One of the most recurring questions we’re asked by entrepreneurs from all around the world is if creating a company in Estonia is a suitable solution for their businesses:
Hello! I’m Alice, and my business does … I’m thinking about starting a business in Estonia. Is it feasible? Is it the best solution for my business?
As you know, there are many different types of businesses. From online shops to restaurants, from Yoga schools to micro-businesses led by one person who works in web development, design, online marketing …
In this article, discuss the type of business that can benefit from opening a company in Estonia thanks to the e-Residency program, and explain why and under which circumstances it may or may not be the ideal solution for yours.
Table of contents
- Understanding the concept -and audience- behind the e‑Residency program
- Types of businesses for which a company in Estonia is NOT advisable
- Types of businesses for which a company in Estonia IS advisable
- Tips and tricks for digital nomads with a company in Estonia
- Our advice
Understanding the concept -and audience- behind the e‑Residency program
Note: if you still don’t know what the e-Residency program is, we recommend you to visit this link first.
The e-Residency program was created to grant anyone access to some digital services offered by the Estonian government, regardless of their nationality or country of residence. Obviously, the most interesting one is the ability to launch a European company in Estonia, completely online, and run it from anywhere in the world.
The e-Residency program was designed for freelancers, digital nomads, startups, and international companies. Not for big corporations whose headquarters are outside of Estonia. There are two reasons for this:
First, because Estonia is one of the very few countries that believe in digital nomads and understands that the future is digital. For decades, this small Baltic country has taken giant steps to digitalize its entire administration. Their way of thriving after years of Soviet occupation has been investing in innovation and building a digital nation that serves not only their citizens but also e-Residents from the whole world.
Quoting the e-Residency 2.0 whitepaper, recently released:
According to various estimates, the number of digital nomads globally is continuing to grow at ever faster rates, and for many, the average stay in a given country is about 2-3 weeks. […] These people aren’t clear on where they should pay taxes, and to what extent. It shouldn’t be like that. […] there is another jurisdiction with intense economic activity but does not have a finance ministry or social insurance board and that’s the internet. Estonia has a potential way of filling this void.
Secondly, because Estonia wants to avoid its innovative business system clashes with other countries. Generally speaking, if your company has its permanent office, all its employees, suppliers, and customers in a specific country, it risks being considered a tax resident of that country by the local authorities.
And that is not a good scenario for your company and for Estonia. Companies established under the umbrella of the e-Residency program are already an enormous contribution to the economy of the country and a market that Estonia has earned, by understanding the development and growth of a new digital society that rejects borders and geographical limitations.
Therefore, an Estonian company is not the right solution for all businesses. However, for some entrepreneurs, opening a business in Estonia has changed their lives. It can offer you the freedom to travel the world and work on a truly location independent business.
Types of businesses for which a company in Estonia is NOT advisable
There are at least two main scenarios in which creating a company in Estonia is clearly not recommended. Let’s describe them in detail.
Your business needs a permanent office or facilities somewhere outside of Estonia
If your company needs a permanent office or facilities outside of Estonia, the e-Residency program may not be the best option for you. The reason is that, as we mentioned above, that other country could claim that your company is actually a tax resident there.
Imagine, as an example, that you have a restaurant in Paris, full of employees. Your business is tied to a specific place in Paris, all your employees are probably French, and your company is generating all its value in France. It makes sense for the local authorities to claim that your business is, effectively, a French resident and has to pay taxes in France. The same would probably happen if you own a bike store, real state office, or a Yoga school. For those businesses, Estonia is not the right place to create your company.
Does that mean you can not be a resident of a country, for example, and have a company in Estonia?
No, that’s perfectly legal. You and your company are different, independent legal entities. However, if you are the only shareholder and member of the board of your company, and all your activity is performed in a country other than Estonia, the local authorities can claim that you have a permanent establishment in the country and, as a result, your company too.
If your company is composed of several board members, distributed around the world, that’s a completely different scenario. Nobody could claim that the activities of your company are then tied to a specific country anymore.
Hence, it’s important that, if you are the sole proprietor of your company, you avoid creating a permanent establishment for your company outside of Estonia. This implies avoiding having facilities outside of Estonia, and avoiding a permanent establishment as the result of your residence in that country.
As an example, renting a permanent office in Germany for more than 6 months a year is not advisable, while working in a coworking space is perfectly ok, for years or more. That’s because a coworking space does not count as facilities owned by your company. It’s also a justifiable expense.
Your business sells, buys, imports, exports, or handles physical goods
Although, in theory, nothing prevents you from opening a company in Estonia to sell, buy, or handle physical goods, it is not the most recommended scenario. Why?
First and foremost, the VAT system for these companies is much more complicated. The fact that your company is in Estonia, but your warehouse is in another country will effectively disqualify you from obtaining a VAT number in Estonia. The Estonian tax authorities will aptly claim that you need to apply for a VAT number where your warehouse is. That introduces a weird situation where your company is registered in Estonia, but its warehouse is, say, in Italy, and so the VAT number of the company. Goods will arrive in your Italian warehouse but will be registered for an Estonian company… that only means regular problems.
