Introduction
On December 1, 2014, Estonia was the first country to launch an e-residency program. Also known as a virtual residency, e-residency is a government-issued digital identity and status that provides access to Estonia’s business environment. Since the program’s introduction, e-resident entrepreneurs worldwide have used their e-resident status to establish and run their EU-based companies globally and 100% remotely. Once an e-resident, you will receive a smart ID card to access services otherwise deemed impossible for a non-resident. E-residency is especially beneficial to foreign entrepreneurs who want to access the EU market, capital, or payment solutions, as well as freelancers, consultants, and digital nomads who provide location-independent services. As of August 2021, there are more than 83,000 e-residents and 17,449 Estonian companies founded by e-residents. Indeed, most people who apply say they do so to conduct business either with Estonia or through the e-Residency program.
Who is e-residency for?
E-residency particularly suits entrepreneurs, such as freelancers, consultants, and digital nomads who:
Have their business based predominantly online;Want to reduce bureaucracy and paperwork;Do not have a fixed location;Dant their business to remain within or enter the EU market, trade in euros, and access EU financial services or funding.
Common scenarios
Let’s look at typical scenarios for obtaining e-residency and registering a company in Estonia, with links to real-life examples of e-residents around the world.
Keep your company in the EU after Brexit
You can think of Estonia as a haven from Brexit and e-Residency as a bridge between you and the EU market. E-residency allows you to move or keep your company in the EU and use Estonia as a digital base to expand regionally or globally. Read: Priya’s and David’s story of moving their business to Estonia after Brexit.
You’re location-independent
e-Residency is highly suited to location-independent entrepreneurs or digital nomads. Company registration and setup are fast and uncomplicated, the administration is minimal, and you can carry your business in your pocket while you travel. Read: Nevena, a perpetual traveler, runs a recruitment business on the road from Serbia to the US and many locations in between. Ian, based in Brazil, and Georg in Austria, operate a global digital marketing consulting company that is registered in Estonia.
Entrepreneurs from Ukraine and neighboring CIS countries
e-Residency is fantastic for entrepreneurs from Ukraine (not part of CIS since 2018) and neighboring CIS countries who have clients in the EU or prefer to manage a company based in the EU and want better access to banking and payment services. Read: Konstantin, who is growing his software development OÜ from its digital base in Estonia.
Advantages of e-residency
Access to a broad range of Estonian public and private e-services;Sign documents digitally;Verify the authenticity of signed documents;Encrypt and send documents securely;Launch and manage a company online from anywhere in the world;Access international payment service providers (e.g. Paypal, Braintree);Apply for digital business banking and online payment services;Declare Estonian corporate taxes online (if your company is an Estonian tax resident).
A step-by-step guide to the application process for e-residency
Gather your documents
You will be asked to provide:
A copy of your government-issued ID;A recent passport-style digital photograph;Motivation statement;Visa or Mastercard.
Submit application
Pay the state fee and receive a confirmation email after successfully submitting. The state fee is €100-120 (depending on the pick-up location). After that, you can reach the application environment online to fill in your application for the e-resident’s digital ID and track its status once it’s being processed. To apply (either first-time application or renewal of your document), you must first create an account using your email.
Application review
Estonian Police & Border Guard Board will conduct a background check and notify you by email when the process is complete. This can take up to 3-8 weeks. Estonian Police & Border Guard Board may also ask for additional documents, increasing processing time.
Pick up your e-Residency kit
If granted e-Residency, you will be asked to:
Collect the e-residency kit at the location selected on your application;Bring a government-issued ID submitted with the application;Submit fingerprints.
Watch the video: How to apply for e-Residency in Estonia
Starting a company
After a successful application process, you will be granted e-Residency, and receive a government-issued digital ID card that provides access to Estonian e-services. The majority of e-services currently available to e-residents are business-related. Therefore, most people who apply for e-Residency do so to establish and manage their business online in Estonia’s secure and transparent digital business environment, with reduced bureaucracy. Let’s now look at the steps you must follow to build your company online.
Name your company
Important: Your company name must be unique, meaning that there can be no overlapping with existing Estonian businesses and trademarks registered in Estonia and the EU. If you intend to create a website and social media accounts for your company, you might want to consider securing an applicable website domain and account names before registering. Remember that you can only use Latin letters for your company name. You can check if your chosen name is still available at the Business Register name query service.
Determine the primary area of activity
EMTAK code (The Estonian Classification of Economic Activities) is the basis for determining the field of activity of your business. You can search for codes from the Business Register EMTAK tool online by picking the activity which corresponds most closely to your primary intended source of income. Even though you can operate in more than one field under the same business, only the main planned field of activity (the one you think will generate the most significant revenue within the first fiscal year) is to be selected at registration. Important: Some areas are subject to special requirements and require special activity licenses. A list of licensed activities can be found on the Ministry of Economic Affairs website.
