I often get lots of similar questions from people who want to open an Estonian company but wonder if it’s the right solution for their business:
Dear Ignacio, I have a business of … I am considering opening a company in Estonia, but I don’t know if it will work for me because …
There are many different kinds of businesses. From online shops to restaurants, from development, design or marketing consulting to a car repair shop.
In this post, I want to describe what types of businesses are best suited for the e-Residency program and help you decide whether it might be the appropriate solution for you.
The Concept -And Market- Behind The e-Residency Program
In this post, I describe in depth what the e-Residency program is, and how to apply to become an e-Resident.
In a nutshell, the e-Residency program was created to allow anyone, independently of their nationality, to have access to some digital services from Estonia. Most importantly, it allows you to open a European company in Estonia and manage it remotely from anywhere.
The e-Residency program was designed with digital nomads, freelancers, and entrepreneurs in mind. Not for big, local companies operating exclusively in one country. There are two main reasons for this:
First and foremost, because Estonia is looking to the future. For some years now, this small Baltic country has made giant strides to digitalize every aspect of their administration. Their way of getting ahead after decades of Soviet occupation has been investing heavily in innovation and building their own digital nation. E-Residents are an essential part of this digital nation.
Secondly, because in most situations, a company that operates in another country, having their permanent headquarters, customers and employees there, will be considered a tax resident of that country.
That’s not interesting for Estonia. The e-Residency program and the taxes from the e-Resident companies are obviously a great source of wealth for the country… And a new market they have brilliantly earned.
Hence, an Estonian company founded thanks to the e-Residency program might not be appropriate for everyone. But for some of us, opening a company in Estonia has changed our lives. In my case, it has allowed my business to take off and has given me the freedom to roam the world.
When Is NOT Appropriate For Your Business To Open An Estonian Company?
There are two main situations in which an Estonian company may not be a good solution for you. Let’s talk about them.
Your Company Needs Permanent Premises In Another Country
Considering the discussion above, if your company needs permanent premises outside of Estonia, the e-Residency program is not a good fit for you. The reason is, as I mentioned above, that this fact is usually enough for a country to consider your company a tax resident there.
As a result, if your business is a restaurant, physical shop, car repair shop, bowling alley, or similar, Estonia is not the right place for you.
Does that mean that you can’t live permanently in another country and have an Estonian company? No. You and your company are separate entities. You can live in, say, France, and have a company in Estonia as long as France can’t claim that your business is generating all its value in its territory.
How can you make sure that doesn’t happen?
Usually, not having any permanent facilities for your business is enough. However, it may be wise also to prove you are an international company by not having all your interests (employees, customers, operations) in the same country too.
Does that mean that you can’t deduct any office or working space as a business expense? No. You can deduct offices and premises up to six months a year, which is pretty convenient if you are a digital nomad. Additionally, you can deduct co-working center costs for as long as you want.
If your company grows enough for it to need permanent premises, my recommendation is opening them in Estonia. Then, you can open other offices in other parts of the world. While that subject is out of the scope of this article, below I discuss an example of how a big company could make sense in Estonia.
Your Company Sells Physical Goods
While there’s nothing preventing you from having an Estonian company that buys and sells physical goods, it’s not the most desirable scenario. There are several reasons for that:
First, selling physical goods is a much more complex area. It has special regulations and laws that make the management of your company much more difficult.
Secondly, the European VAT system for such businesses is a lot more complex. Unfortunately, the different VAT regulations in Europe are not (yet?) fully harmonized.
Finally, it would require full control of your inventory, which makes managing your company even more difficult, and reduces the benefits of a remote, hassle-free company. To make things worse, if you need to keep your stock in permanent premises, you will face the problem described in the previous section.
Even if you don’t have an inventory or physical office, selling physical goods is not the best type of business for an Estonian company.
When Is Appropriate For Your Business To Open An Estonian Company?
Ok, so now that we know the types of business that are not appropriate for a company in Estonia, let’s have a look at the ones that are perfect for it.
An Estonian company is a perfect solution for you if you are a freelancer. If you offer consulting services of any type, or you are a programmer, marketer, designer, writer, blogger… Being an e-Resident and having your company in Estonia is the easiest way to run your business while focusing on your work.
If you happen to be a digital nomad also, then it’s just a no-brainer. Estonia is one of the few options I know for conducting a reputable business online without hassle.
Alternatively, if you are a solopreneur or a one-man company offering digital products, Estonia is perfect for your business. The fact that you don’t pay any taxes for the revenue of your company, only when distributing dividends or salaries, it’s a competitive advantage. The same goes for digital services or online software.
For small teams and startups, it’s also a very convenient solution. Believe it or not, most startups in Spain are not constituted as legal entities of any kind. The reason? In Spain, to have a company, at least one member -the administrator- needs to be a freelancer, paying a monthly fee for that of 340€. As you can imagine, that’s not viable to a startup that has no customers or turnover.
Additionally, another interesting aspect of the e-Residency program is the ability to digitally sign documents with your e-Resident identity. That would allow a startup comprised of three e-Residents to work from different places and sign agreements and documents remotely.
Tips And Tricks For Digital Nomads
As I mentioned before, if you are a digital nomad, an Estonian company is the perfect solution for you. Why? Because all money re-invested in the company or spent during the course of your business activity is not taxed.
What does that mean for you as a digital nomad?
To begin with, you can deduct all co-working spaces as a business expense, not paying any taxes. Also, if you travel on a semi-permanent basis (3-6 months), you can rent an office space -i.e: on AirBnB- free of taxes too.
The Daily allowance covers your business trip expenses -such as food- and it’s tax-free also. All consumables and office supplies expenses are also tax-free. The cost of all business trips, public transport, taxis… for visiting customers or any other work-related activity is also tax-free.
Just compare that with your current situation as freelancer or company in your home country.
Can My Estonian Company Grow?
Let me illustrate this topic with an example of a company that is not Estonian, but could perfectly fit in, in my opinion: Buffer. While it’s not IBM or Accenture, It’s certainly not a small company. Buffer began as a startup, but it can’t be considered that anymore. It has more than 80 employees -at the time of writing- distributed across six continents and more than fifty cities.
All of their employees work remotely. As far as I know, they don’t have -or maybe they do, but probably don’t really need- permanent headquarters. They are the perfect example of how an Estonian company could work at scale.
Of course, Buffer is no ordinary company. They are, in my opinion, an example of the company of the future. I was lucky to hear Joel -when he visited Google Campus Madrid- talk about what a company should be. Without really knowing the company from the inside, I will venture to say they have pretty revolutionary ideas about remote teams, corporate structures, and location independence.
And while they are not an Estonian company, I think they meet all the requirements to be one.
If you are a freelancer, digital nomad, solopreneur or member of a startup, Estonia is the way to go. The e-Residency program is ahead of the game, and in my opinion, other countries will realize it sooner or later and will offer similar solutions.
If you are considering opening a company in Estonia, I can recommend you Companio to take care of everything, from registering the company to taxes and VAT reports.
They offer the most professional and complete alternative, support multiple owners and employees in and outside of Estonia.
The e-Residency program allows anyone to create a company in Estonia and manage it remotely. However, not all types of ventures are appropriate for taking advantage of this revolutionary program.
In this post, I discuss whether you should, or should not, open an Estonian company, depending on your business.