estonia pay 20% corporate tax on net profits but, wait for it, the corporate tax is only due when you take money out of the company.
Think about this for a second. You could use an Estonian corporation and accumulate money within the company while paying yourself a small salary to manage personal expenses. You could have a corporate investment account and even invest the money in the stock market. Eventually, if you’d like to withdraw money from the company you could take advantage of favorable tax residence or several tax management strategies to maximize your capital withdrawal.
In any case, you have the option of keeping your capital within your corporate structure and investing it so that your initial corpus is much larger. Let’s do some math! If your Estonian corporation made a profit of $100,000 in 2016 (congrats!), then you have two options. You could withdraw $80,000 to your own name (you’ll lose 20% as corporate profits tax), or, you could invest the entire $100,000 in the name of your company. If you make your investments in the name of your corporation you can benefit from the magic of compound interest and grow your money faster. Even if you decide to directly invest back into your business you’ll have 20% more money to work with because of the 0% corporate tax rate and won’t get your wings clipped with initial tax expenses. I recommend that you use Interactive Brokers if you’d like to open an investment account for your corporation. They are extremely low cost and let you invest globally in several stock markets in multiple currencies.
Of course, apart from pure mathematics, it goes without saying that Estonia is a part of the EU and a reputable jurisdiction to have your company in. This is also definitely beneficial if you do a lot of business with clients in the EU.
Banking in Estonia
When the e-Residency program started out, lots of entrepreneurs had a tough time opening bank accounts in Estonia for their Estonian company. At the time you would’ve needed to physically visit a bank and have a face to face interview to open an account. You would often also have to explain your business model and why you want to bank in Estonia. This is not unusual because due to anti terrorism and money laundering laws, many banks around the world have similar policies. You could of course always open a bank account for an Estonian company in any other country, but for that you would need apostilled company documents.
The people at the e-Residence program received a lot of feedback about this. As of 2016 the laws have been amended for banks to feel comfortable opening accounts for Estonian corporations based on Skype video interviews. Thus, you can now potentially open an Estonian bank account without needing to visit Estonia.
Tax Residence in Estonia
This is where things get tricky. e-Residence does NOT grant you tax residence. Estonia has some specific rules on establishing personal tax residence but to meet that criteria, you need to live there.
Since you don’t really have the right to live and work in Estonia, how can you establish tax residence there? Estonian corporations are tax resident in Estonia by default unless someone claims otherwise.
What does that mean?
If you want to understand more about tax residence, please read our article on Taxes for Digital Nomads. The short version though, is the following: If you, as the owner of an Estonian company, do not establish tax residence in another jurisdiction, your company is tax resident in Estonia.
You need to be aware that if you establish personal tax residence (by triggering the requirements that are defined in every country’s tax code) in any country, it is quite likely that your Estonian corporation might also become a tax resident there, especially if you are the only senior officer in that company and are perceived to be the person making the key decisions for the company. This would then result in a lot of confusion and expensive tax compliance paperwork.
As a digital nomad, it is your responsibility to make sure that you do not trigger tax residence tests in any countries that you may be spending time in.
Why not Estonia
Although there are several reasons to choose Estonia one of the big reasons not to is VAT (Value added tax) compliance. All EU companies must correctly process and pay VAT. While VAT can get quite complicated, you won’t need to worry much about it if your incoming payments originate outside the EU. Still, it’s an added compliance requirement that other jurisdictions will not impose on you.
However, if you have EU clients Estonia is a good jurisdiction to be in because it is a full EU member and you will have the support of the EU legal and tax framework for all your business activities.
The program is still very new so if you are an Apple or a Starbucks, it’s probably not for you. But if you’re a budding on-the-go entrepreneur then this might be a great choice for you! The 0% corporate tax until distribution makes it a really attractive way to accumulate capital for growth or re-investment. There are some minor compliance and statutory requirements and this is where LeapIN can help you out. They are experienced in running Estonian businesses and can help you stay compliant for a small fee. They will also work out any tax issues for you and be your point of contact in Estonia.
The fact that the Estonian government has taken this route and also backed up their promises with actual changes in legislation gives me great confidence in the e-Residence program. Not only did they launch a program for global entrepreneurs to incorporate in Estonia, they followed up on issues that customers were facing with banking and amended their laws to better suit new entrepreneurs.
Overall the e-Residence program from Estonia is a breath of fresh air in a stuffy and slow moving space and I look forward to seeing what new possibilities it brings in 2017 for remote work around the world.
Thanks for clearing up a lot of the “grey” areas. Certainly something I’m very carefully considering over the next couple of weeks.