For the last decade, Estonia has been known for its innovative digital solutions and extensive e-governance programs. One of those programs, ‘E-residency of Estonia’, was introduced in 2014 as a tool to attract location-independent entrepreneurs, such as software developers and writers, to the Baltic country.
What is e-residency?
E-residency provides entrepreneurs from all over the world with the opportunity to become e-residents in Estonia without the need to physically stay in the country. The main instrument for managing e-residency is the digital identity card (ID) issued by the Estonian government, which provides a secured access to a variety of e-services.
What are the benefits of e-residency?
By using their digital identity cards, entrepreneurs can remotely establish, manage, and fully own companies in other EU countries, without the need to appoint a local director or representative in Estonia and without the need to effectively carry business activities in Estonia. Starting an EU company through e-residency enables the e-resident to benefit from the EU legal framework, the EU single market, and a large number of EU-based providers of financial services. All government-related documents (e.g., incorporation documents and tax returns) related to the company can be submitted online. Furthermore, entrepreneurs can use their digital identity cards for opening Estonian bank accounts online and digitally signing documents in a form accepted by the EU, the US, Switzerland, South Korea, Turkey, and other countries.
How to apply?
All steps of the application process for e-residence can be completed entirely online. The application should include the following documents: (i) a copy of applicant’s government-issued ID card; (ii) a passport style digital photo; (iii) a motivation statement; and (iv) credit card details. After the application is confirmed, the new e-resident can pick up his/her digital ID from the chosen pick up location which can be inside or outside Estonia.
After becoming an e-resident, a person can set up an Estonian company. In order to do so, the following steps should be completed: (i) obtaining a legal address in Estonia (e.g., a virtual office); (ii) choosing a business name; (iii) registering the company online; and (iv) paying applicable state fees and company’s share capital.
How can e-residency impact taxation?
The rapid growth of the Estonian economy is empowered by one of the most competitive tax environments among the OECD countries. The Estonian corporate tax rate is just 20%.
In general, a company that is incorporated in Estonia is regarded as an Estonian tax resident and, therefore, subject to Estonian corporate taxation. However, this principle may not apply to companies with an international character. Such companies may be subject to tax treaties or other rules. According to many tax treaties concluded by Estonia, the decisive factor for determining tax residency is the place of company’s effective management. Hence, Estonian companies that are effectively managed from abroad can be regarded as tax residents of the countries where their effective places of management are located.
Estonian non-resident companies are subject to taxation in Estonia only in two cases, namely, (1) they have permanent establishments or some business presence in the country (e.g., sales representatives based in Estonia) or (2) they derive income from Estonian sources (e.g., through real estate based in Estonia).