e-Residency: What you need to know about Estonia’s program
Estonia’s e-Residency program is another proof that the world is changing.
Technological progress is accelerated — political, economic, and administrative systems themselves started changing with the technology. One example is e-Residency.
The Estonian e-Residency program is conquering more and more digital nomads and remote workers (me included!).
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First of all, a disclaimer; I wrote this content for informational purposes only. The information contained in this article is not a replacement for advice from a professional accountant. I expressly disclaim any liability for any adverse effects resulting from the use or application of this information.
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E-Residency Context
I am fascinated with the story of e-Residency. To understand the rise of this program, we need to go back to 1991.
In 1991, Estonia obtained independence from the Soviet Union and was in the early stage of building its economy.
Leaders at this time were incredibly fast to identify the potential of the Internet and open source collaboration tools. But funny (or not), this interest derived because Estonia had no money to pay expensive software licenses!
They ultimately became the world’s leading digital nation. Estonia has pioneered several digital initiatives, becoming one of the first paperless governments and creating a full digital framework around its economy and society.
In Estonia, there are programming classes from primary school, and 99% of public services are dematerialized — meaning they are managed and accessible online.
The e-Residency program emerges in 2014 as a way to grow Estonia’s internal economy.
This small country of only 1.3 million inhabitants started getting attention from all over the world, leading to an internal growth revenue with these new companies that exist only in digital.
What e-Residency is NOT
This program:
- It is NOT a residence visa. If you are European, you technically can live in Estonia if you want, since it is a country that is part of the European Union. However, if you do not have a European passport, even if you enroll in this program, it does not entitle you to stay in Estonia, the EU or the Schengen area;
- It is NOT a way to avoid paying taxes in your country of residence. This article published by the Estonian Government explains why this program disappoints those they are looking for a way to escape taxes;
- It is NOT an ID that can be used for travel or as a “real” ID;
- It does not make you a citizen of Estonia, and you have not the right to receive consular support only for being part of the e-Residency program.
What is an e-Residency?
In Portugal, I was used to bureaucratic problems with public services, like the IRS. Since 2017 that I live in the United States and that did not change a lot 🤷♀️
Considering that I work almost exclusive in Euro and with Portuguese customers/clients, I decided to open an e-Residency business to manage my European transactions and activity.
In Estonia, for almost twenty years, citizens have been using technological tools for multiple purposes related to this type of bureaucracies.
School or college enrollments, car registrations (I envy them: they do not need to spend hours at DMV centers), access to medical records, and also voting. Every one of these tasks is done digitally in Estonia, saving everyone time and money.
With a functional system, the Estonia government found a way to adapt its rules to the digital. They allowed people from around the world to open their businesses in the country.
e-Residency was the first government program that gives you the freedom to set up and run a paperless European Union-based company 100% online.
This digital citizenship associated with this program allows me, as a Portuguese entrepreneur, to have my company opened in Estonia. I manage my company from California (where I live), will I provide my services to clients in Portugal.
I did everything online. I never went to Estonia, even if I have my business there since 2018!
For who is the e-Residency Program?
The program is designed for entrepreneurs, startups, self-employed, and freelancers that sell their services online.
This program allows someone who does not reside in Estonia to be a “virtual resident” here.
By integrating this “virtual citizenship,” you can start a business or run your professional career as a freelancer without going through complex bureaucratic processes.
Most companies that use the e-Residency program are companies that operate remotely and online, and where the main business activity takes place outside Estonia. Meaning, they are often remote businesses without a fixed office.
I would say that e-Residency is mainly for those who:
- provides services that 100% remote/online;
- seeks to test the scalability of the business;
- lives as a digital nomad, living in various countries and looking for a way to manage all accounting 100% remotely.
What type of company is open?
A company open with the e-Residency program is a European company based in Estonia. You have the same rights and responsibilities as a physically registered company in Estonia.
The most common way to start a business under this program is as a private limited company, called in Estonia as OÜ.
“An OÜ is a company in which the owner’s liability is limited to the owner’s shares. An OÜ is liable for its obligations across all assets, but a shareholder is not personally liable for the obligations of the OÜ.” — e-resident.gov.ee
How does the opening process work?
To be part of this program, you must make your Estonian ID-card.
First step: you need to share your motivations for the application to the program. You need to explain what your business or activity is and explain why you want an e-Residency.
At this point, you need to pay €100 (more fees if you are outside Europe), which is the value of the application for the ID-card.
The Estonian Government reviews your application. If it is approved, you should go to the Estonian Embassy or an Estonian official pick-up office. You have several pick-up locations; you can check them here.
The physical pick-up serves to confirm your identity. It is a pretty quick process — in my case, it took less than ten minutes.
Once you have signed a few papers, you receive the e-Residency kit. This kit contains your Estonian ID-card, your access codes, and a USB flash drive. This flash drive allows you to authenticate and make digital signatures.
The whole process (from the first application and the pick-up) took me approximately three weeks.
You can make the application directly on the official e-Residency website. But I chose to do the process through XOLO (ex-LeapIN) because I knew I wanted to work with them on accounting for my company.
The fees are the same through XOLO or the Estonian government website. The advantage is that by making the application on XOLO, you benefit from individual support.
Use the code NOMADISMO at the time of registration with XOLO to qualify for a €100 credit.
Company Registration
Once you have your ID card, it is time to register your company.
To do this, you need to use a service that allows you to have an Estonian address and a legal representative. You can see the list of Estonian Government-certified services by clicking here.
