One of the most recurring questions we’re asked by entrepreneurs is this one:
I’m thinking about starting a company in Estonia. 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, and online marketing…
So if you are thinking about starting a business in Estonia but you are not sure if it is the best option for you, keep reading.
Table of contents
- What is the e-Residency program and who is it for
- Estonia is not a good option for you in these cases
- Estonia is a great option in these cases
What is the e-Residency program and who is it for
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.
One of the most interesting benefits is the ability to open 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:
- 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.
- Estonia wants to make sure that the entrepreneurs adhering to the e-Residency run an online business and are location independent, avoiding problems with local administrations/regulations. 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.
Therefore, opening a company in Estonia 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.
Estonia is not a good option for you in these cases
There are three main scenarios in which starting a company in Estonia is clearly not recommended. Let’s describe them in detail.
You need 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.
As we mentioned above, the main reason is that other countries 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. So this means that:
- Your business is tied to a specific place in Paris.
- All your employees are probably French.
- 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 estate office, or a Yoga school.
For those businesses, Estonia is not the right place to create your company.
But 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.
That’s why 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.
But there is another possibility: if your company is performing a substantive economic activity in Estonia and you can prove it— for example, with staff, equipment, assets or premises — your company will be considered a tax resident in Estonia, even if all the board members of the company live in a specific country.
You operate with physical goods
This means our 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?
- If you operate with physical goods you may need physical presence in another country. For example, you might require offices, warehouses and employees.
- 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 dropshipping 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
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. This means that if your company has a legitimate activity and you can prove this substantive activity in the country, for example, staff, equipment, assets or premises in the country your company is tax resident, you have nothing to worry about. You can find more information in this article.
For more information, you should check if your country has a double-taxation treaty with Estonia. If in doubt, is advisable to consult a lawyer.
In Companio 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.
For example, if you have a restaurant in France, your business is tied to a geographical location. Or 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.
Estonia is a great option in these cases
So what kind of businesses are especially suited for an Estonian company through the e-Residency program?
Location independent freelancers and solopreneurs
It’s the perfect solution for location independent freelancers and solopreneurs working in the digital world.
For example, 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 allow you to focus on growing your business while avoiding all the hassle and bureaucratic red tape.
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. It’s not a tax haven— like Panama or Seychelles—.
Furthermore, the money you 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?
- Your co-working centre 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.
Small business owners
If you’re a small business owner that offers 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 the distribution of benefits, it’s a competitive advantage.
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…
Cryptocurrency and blockchain businesses
In general, cryptocurrency and blockchain startups are faced with a lack of knowledge from most of the population, governments and official institutions.
The consequences are poor legislation frameworks that act in a defensive way, rather than trying to understand and regulate the technology and its possibilities.
Estonia is a respectable country of the European Union, so it won’t be considered as if it was in a shady tax haven like Gibraltar or Bermudas.
In addition, in Estonia, the digital administration works on blockchain technology -the X-Road- and the country considered implementing a national cryptocurrency, the Estcoin.
If you want to know more about how to launch your cryptocurrency startup you can read this article.
The world of today 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.
Estonia has been the first country to realize that the professionals and jobs are changing. 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.
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.
If you have discovered that Estonia is the perfect solution for your business but you do not know where to start in Companio we can guide you through the e-Residency application. We also help you open a bank account and with the accounting. If you want to know more, click here.