Estonia is widely regarded as the first country to issue e-residence, i.e., an identity card issued by the Estonian government that provides its owners with access to certain digital services. The services include, but are not limited to, the opportunity to register EU companies online, accept online payments, sign legal documents digitally, conduct various business activities remotely, and declare business taxes online.
While the Estonian e-residence is certainly an innovative governmental product, it is important to stress out that it has no real impact on the taxation of companies and individuals. The reason for this is very simple – most countries use the physical residence as a criterion for assessing whether a natural person is subject to personal income taxes. With regard to corporate entities, the criterion usually is the place where the management of the company resides.
The Estonian e-residence card is not a traditional residence card that provides rights to reside and travel in a specific country. The government of Estonia clearly states: “Note, an e-Residency digital ID card provides access to e-services, but it is not a valid form of physical identification and cannot be used as a travel document. e-Residency does not confer citizenship, tax residency, physical residency or right of entry to Estonia or the European Union.”
Evelyn Liivamägi, the Head of the Tax Department at the Estonian Tax and Customs Board (ETCB), confirmed the difference between tax residence and e-residence by stating: “E-Residency is not tax residency” and “Not all e-residents contribute taxes to Estonia, but when they do it is based on what e-Residency has enabled them to do (by creating a company that is legitimately tax resident here under international rules) and not just because they are an e-resident.”
Based on the above, it is clear that an Estonian company managed by people living in another country will likely be taxed in that other country. Also, an Estonian e-resident living and working in another country will likely be subject to personal income tax in that other country.
It should be noted that the managers of Estonian companies should clearly indicate if they are based outside of Estonia. This is because the Estonian government requires that, if the management board of a company is located in a foreign state, the company must designate a contact person in Estonia. Only the following persons may be designated as contact persons: (i) notary; (ii) notary’s office; (iii) advocate; (iv) law office, (v) sworn auditor, (vi) audit firm, (vii) tax representative of a non-resident; and (viii) trust and company service provider specified in §8 of the Money Laundering and Terrorist Financing Prevention Act.
If the Estonian e-residence was a “tax panacea”, many butchers, bakers, and hairstylists outside of Estonia would have already been Estonian e-residents. However, most governments have taken measures to avoid all kinds of circumvention of tax laws. In this regard, it is worth mentioning the controlled foreign corporation rules adopted by a large number of countries. According to those rules, a company registered in a given jurisdiction may be taxed in another jurisdiction where the people who control the company are based.
From a tax point of view, the term “e-residence” is misleading as it has nothing to do with tax residence. Up until the present moment, no country offers “e-tax residence” and we cannot expect the appearance of such a service in the near future because many governments will lose taxpayers as a result of it.
Individuals and companies of high-tax jurisdictions willing to reduce their tax burden need to ensure that they are no longer tax residents of their jurisdictions. To do this, they need to relocate to a low-tax jurisdiction. The times when secret offshore companies were useful for tax optimization purposes are gone.
For example, Bulgaria has flat personal and corporate income tax rates of just 10%. Furthermore, it has an affordable workforce which allows companies to hire administrative and highly-qualified staff without incurring substantial expenses. From a tax point of view, a tax residence in Bulgaria can be more beneficial for freelancers, digital entrepreneurs, startup companies, and other businesses than an Estonian e-residence.
If you would like to get ideas on how to reduce your tax burden through legal and innovative tax optimization techniques, please do not hesitate to contact us. We would be glad to assist you.