After the article we published about E-residency, many comments and questions came up. The main question is always: how to open a company in Estonia?
I decided to wait for the whole process to be over so that I could share my experience. This article is a guide to help you understand how everything works and to give my opinion about the program.
And why did I end up opening a company in Estonia?
The country is gaining prominence for being one of the most technological and secure countries in the world. Almost everything there is done 100% digitally. Its laws and taxes for entrepreneurs and self-employed people are very attractive when compared to other countries.
How was the step-by-step process? Is it really worth it? What are the advantages and disadvantages?
Read on to find out these and other questions.
Table of Contents
How to start a company in Estonia?
I believe that just like me, you are also interested in opening a company in Estonia, right? So now I will introduce you to the steps you need to take through E-residency.
It is possible to do the processes by yourself or with a specialized company. I used Xolo – an accounting and business management service in Estonia because the company gave me confidence and for these issues, it is always good to have specialists helping me.
An important piece of information is that Xolo does not open a company with partners. The focus is on freelancers and the self-employed. There are some alternatives, but it is best to contact them to learn more.
Official website: https://www.xolo.io/
Check now all the steps:
1. identify your motivation for applying
The first step will be the process of ascertaining your motivations for starting the company. Then, you will have to tell details about your business and how it operates remotely.
You can perform this process by logging on to the official E-residency website.
With Xolo, you need to log in to the company’s official website and start your registration.
There are different questions about your business, as they need to understand all your activities and how your company will be in the future.
Xolo will send you an email indicating whether your company fits into the program or not. After this verification, they accept your application and you can start the E-residency program.
2. Applying for E-residency
In the second step, you must apply for the E-residency program by filling in all the data on the official Estonian government website. See what the questions are in this stage.
- The fee for this stage is €100, but if you apply to withdraw the “Id card” outside Estonia they add a fee of €20 euros, totaling €120. If your request is rejected, they will not refund this amount;
- The card is not delivered to your home, you must select one of the points (Estonian embassy) listed on the site to pick it up in person. This is the only process that requires a physical presence;
- There are points in different countries, but it doesn’t cover the whole world yet;
- The deadline is 30 days to get an answer with the result of the application. I had 18 days after sending all the data and making the payment.
3. Receiving the E-residency starter kit
After you have been approved in all the previous steps, the Estonian government will send your E-residency starter kit via diplomatic courier to the chosen pickup location that you have indicated on the registration form. This step takes between 2 and 5 weeks.
After receiving the confirmation e-mail, it is necessary to go to the indicated location to leave your fingerprints and receive the kit. The process is very simple and takes less than 15 minutes to complete.
The kit is composed of:
- Digital ID card;
- USB card reader;
- Codes and the access stick.
Through them, you will be able to authenticate your identity and digital signatures.
With all these documents in hand, you can now take advantage of the opportunity to proceed with your company’s registration.
4. Registering your company
The time has come to register your company. The first step is to hire a local service. He will be your address in the country and will also act as your accountant.
Then, once chosen, you must fill out the entire government form and wait for the approval. The cost for this step is €190. Generally, the result comes out in 3 hours.
Remember that Xolo performs this process, acting as your accountant, and is one of the services included in the monthly fee.
5. Open an account in a digital bank
You will have to have a bank account to operate the company. So, you can opt for a digital bank.
If you decide on a physical branch, you will have to go there to open an account. You should check which is the most feasible way.
6. Make a capital contribution
Finally, you just need to make a capital contribution to get your business in Estonia up and running.
You may be wondering about accomplishing all the steps without help. The truth is that you can do everything yourself, but I always advise you to look for qualified companies to help you.
The cost table for starting a business in Estonia
Are you eager to open a company in Estonia? Know that I am too, and I cannot wait for this to become a reality.
I decided to create a small summary with the costs in each step, including Xolo’s monthly fee if you choose to do so. I believe it will help you a lot, check it out:
Applying for Digital ID
€100+ €20 = €120
€25 + IVA*
Xolo’s monthly fee
€79 + IVA*
*Value added tax.
What business activities are accepted?
The country’s main idea is to attract self-employed professionals and freelancers who work 100% remotely. The areas and activities are diverse, giving you a wide range of opportunities.
To give you an idea, today there are more than 70,000 e-residents and more than 10,000 companies open. Most of them saw Estonia as a place that encourages the growth of organizations. The World Economic Forum voted the country as the most entrepreneurial nation in the world.
For this reason, every day, more sectors are included in the list of possibilities. Here are the main areas that e-residents are working in:
Did you notice the great diversity of sectors? Then it is a fact that it is a great opportunity for entrepreneurship.