Obtain a contact person and legal address located in Estonia
If the management board of your Estonian company is located abroad, you will need a designated contact person and a legal address in Estonia, as required by the Commercial Code. Both can be acquired online from licensed service providers on the e-residency Marketplace. Service plans are typically charged on a subscription basis and range from €30-€150 monthly. Some include various features, including accounting and tax consulting services. Only a notary, notary’s office, advocate, law office, sworn auditor, audit firm, or licensed trust and company service provider may be designated as your contact person. However, a person affiliated with your company (management board member, partner, shareholder, or a procurator of your company) who resides in Estonia can also be appointed as a contact person. Since January 2018, your legal address has been tied to your designated contact person, meaning the address of your contact person will be assumed as the legal address of your company. Most e-residents choose a single service provider for both. Note: The contact person acts as a messenger and is responsible for receiving and forwarding any procedural documents or letters of intent addressed to your company. They are not granted any rights to act on behalf of your company.
Register your company
The next step is to submit the online application for a private limited company (Osaühing – OÜ) registration either directly on the Company Registration Portal (either in Estonian or English) or through an API service on your service provider’s website (offer additional languages). The company registration application process contains four steps: preparation, signing, payment of the state fee, and finally, submission. The state fee for establishing an OÜ online is €265 (as of April 2022) and must be wired to the Estonian Ministry of Finance account and linked to your application. Other payment options such as card payment and PayPal are only available from service providers using Business Register API service. The application must be signed by all board members, shareholders, and the contact person service provider. All documents can be signed online remotely and at the same time with your e-residency card using Estonian ID-card software (DigiDoc). Recommended video: How to register your company in the Company Registration Portal? Important: Your company can only be registered online if all founders (inc board members etc.) have an Estonian e-Residency ID card, or an Estonian, Latvian, or Belgian ID card, Estonian or Lithuanian mobile ID, and they are private persons. If that is not the case, you need to use the services of a public notary office in Estonia, as clarified in the State Portal. Once your business is registered, though, it can be managed entirely online with an e-Residency digital ID card. According to the Commercial Code, which primarily regulates the legal environment for business entities in Estonia, these are the forms of business you can register in Estonia: Note: Sole proprietors (FIE) are taxed differently compared to limited companies. For example, sole proprietors typically have to settle quarterly advance income and social tax payments. For a non-resident, it would just be costly and burdensome, considering that registering as an OÜ is relatively straightforward and requires little initial investment in Estonia. As a result, e-residents are not advised to register as FIE.
Open a bank account
After successfully completing all steps and submitting your application, you need to wait for the court decision. The review process typically takes one business day, after which you receive a notification to your email address. Once your company has been registered in the Business Register, the next crucial step is to open a bank account for your OÜ. As an e-resident, you have three options: Previously, your ability to register share capital was limited exclusively to Estonian banks. However, since the Estonian Commercial Code was revised in January 2019, the share capital can also be registered with a financial institution within the European Economic Area (EEA). Note: To choose the best banking option for your venture, be sure to read our comprehensive ‘Best Small Business Bank Accounts‘ guide. Recommended video: What are your banking options for your e-Residency company & how can you accept payments?
Make a share capital contribution
After you have registered your private limited company (OÜ) and acquired a business bank account, you can now make a deferred share capital contribution by transferring necessary funds from your personal account to the company’s bank account. The minimum mandated share capital for an OÜ is €2,500. The monetary share capital contribution is not a fee but belongs to your company and can be used to pay for business-related expenses. However, you cannot pay dividends from your share capital contribution. Dividends may only be paid from the company’s revenue.
Taxes
Taxation is governed by the Estonian Tax and Customs Board (EMTA). You can visit their website for a detailed overview of e-Residency tax information, as well as the Estonian state portal, for an explanation of the entire tax system. For detailed information on how to run your cross-border company: E-Residency, together with PricewaterhouseCoopers, has compiled a comprehensive business guide for e-residents, mainly focusing on taxation. Recommended video: e-Residency tax basics
Personal tax residency
You must always pay personal tax in the country where you are a tax resident, regardless of your e-residency status. E-residency is a digital status and does not mean you are an Estonian tax resident. The only exception is when you pay yourself a board member’s fee, taxed in Estonia at 20% of net income, plus social taxes of 33%. Note: A person is only considered an Estonian tax resident if their residence (where they permanently or primarily reside) is in Estonia or if they have lived in Estonia for at least 183 days within one full year. Usually, residents are taxed on their global income in their country of residence, where they submit their annual personal income tax returns. Thankfully, domestic and bilateral measures are in place to avoid or mitigate double taxation if this revenue has already been subject to tax in the country (the source state) you received it. Therefore, you should always keep proof of taxes paid or taxes that have been withheld in Estonia to be presented to your local tax authorities. Local tax treatment may differ for each type of income (dividend, salary, directors’ fee). It can also be affected by what has been determined in the tax treaty between your country and Estonia.
