Challenges for the e-Residency Program

The e-Residency program is probably one of the most innovative and ground-breaking ideas that a country has implemented in the last decades. However, in my experience, there are still areas with room for improvement. In this article, I want to talk about the current challenges for the e-Residency program and offer suggestions for its future development from the point of view of an e-Resident owning a company in Estonia.

Most of the things discussed in this post relate to e-Residents who have founded a company in Estonia. It may not be that relevant if you are an e-Resident for any other reason.

Empowering Entrepreneurs

First, I would like to make this clear: the e-Residency program can change your life. Being just a member of the digital nation may not be a big deal on its own. However, it’s by founding a company in Estonia that you can actually unleash the power of being an e-Resident.

If you are a micropreneur, member of a startup, or digital nomad operating in the online world, the e-Residency program allows you to conduct your business without the limitations of physical borders.

Most countries still haven’t realized that the world is changing. Just like Airbnb disrupted the hotel industry, and Revolut and other fintech startups are disrupting the banking industry, the companies of tomorrow will be very different from the ones from the XX century.

Bloggers and YouTubers, solopreneurs, freelancers, cryptocurrency traders, multinational startups… There’s a transformation going on in the business world. The e-Residency program was just the first official acknowledgment of this transformation. It was a bold move from this small Baltic country, but a very smart one.

With Estonia, the emphasis is absolutely not on the financial or tax aspects, who admittedly are similar to other European countries. The real freedom comes from having a company in a country that empowers you with tools to manage your business completely online as a foreigner, even when traveling the world, without needing to be a resident, have a physical office in Estonia, or spending there most of the year.

It’s the future. But is it completely here yet?

Challenges For The e-Residency Program

While Estonia has done an excellent job in providing us with a business framework that works, during my experience as an entrepreneur, I have witnessed some places when there’s room for improvement.

Having a business is no trivial matter, especially when your company is in a foreign country. There are lots of considerations to take into account, from how you operate your business on a daily basis, to how it can set free or limit your present life and your future.

In my experience, there are some challenges for the e-Residency program that the Estonian government should at least consider for e-Residency 2.0.

Let me address some of them from the perspective of a happy e-Resident company owner.

Recognition of Rights

I am fully aware that e-Residency is not a physical residency. Being an e-Resident does not give you any right usually derived from a traditional residence. That’s only fair, as e-Residency just gives you access to a series of online services from the Estonian administration.

… However, when you have a company, things change. For starters, you are establishing a business in Estonia, which implies a series of obligations like having a person of contact in Estonia, a bank account, a physical address for your business, etc, that bring business and money to the country.

But more importantly, in order to be able to receive a salary from your company, you need to register as an employee (more concretely, “Member of management or controlling body” of your company). That means that whenever you assign yourself a salary, you are paying taxes in Estonia, concretely, you pay two different taxes: the income tax, and the social tax.

The first one makes perfect sense for a non-resident. It allows you to enjoy having a global business that can be managed online. However, the second one is a bit more tricky.

This is a social tax, that you usually pay to cover health insurance, unemployment or pension expenses. However, you won’t benefit from it at all, as you can’t enjoy any of those rights unless you are a -physical- resident in Estonia. Edit: it seems that if you pay the minimum social tax fee (155,10 as of September 2018), you would be eligible for health insurance in Estonia. However, it's important to notice that paying taxes, especially social taxes, in a country where you are not a tax resident is not compliant with the taxation legislation of the country where you are indeed a tax resident. Said otherwise, it's illegal to pay social taxes in Estonia if you are not a tax resident in that country. Estonia may not care, but your country definitely might.

I believe you must pay taxes and contribute to the country you are resident in, in exchange for the services you receive back. But this is a different situation.

So in my mind, there are some important implications for the fact that hundreds, probably thousands of e-Residents are registered as employees in Estonia, paying social taxes and not having access to any right out of it. Something Estonia needs to consider thoughtfully.

Finding The Right Social Contract For e-Residents

And that leads me to the social contract between e-Residents and the Estonian society. Recently, Kersti Kaljulaid, president of Estonia, surprised me with one of the most ground-breaking, forward-thinking twitter threads I’ve read from a politician ever.

1/3 Globally it’s not yet recognized that tech has made ppl free. Most govs expect citizens to have an address, so that the tax revenue can be collected. In digital societies you need to think differently #NorthernLight

— Kersti Kaljulaid (@KerstiKaljulaid) June 29, 2018

Right now, e-Residents owning a company in Estonia find themselves in a strange limbo. They have some obligations that tie them to Estonia, like the need of having a physical address for their companies, or a person of contact there. That does not really fit into the idea of a “location independent” business. At the same time, they don’t have access to some benefits of their link with Estonia (like the social tax previously mentioned).

