Is Starting a Business in Estonia the Right Solution for You?

Many entrepreneurs ask, “Starting a business in Estonia is the best choice for my company?”

There are various types of businesses, such as online shops, restaurants, yoga schools, and small businesses, run by individuals specializing in web development, design, and online marketing.

If you’re considering opening a company in Estonia but are still determining if it fits your situation, this article is perfect for you.

What Is the e-Residency Program and Who Is It For?

What is the e-Residency program, and who is it for?

The e-Residency program was created to allow people from any country to access certain digital services the Estonian government provides.

One of the most interesting benefits of this program is that you can start a European business in Estonia entirely online and manage it from anywhere in the world.

The e-Residency program is ideal for freelancers, digital nomads, startups, and international companies. However, it’s not intended for large corporations based outside Estonia.

Here’s why:

• Estonia is one of the few countries fully embracing digital nomads and recognizes the importance of going digital. This small Baltic country has made impressive progress in digitizing its entire government system. It has become a digital nation serving not only its own citizens but also e-residents from all over the world.

• Estonia wants to ensure that e-residents who run businesses are online-based and not tied to a specific location. This way, they can avoid complications with local regulations and administrative matters. Suppose your company has a physical office, all its employees, suppliers, and customers in a particular country. In that case, local authorities may consider it a tax resident of that country.

Therefore, starting a business in Estonia may not be the best solution for every type of companies.

However, opening a company in Estonia has been life-changing for some entrepreneurs. It provides the freedom to travel and operate a business that is truly independent of any specific location.

Starting a Business in Estonia: When It’s Not a Perfect Fit

We wouldn’t suggest starting a business in Estonia in three main situations.

However, suppose you’re in one of these situations or something similar. In that case, it’s always a good idea to seek advice from a local tax advisor.

They can look into your specific situation and guide you through your tax responsibilities in your own country. This way, you can avoid any issues or fines.

You need a permanent office or facilities outside of Estonia

If your company needs a physical office or facilities outside of Estonia, the e-Residency program may not be your best choice.

For example, suppose you have a restaurant in Paris with employees, and most of your business is in France. In that case, the local authorities will see your business as a resident of France and expect you to pay taxes there.

The same goes for businesses like bike shops, real estate agencies, or yoga schools. Estonia isn’t the right place for these types of companies.

However, knowing that you can still reside in one country while having a company registered in Estonia is important. You and your company are considered separate entities.

But if you’re your company’s only shareholder and board member, and all your business activities are in another country, that country’s authorities may consider your company a resident there for tax purposes.

On the other hand, if your company has multiple board members spread across different countries, it becomes harder for anyone to claim that your business is tied to a specific country.

So, if you’re a sole proprietor, it’s best to avoid establishing a permanent presence for your company outside of Estonia. This means not having physical offices abroad and ensuring that your residency in another country doesn’t make your company a resident there.

For example, renting an office in Germany for more than six months a year is not recommended. Instead, consider using a shared coworking space.

However, if you live in Spain and rent a coworking space, be cautious about declaring it as your permanent establishment for tax purposes. It may cause complications. It’s better to rent the space but not claim it as a deductible expense to avoid potential issues.

Operations involving physical goods

Suppose your business involves selling, purchasing, importing, exporting, or handling physical goods. In that case, there may be better options than starting a business in Estonia.

Here’s why:

• Dealing with physical goods often requires a presence in another country. This means you may need offices, warehouses, and employees there. 
• It also involves complying with specific regulations, licenses, and complex accounting rules.

In Estonia, businesses dealing with physical goods must manage inventory control locally. This adds complexity to managing the company and reduces the benefits of operating an online-based business.

👉🏻However, there’s an exception to this rule. If your business operates under a dropshipping model similar to Amazon’s FBA program, establishing a company in Estonia can be a suitable choice. But there are certain conditions to meet:

• Your company doesn’t store any goods.
• Customers make purchases directly through your online shop.
• Your suppliers ship the goods directly to the customers.
• You earn revenue through fees by acting as an intermediary between the provider and the customer.