I chose XOLO. If you also select XOLO, register by clicking here and use the referral code NOMADISMO to benefit from a credit of 100 €.
The process is fast, and if you have any questions about filling in any information, you always have someone from the XOLO team to help you.
At this stage, you need to choose a name for your company. By using the XOLO, the platform helps you understand the legality of the name you have in mind and runs the name of the Estonian and European business databases.
For example, I could not register the name “Nomadismo Digital” as my company name because of a trademark associated with the word “Digital,” so I ended to register my company name as “Nomadismo.”
If it was not for XOLO’s intuitive platform that gives immediate feedback on names, I might have tried to register “Nomadismo Digital.” If I did that, the name would have been declined, and the whole process would have been much longer.
At this moment, you also need to pay the company registration fee, which costs €190, and €25 (+ VAT) for the company registration in the Estonian Commercial System.
Summary of initial business costs:
- €100: Digital ID-card
- €190: Company registration (via XOLO)
- €25 + VAT: company registration in Estonian Commercial Register (via XOLO)
- €49 + VAT: XOLO first monthly fee
Receive €100 credit on XOLO by register with the NOMADISMO referral code. Enter Nomadismo on the field that says “Referral Code.”
Taxes and fees in Estonia
The tax system in Estonia is appealing, but it is not a tax refuge. If you are looking for a way to avoid taxes, this program is not for you.
I start by remembering something that I said above. This program does not give you tax resident status in Estonia.
You must always pay your taxes in the country where you are a tax resident.
It is crucial to understand the difference between e-residence and residence. The first is a digital status; the second is a physical status with benefits and residential obligations.
Having e-residence does not mean that you are a resident of the Estonian tax system.
The money that does not go out of business
In Estonia, you do not pay corporate income taxes on retained and reinvested profits.
There are only taxes on money that leaves the company. For example, to pay salaries or if you want to withdraw dividends. But Estonia usually does not tax the salary paid to people living outside the country.
If you are a non-resident who performs the duties abroad, no taxes are due in Estonia on your salary too.
But quoting XOLO, “if you spend significant time on administration of your Estonian company as a board member you may be required to declare part of your salary as a board member fee. These payments are subject to Estonian withholding income tax at a rate of 20%.”
Salary
When you have a salary from your company, that salary classifies as an employee salary, and no income tax is paid in Estonia. However, that does not mean that this salary is tax-free.
What this means is that you do not need as an individual to pay social taxes in Estonia. But you are still responsible for declaring this income where you are a tax resident.
You can receive a salary from your company at any time. You can get a salary once a month or each 15-days. You decide! There is also no obligation to pay yourself a fixed salary.
Dividends
If you want to receive dividends from your company, you pay corporate income tax (IRC) in Estonia.
The fee is 20%, calculated at 20/80 of the net payment you receive. If you receive €800 in dividends, the IRC is €200.
Estonia tax system does not add any individual income tax. However, in the country where you are a tax resident, you need to report the income itself (e.g., €800).
Accounting and banking with e-Residency
The time you save in administrative work is another advantage of this program.
I hate business administrative tasks and bureaucracies. When I see accounting stuff and numbers, I am the first to run away!
Estonia has simplified this process, and with XOLO, everything is super easy.
XOLO has integrations (APIs) with Transferwise, Stripe, and PayPal, the three methods that I use for the transactions on my business.
When the transactions synchronize with my XOLO dashboard, I just need to submit the receipts, invoices, and extra expense information. All in a super intuitive and self-service platform.
XOLO handles payments and submissions of any documents, fees, and taxes to the different countries of my clients and also handles all communication with the Estonian government.
Every time that there are taxes to pay, I get an email with the amount that I need to transfer.
Banks
You can choose to have either a physical bank or a virtual bank.
Traditional Banks
There are currently three banks that support the e-Residency program:
- SEB (Sweden)
- Swedbank (Sweden)
- LHV (Estonia)
Both SEB and Swedbank are relatively large. They are two world-class Swedish banks with large-scale operations in Estonia.
LHV is a modern Estonian bank, rooted in an investment firm. LHV is the bank used by Transferwise for all SEPA euro transactions.
Opening an account with a traditional bank has several advantages, the main one being that your money has the security of a physical bank.
However, the disadvantage is that you have to go to a branch of the bank. You need to travel to Estonia (or Sweden) with your virtual resident card and your company documentation.
Opening a bank account with a physical bank cannot be done remotely, although once opened, you can manage the account virtually.
Fintech
You can create a virtual bank account with Payoneer, Transferwise, or Holvi to manage your money in Estonia. These Fintech companies accept e-Residency for opening business accounts.
If you choose one of these companies, you can do the opening process entirely online.
Accounting
There are 100% online alternatives that deal with the entire administrative system of your business. The one I use and recommend is XOLO.
Use XOLO for your Estonian company using the code NOMADISMO at your checkout and immediately receive a €100 credit in your account.
XOLO is your “accountant” that helps you run your business remotely.
I subscribed to XOLO at the beginning of my process on e-Residency. Having created my company through XOLO, allowed me to have support from the first minute on this e-Residency journey.
After assisting you in registering your business and answering all the questions that you may have, XOLO handles all of your company’s daily accounting.
XOLO handles everything about billing and communication with Estonian tax institutions. You have a person that is available for you, so you can ask every question that you have about your business.
Conclusion
Here are some useful links to read more about this program:
- The official website of the Estonian government’s e-Residency program and
- the XOLO website.
If you have any questions, leave a comment!