2/3 If your people are working everywhere, to whom are they going to pay taxes? Probably for those who offer them a safe harbour of services globally. We need urgently to figure out the new, free social contract between a state and a citizen, #NorthernLight

— Kersti Kaljulaid (@KerstiKaljulaid) June 29, 2018

e-Residency was a brave step forward, but the words of Mr. Jaljulaid look further into the future. I applaud them.

All societies need to adapt to the new digital era and reconsider the social contract between them and their citizens. Estonia is one step ahead and needs to think also how its e-Residents fit into that puzzle.

I’m really hoping that in the future, the Estonian government will empower the members of the digital nation to find that safe harbor in Estonia where they can contribute to the country and get rewarded with access to some services in return. Maybe not like citizens, but definitely as members of the new complex societies we are building.

Ambiguity And Concerns About Our Future

The general concept of e-Residency and owning a company online is clear. However, there are some ambiguities related to how that works in practice. Probably the most important one is if your Estonian company is future-proof. Let me elaborate on that.

While the e-Residency program seems to be designed for digital nomads, it’s not clear if only digital nomads can benefit from it. Can someone who is a resident in a specific country be an e-Resident and conduct a global business in Estonia?

It will be unfair, obviously, to ask the e-Residency program to answer this question alone. There are wildly different laws in place in different countries, and as of today, there’s still no clear, unified legislation about owning a company abroad, not even in Europe’s single market. Also, most countries are still struggling with the concept of digital nomads.

That said, the e-Residency program is probably the most interested party in dissipating these doubts. But as of today, they keep this purposely ambiguous attitude of not discussing or clearly addressing this question.

The “Grey”, Ambiguous Area

I have discussed before the conditions that may make your country claim your company as tax-resident there. In Spain, according to the Tax Office, a sole proprietor is supposed to have a permanent establishment in the country:

… when he or she holds in any way installations or work premises of any kind, in which he or she carries out all or part of his or her activity, or acts in it through an agent authorised to hire, in the name and on account of the non-resident, using these powers regularly.

While the law seems to mention physical buildings exclusively, it’s not clear if residing in Spain alone will be considered a permanent establishment too. Some interpretations or other legislations seem to suggest that if a sole proprietor is a tax resident in a country, or most of their activity is performed in the country, that means a permanent establishment too. Unfortunately, the law is not unequivocally clear about this in any European country.

Even accepting this last point was actually true, the conclusion in the edge cases is clear: if you are a digital nomad and have no personal country of residence, you are good to go. If you, on the other hand, are a permanent resident in your country of residence, as the sole owner of your company, that country may claim that your company should pay taxes there.

What If You Travel Regularly, But Are Still Not A Digital Nomad?

The problem is the in-between situation, where a lot of people may find themselves in. What if you are a tax resident in a country, but you travel regularly, and a big part (even most) of your activity is performed abroad? What’s the acceptable percentage of “foreign activity” you need to perform to prove that your business is not tied to your country? Is your tax residence enough to tie your company to your country even if you don’t spend more than 6 months a year there?

We need a clear, unambiguous answer from the e-Residency program about this.

Moreover, if all your work and services are online, and can be performed anywhere on earth with just a laptop and an internet connection, how can a country claim that your activity is performed in that country? Shouldn’t we realize we live in the XXI century and acknowledge that this definition of “physical place where the work is performed” doesn’t really apply anymore?

How are we going to build a digital nation if we still cannot escape the countries where we live?

When I Get Older Losing My Hair… Many Years From Now…

While a location independent lifestyle is growing in popularity, one important possibility every digital nomad must consider is that eventually, they might want to settle down in a specific country. I am 38 now, and enjoying my nomadic lifestyle… but perhaps when I am 50, or 55, or maybe 60, I would like to step down… Perhaps rent a nice house by the sea and live there for years.

Of course, when you do that, it’s only fair that you contribute and pay taxes in that country. You are benefiting from living there, the social security, the services, etc. So in my mind, it’s the right thing to do. But then again… as of today, that may imply problems with your company.

So I can’t help but having this very distressful concern. If I do that, will the authorities of that country claim that my business must pay taxes there one day?. The EMTA (Estonian tax office) seems to affirm that if your permanent establishment is in another country, that could be the case. That poses so many questions and uncertainty about the future of so many e-Residents. What will happen if we decide to stop traveling? Will we need to close our Estonian companies?

The dream of being a digital nomad can become a nightmare if you are forced to do it eternally unless you want to risk losing your business.

One of the biggest challenges for the e-Residency program today, in my opinion.

Promote e-Residency Among Other Governments

That leads me to the way other countries deal with e-Residents. Generally speaking, most e-Residents have no luck when trying to explain their situation in their home countries or the countries they are residents at.

The problem is that e-Residency is not well known, and definitely poorly understood, in other countries. I’m talking about European countries here, due to my experience, but I guess the situation might be worse outside of Europe.