Company taxes
If a company is a tax resident in Estonia, it is incorporated under Estonian laws. If you have registered your Estonian OÜ, your business is an Estonian tax resident and liable for tax in Estonia. However, some countries have different rules for determining if a company is a tax resident. For example, in addition to the place of incorporation, the site of effective management can often trigger tax residence as well. Suppose you run your business in a country with such rules. In that case, the company might have dual tax residence, meaning two states believe that the company is a tax resident in their jurisdiction and will want to tax its earnings. On the Estonian Government website, you can find a list of all Conventions to avoid double taxation. Although international taxation is complex, having an e-residency can make the tax-paying process more transparent and comfortable through e-services available in Estonia. For instance, if you owe corporate taxes in Estonia, you can declare all taxes entirely online. Important: International taxation rules can be complicated and are subject to the specifics of your business activities and location. For more complex situations, you may want to reach out to a tax consultant familiar with Estonian law or one based in the relevant country.
Example: a German resident running their OÜ from Germany
You manage your Estonian company from Germany;The German tax authority might decide that a PE (Permanent establishment) exists, meaning revenue from business activities carried out from Germany would be taxable in Germany;E-Residency doesn’t exempt your Estonian company from these foreign tax liabilities, as you will keep your tax residency in Germany;However, the treaty between Estonia and Germany will ensure that dividends distributed in Estonia will be exempt from income tax in Estonia.
Estonian tax system
In Estonia, income tax is assessed on a monthly basis, not on the profit earned every year, and only when profits have been distributed (e.g. when you pay out dividends). The corporate tax rate is typically a flat 20%, calculated as 20/80 from taxable net payment. Since 2019, if regular dividends are paid out, a reduced rate of 14/86 may apply. Besides corporate income tax, e-residents with businesses in Estonia will also need to consider the following Estonian taxes:
20% income tax from the director’s fee;33% social tax from the director’s fee.
This is a generalization, however, and exceptions may apply depending on the specifics of your business.
VAT registration
When you register a company (OÜ) in Estonia, you are not automatically treated as a person subject to VAT. Additionally, you do not have the right to deduct input VAT that the company incurs when buying goods or services for its business. The turnover threshold for mandatory VAT registration is €40,000 from the beginning of a calendar year; before that registering is optional. Whether you benefit from registration depends on the VAT amount on goods and services you buy and whether your clients are individuals or VAT registered businesses.
Being VAT registered means monthly tax reporting and monthly accounting fees in Estonia;
Delivery of services to other Estonian companies or individuals will typically be subject to a standard 20% VAT rate;
There’s also a reduced 9% VAT rate, which applies to accommodation services and the sale of books, certain periodicals, pharmaceutical products, and medical devices.
If you, however, provide services to customers in another EU member state or a third country, then a 0% VAT rate is generally applied.
Tax identification number
There is no company tax ID in Estonia. However, an 8-digit company registration code and your 11-digit personal identity code (isikukood) should be enough for all institutions and services in Estonia. If you are asked to submit your unique taxpayer number (sometimes called TIN) somewhere else in the world, present your registration code. You will receive a VAT registration number only if you’re VAT registered. Important: To understand which Estonian taxes you need to pay as an e-resident, you can take a survey online. However, VAT is not included in this version, so make sure to consult with experts on this matter.
In conclusion
To sum up, the primary goal of the e-residency program is to make life and business significantly easier for freelancers, digital nomads, business owners, international partners, or any other non-resident who has a connection to Estonia. So whether you want to launch a new company or expand your current business, invest in new ventures, or open a European Union business, Estonian e-Residency makes it possible as well as relatively quick and easy. Entrepreneurs can launch a business anywhere in the world with national borders and restrictions no longer an obstacle, with all systems and managing features integrated online. However, it is essential to bare in mind that e-residency is not a visa, a right to remain in Estonia or the EU, nor does it come with any social rights that local Estonians have. Furthermore, e-Residency is not a way to avoid paying taxes in your home country and certainly shouldn’t be seen as a pathway to evade paying your fair share. Finally, consider all your goals, business objectives, and options before making any decisions. While establishing a company in Estonia via an e-residency is beneficial for many, it doesn’t fit everyone’s needs. To register your company, you must first obtain a designated contact person and a legal address in Estonia by using a licensed service provider that you can find on the e-residency Marketplace. If you have registered your Estonian OÜ, your business is an Estonian tax resident and liable for tax in Estonia. Companies in Estonia do not pay taxes on profits that are reinvested into the company. Only gains that are distributed or other taxable expenses are taxed. The tax rate is 20% of net distributed profits. But if dividends are regularly distributed over three years, this tax rate decreases to 14% of net distributed profits. The turnover threshold for mandatory VAT registration is €40,000 from the beginning of a calendar year; before that registering is optional.
