E-Residency In Estonia Explained

The world is both a massive and small place at the same time. When we can work anywhere, why should we be constrained to residency of the nation that we were born in?

That’s the basic idea behind Estonia’s e-residency program and if you work remotely from other countries, it might be something that is useful to you. 

What Is E-Residency?

E-residency is not an invitation to go and live in Estonia. Instead, it’s the right to be “virtually” based in Estonia.

When you sign up to the program, they give you a Smart ID card that allows you to sign documents and access services (securely) in Estonia even when you don’t live there.

So, for example, a Filipino national with a business in Hong Kong could use an Estonian E-residency to open an Estonian company, which would make it easier to carry out transactions within the EU.

And there’s no need to go to Estonia, it can be done online and remotely. 

What Are The Benefits Of E-Residency?

The e-residency program is targeted at:

• Business owners seeking to run a paperless, digital company in the EU
• Entrepreneurs looking for payment or funding solutions
• Freelancers and consultants who want to issue invoices seamlessly to EU clients
• Digital nomads seeking freedom from fixed locations

And the benefits of the program are effectively:

• You can register a company online and use Estonia’s digital environments to run an EU based business
• You can access Estonian banking services and both pay and get paid easily
• You can automate a lot of your general business admin and go fully paperless
• You get connections to a global community of like minded folks and access to experts in certain fields
• You don’t pay income tax on your profits, you only pay it on your drawings (this sounds complicated but basically Estonia’s tax is 21%, if you leave the profits in your business, you pay no tax, it’s only when you take out money to put it elsewhere in the world that you pay tax)
• You can therefore, essentially, invest with minimal tax – if you invest in something and place the asset within the company, you don’t need to pay tax on it, until you sell it AND withdraw the money from the business, if you allow the money to rollover inside the business? Then you don’t pay tax. 
• You are not compelled to handle data under the GDPR unless you are resident inside the EU. 

What Are The Drawbacks Of E-Residency?

If this all sounds amazing, so far, then we need to take a look at the drawbacks because there are some and they can be pretty heavy:

• You may still owe tax in your own country – a UK resident that takes up Estonian e-residency is not exempted from paying tax to the UK, for example. However, a UK citizen who is non-resident of the UK may not have to pay UK taxes on their Estonian income. It can get complicated fast and you need to talk to an accountant about the ins and outs of this.
• You need to be aware of the costs – it’s super cheap to set up e-residency and a sole trading business, the total cost is 190 Euro. However, if you want a limited company (and most people will) there must be at least 2,500 Euro in capital held within the business and if it’s not? You cannot withdraw any money from the company. This can be a real downside for those struggling to find their financial feet. It’s also worth noting that for a UK resident, for example, you can be a sole trader for about 12 Euro and there are no other costs (and if you earn under about £40,000 the tax rate is lower in the UK too). 
• You may be accepted into the Estonia e-residency and be denied personal banking facilities – this is a real pain and a deal killer for many. The Estonian government cannot compel a bank to provide you with banking facilities and European anti-money laundering laws often make it very hard for banks to provide such facilities to people outside of the EU. 

This means that you’re going to want to spend some time before committing to an e-residency deciding if it’s really for you. 

While it sounds great, in theory, the practice may be damaging to your financial health and you still may not be able to bank in Estonia, even if you can open a company there. 

In general we’d suggest that E-residency is a bad idea if:

• You work from a specific location all the time – e-residency is really aimed at e-business not those with physical offices
• You trade in physical goods – again the e-residency is really aimed at business that sell services and digital products online

Otherwise, we’d suggest you talk to an accountant (and yes, that may cost money but it could save you a fortune in the long run) about whether e-residency is right for you. 

Are There Other Countries That Offer E-Residency? 

Yes, though for the moment only Lithuania and the Ukraine offer competing programs and for many, they may be less advantageous than Estonia’s.

It’s also worth noting that the U.S., Dubai, South Africa, Portugal, Singapore, Japan and Thailand are all currently talking about launching such a program.

And… it’s important to realize that you don’t need e-residency to open a company in many countries, you can fly in and open one with minimal fuss and low fees in most countries and in the U.S., for example, you can even open one online without much hassle. 

Overall, this means it’s a really good idea to get professional advice before you locate your company, you want the best deal for your circumstances and that can vary hugely from individual to individual. 

Final Thoughts On E-Residency In Estonia

Estonia’s e-residency program is to be congratulated for being a trailblazer for e-residency and for recognizing that in a digital world, truly digital solutions are needed for remote workers, freelancers and entrepreneurs.

However, you need to be careful about committing to this program as it might cost you far more than it’s worth. 

If you work online, you may also appreciate our remote work wellbeing tips, our productivity tips and our guide to setting up a VPN at home.