Thus, I would really like to see Estonia working more closely with other governments to make sure the e-Resident community is better understood by the local authorities. This includes lots of things such as personal taxes, health insurance and unemployment rights, and residence vs e-Residence, among others.

While I agree the ball is in the court of the rest of countries, Estonia could greatly help them recognize e-Residents and make our lives easier. Perhaps, some of these nations will learn about the e-Residency program and not only become more open-minded about it, but hopefully decide it’s an idea worth replicating.

Work More Closely With Banks And Payment Solutions

Estonia is making big efforts to give e-Residents tools to open bank accounts and access payment solutions for their companies. Fintech solutions like Holvi and even traditional banks make it possible to operate completely online with your Estonian company.

However, sometimes it’s not that easy to open a bank account. One example is cryptocurrency businesses. While Estonia is one of the most friendly countries for establishing a cryptocurrency startup -even issuing licenses for crypto trading and wallet services- opening a bank account for them is close to impossible.

Other times, traditional banks will refuse to open bank accounts for e-Residents, claiming that being a member of the digital nation is not enough to prove that you have a link with Estonia.

More alarming is the recent case of LHV, that recently announced absurd fees for non-resident e-Residents (20€/m for company accounts and 10€/m for private accounts).

Payment gateways are still also one of the biggest challenges for the e-Residency program. While there are several payment solutions available, most of them are still stuck in the paradigm of traditional companies, asking e-Residents information they simply can’t deliver, such as utility bills.

If the whole point of an e-Residency company is having a global, location independent business, why do I need not only a physical address, and a person of contact in Estonia, but also utility bills? That kind of defeats the whole purpose of the digital nation.

Unfortunately, other payment solutions that are friendlier to solopreneurs, freelancers and startups, such as Stripe, don’t have plans for supporting Estonian companies (soon?).

Better English Support And Documentation

I am trying to learn Estonian. Well, it’s difficult, but as I have my company in Estonia, Arvo Pärt is my favorite composer, and I plan on spending more time in that beautiful country, I would love to eventually be able to speak it.

Nonetheless, English is the official language of the e-Residency program. And the problem is, not all governmental websites you need to access to operate your business are completely translated. As you can see in the image, some of them are half in English, half in Estonian.

Additionally, some of the documents of your company, like the “Articles of Association”, are delivered in Estonian only. You need to use the services of a sworn translator if you want to have the English version. For your everyday activities, that’s no big deal, but if you ever need to negotiate with investors, or establish agreements with international companies, it might be a problem.

Last, but not least, a lot of documentation on places such as EMTA (the Estonian Online Tax Office) is available only in Estonian. That is an issue when you need to understand some of the duties of your company in areas as important as paying taxes or registering employees.

Fortunately, most banks, both traditional and fintech solutions such as Holvi, are flawlessly translated into English. At least in my experience, you won’t have any problem performing your daily banking activities.

A Friendly, Comprehensive e-Residents Interface

Good design is obvious. Great design is transparent.
— Joe Sparano

I would recommend most people to use a service provider to register their company and take care of the accountancy. However, some people just like to have more control over certain parts of their business or at least get to know what’s happening behind the scenes. It’s always recommended to have some general idea on how your business operates if you are the owner.

Unfortunately, right now the experience is quite disjointed from the perspective of an e-Resident. There are some websites where you can manage certain parts of your business, like the Tax Office, the e-Business Register, or the e-Estonia gateway. Some of them -like the Tax Office- have old, unfriendly interfaces that, as discussed previously, are not fully translated into English. Overall, you have a very fragmented set of websites that would benefit from a unified, more modern interface.

Then again, I acknowledge the enormous amount of work behind these websites, especially in regards to security and online accessibility. What you can do with your e-Residency card is simply mind-blowing.

What I really miss, and believe would be a great addition to the e-Residency program, is a centralized dashboard specifically thought for e-Residents owning a company in Estonia. A place where we can manage all aspects of our company, completely in English. A more modern, friendly and easy to use design would really be a selling point for entrepreneurs willing to conduct a borderless business.

Conclusion

Estonia’s e-Residency program has paved the way for the future at so many levels. It’s repercussions go far beyond the mere ability to open a company and operate it completely online.

Concepts such as citizenship, residence and the relation between a country and its citizens are also been questioned these days. And we shouldn’t be afraid of that. The social movements of the 60’s spawned a series of changes that allowed our societies to progress.

Thanks to technology, we are witnessing a similar disruption in an important number of areas that were considered irrefutable staples of our society before. It’s only natural that this process will reach the core of our societies, where we live and how we work. I see e-Residency as one of the pioneers of that process.

However, there are still challenges for the e-Residency program, and areas where it can improve. In this article, I shared my thoughts, as an e-Resident owning a company in Estonia, on some of them. My goal is adding my humble voice to make our digital nation even better.