Your business is tied to your geographical location

Let’s imagine a situation where you are the sole owner of your company and live in a European country.

In many countries with Controlled Foreign Company (CFC) rules, if you are a tax resident, all of your company’s activities are assumed to happen in that country. It’s like having an office there.

This creates a permanent establishment for your company in that country. The same applies if most of the shareholders (in the case of a multi-member company) are tax residents of that country.

It’s important to know that the new European Directive on tax avoidance, starting from January 2020, exempts European citizens from these CFC rules under certain conditions.

As a European citizen, you can live (and be a tax resident) in any European country and manage your Estonian company online without being a digital nomad.

However, showing genuine business activities in the country where your company is a tax resident is crucial. This can include having staff, equipment, assets, or premises there.

If you want more detailed information, it’s advisable to check if your country has a double-taxation treaty with Estonia and, when in doubt, consult a legal professional.

At Companio, we strongly believe in Estonia and the e-Residency program as valuable resources for empowering entrepreneurs and startups who want to work from anywhere.

For example, suppose you have a restaurant in France or develop software in Italy without leaving the country. Even if your business is conducted online, it’s still tied to your location.

Starting a Business in Estonia Is a Great Choice for These Scenarios

Now, let’s talk about the types of businesses that are a great fit for starting an Estonian company through the e-Residency program.

Location independent freelancers and solopreneurs

Estonia is the perfect solution for you if you’re a freelancer or solopreneur working in the digital world.

Whether you provide IT consulting, development, design, online teaching, marketing services, or work as a blogger or architect creating digital projects for clients, the e-Residency program and having a company in Estonia allows you to focus on growing your business without unnecessary bureaucratic hurdles.

Digital nomads

Estonia is the best choice worldwide for digital nomads who want to run a location-independent business. 

With its efficient online administration and favorable tax system for digital nomads, Estonia offers the benefits of being part of the European Union while maintaining its reputation as a respected member. 

It’s important to note that Estonia is not a tax haven like some other countries.

 As a digital nomad, you can enjoy tax-free daily allowances for business travel expenses and fully justify other business-related costs, such as office equipment or transportation expenses, as tax-deductible.

Furthermore, Estonia’s tax regulations are transparent and straightforward. There are no obscure rules or peculiar exceptions to navigate. Everything is clearly defined, from deductible business expenses to the tax rates applicable to salaries and dividends.

Small business owners

Estonia is the ideal location to establish your business if you’re a small business owner offering digital products, software, or services.

The innovative Estonian tax system, which taxes profits only when distributed, gives small businesses a competitive advantage.

Startups

Estonia supports startups by allowing them to register as companies even in their early development stages before generating significant income.

As e-Residents, startup members can digitally sign documents using their Estonian identity cards, making it convenient for global teams to hire employees, establish legal agreements, distribute dividends, and more.

Cryptocurrency and blockchain businesses

Estonia stands out as a reputable member of the European Union. It offers a transparent environment for cryptocurrency and blockchain startups. 

Unlike dubious tax havens, Estonia embraces these technologies and operates its digital administration on blockchain technology called the X-Road. 

The country has even explored the possibility of implementing its national cryptocurrency, Estcoin, demonstrating its progressive approach to the industry.

If you’re interested in launching your cryptocurrency startup, you can find more information in this article.

The World of Today Is Digital

In conclusion, Estonia offers an ideal solution for entrepreneurs seeking to build a borderless online business.

Whether you’re a freelancer, small business owner, or startup founder, establishing a company in Estonia through the e-Residency program allows you to work and thrive in the digital world without geographical limitations.

If you’ve discovered that Estonia is the perfect solution for your business but don’t know where to start, we’re here to help.

At Companio, we can guide you through the e-Residency application process, assist you in opening a bank account, and provide accounting support. To learn more, click here.