Secondly, because all those activities are usually subject to special regulations, licenses, and more complex accountancy rules. Concretely, these businesses would require inventory control in Estonia. This makes managing the company much more difficult and reduces the benefits of operating the online business.
As an exception to this rule, if your company works in the drop-shipping model, like Amazon’s FBA program, a company in Estonia makes perfect sense, as long as some conditions apply:
- you don’t store any goods
- the customers buy from your online shop
- your providers send the goods directly to the customers
- you monetize the sale as a fee, effectively acting as an intermediary between the provider and the customer.
Your business is linked to your geographical location, especially if you reside in a European country
Let’s say you are the only member of your company, and you live in a European country. Most countries with CFC rules establish that when you are a tax resident there, 100% of your activity is supposed to be carried out in that country. Thus, it can be said that “effectively” 100% of the company operates in that country. This would be the equivalent of having an office there, implying a permanent establishment of your company in that country. That same situation happens if the majority of the shareholders live in the same country (with CFC rules) as tax residents, in the case of a multi-member company.
IMPORTANT NOTE: with the new European Directive on tax avoidance of January 2020, these CFC rules don’t apply to European citizens under certain conditions. That means you can live (and be a tax resident) of any European country and manage your Estonian company online from there, without the need of being a digital nomad. More info here.
For more information, you should check if your country has a double-taxation treaty with Estonia. If in doubt, is advisable to err on the safe side on things and consult a lawyer.
In Your Company In Estonia, we are firm believers in Estonia and the e-Residency program as the right tool to empower location-independent entrepreneurs and startups. But we know it may not be the ideal solution for everyone. If you have a restaurant in France, your business is tied to a geographical location. If you develop software in Italy, and never leave the country, even if your activity is completely online, your business is tied to your location too.
Types of businesses for which a company in Estonia IS advisable
So, what kind of businesses are especially suited for an Estonian company through the e-Residency program?
For starters, it is the perfect solution for location independent freelancers and solopreneurs working in the digital world. If you offer IT consulting, development, design, online teaching, or marketing services, or you are a blogger or an architect that creates digital mockups and projects for your customers on-demand… The e-Residency program and a company in Estonia is the perfect solution to allow you to focus on growing your business while avoiding all the hassle and bureaucratic red tape.
Also, if you are a digital nomad, this is simply the best alternative available worldwide for running a location independent business. Estonia combines its online administration with a very beneficial tax system for digital nomads, alongside a strong reputation as a respectable country from the European Union. Estonia is not Panama or the Seychelles, it’s not a tax haven.
For small business owners that offer digital products, software, or services, Estonia is the perfect place to establish a business. The innovative Estonian tax system, applying taxation only when there’s distribution of benefits, it’s a competitive advantage.
For startups, it is also a great solution. In some European countries, most startups are not, in fact, registered as companies. Not at least until years later, when they have a steady revenue flow. That’s because in those countries, the hassle and costs of running and managing a company are not viable if the startup has no customers or it’s not generating revenue yet.
Additionally, remember that as e-Residents, members of a startup can digitally sign documents with their Estonian identity cards. This is a perfect scenario for a startup whose members live in different parts of the world but still need to hire employees, make legal agreements, distribute dividends, etc…
Tips and tricks for digital nomads with a company in Estonia
I mentioned above that if you are a digital nomad, a company in Estonia is the best solution for your business. Why? Mainly because the money your compare-invest in the company, or spend in the course of your activity is not subject to taxes.
What does this mean for a digital nomad?
To begin with, your co-working center costs are justified business expenses, so you do not pay taxes for that. If you travel semi-permanently (3-6 months), you can rent an office -for example, in AirBnB- and deduct it as a business expense, free of taxes. You will need to ask for a rental contract for your company and make sure it’s up to 6 months a year.
The Daily Allowance covers your business travel expenses, like meals, and it’s also free of taxes. In addition, all fungible office equipment, public transportation, taxis, buses, etc, are justified business expenses, so you will not pay a euro in taxes for that.
The Estonian taxation system is not only fair, but clever, and designed to help you grow your business. When your company becomes bigger and starts hiring employees, you will pay taxes for them. Also, there are no obscure rules or weird exceptions to understand. Everything is clearly defined, from what you can deduct as a business expense to how much taxes you pay for salaries and dividends.
If you are a freelancer working in the digital world, a location independent small business owner, or you want to launch a startup, creating a company in Estonia is the best option to have a borderless, online business that travels with you. The e-Residency program is ahead of the game from most other business systems, in Europe and abroad.
Estonia has been the first country to realize that the professionals and jobs of tomorrow will be different from the ones of today, and that the new entrepreneurs are: bloggers, freelancers, developers, startups, cryptocompanies, designers, video and audio editors, YouTubers, digital nomads… The rest of the countries are still struggling with business systems that predate the digital revolution, and we hope that sooner or later, they will also understand that they need to adapt them to modern times.
The world of tomorrow is digital. It is a world without borders, geographical limitations, barriers, or prejudices. A world where you can travel, live, and work wherever you want.
The e-Residency program allows anyone to start and run a business in Estonia and manage it online. However, not all types of businesses are suitable to benefit from the innovative program of Estonia.
In this article, we offer you a guide to know if a company in Estonia is the perfect solution for your business.