What are the banking options?
We already know that to start a business, you will need a bank account. You are free to choose between traditional and digital banks.
See a table with examples of institutions that are cleared for e-residency:
Again, traditional banks require physical presence. So if you decide on any of them, you will need to go to the branch to open the account.
Taxes and Fees in Estonia
The country has a different policy regarding the payment of taxes. There, you will pay only for the money that leaves your company.
This means that if the money is invested, and paid for fixed and variable expenses for the company, it is practically tax-free. You can use different activities to pay for company expenses. Like office rent, online tools, airline tickets, and other activities that need to be paid for by your company.
Another point that we must highlight, is that income tax is charged monthly and only after profit distribution (i.e. when dividends are paid).
Normally, the corporate tax rate is 20%, with the calculation of 20/80 of the net taxable payment.
Good news: in the opposite direction of different countries around the world, Estonia has lowered its taxes for entrepreneurs. What does this change?
Dividends that are paid out regularly can be applied a 14/86. In short, if you work as a freelancer and wish to have some money (or all of it) as a dividend regularly, the amount deducted from tax is 14%.
E-residents with business in Estonia will need to consider the following Estonian taxes:
- 20% corporate tax on director’s fees;
- 33% social tax on the director’s fee.
If you have residence in any EU or treaty country (Canada, Australia, and Ukraine for social tax purposes). Personal tax deductions are not considered, so you only pay 20%.
The second is aimed at digital nomads and finally recognizes the possibility of adopting a social tax model where Estonia collects this social tax and also provides health insurance and pension for them. Or also for those who do NOT have personal residence in the aforementioned countries.
To avoid the company paying 33% social tax in Estonia, you must obtain an A1 certificate proving your coverage from competent local authorities and submit it to the Estonian tax authorities. The A1 and other forms relating to social security rights are listed here, but more specific information is probably available in your home country:
- If you live and have social security insurance in Canada, Ukraine, or Australia – countries that have concluded a Social Security Agreement with Estonia – you can submit the respective certificate demonstrating your social security coverage issued by your local authorities. This is to allow the company to exempt directors’ fees from social tax in Estonia.
- Directors’ fees paid to residents of third countries or to those persons not covered by a social security scheme in the EU, EEA countries. Switzerland or treaty countries will not be able to get the Estonian social tax exemption.
To be clear, when profits are eventually distributed as dividends, the 20% tax is paid by the company (as corporate income tax) and not by the person receiving the dividends. There is no withholding tax on dividends in Estonia.
In most cases, the receiving person (legal or natural) needs to pay dividend or income tax according to the taxation rules of their country of residence.
How do your tax obligations work?
First, it is important to understand that your personal tax residence and your company’s tax residence are not always the same. You need to differentiate that once you decide to open a company in Estonia, it and I are completely different things.
When you open the Company in Estonia, you pay only the tax resident tax. Personal tax is going to be in your country of residence, through income tax, for example.
Let’s go to the details:
Personal taxes include a wide variety of services, ranging from pensions to health care and education. It is important to understand that your personal and business taxes are not always the same. Each country has its own way of designating a tax residence.
To understand it better, in a nutshell, it is where you have a physical address, either your country of birth or the one in which you have citizenship, or a residence permit.
Many countries consider you a tax resident if you have a residence permit and are present in the territory for more than 6 months in a year.
In Estonia, for example, you are considered a tax resident if you are in the country for at least 183 days a year. You have to be aware that E-residency does not make you an Estonian citizen.
Having a country of tax residence is far from being a problem. Usually we all have a country of origin or residence permit.
It is worth remembering that those who are not in the country are frequently not considered that you do not live in it.
In short, the tax you have to pay is on your income when you receive your salary from your company. For this process, you need to have an accountant or platform that can help you with all these issues. That is one of the reasons I decided to do the whole process with XOLO.
Organization tax is paid by your company where it has tax residency. As I mentioned before, it is different from the previous topic, remember?
It is up to you to decide where your company will have its tax residence, and then have all the obligations according to the chosen nation. The most important thing is to make sure that all taxes are paid so that you do not have problems with tax authorities in the future.
To avoid confusion, since this is a matter that deserves a lot of attention, I advise you to seek help so that you don’t have to waste a lot of time or have something go wrong. After all, we are looking to open a company in Estonia to have more ease among other things.
All companies that open in Estonia as E-residents are automatically considered tax residents.
The country already has 57 treaties to avoid double taxation, which includes all EU member states and the vast majority of OECD countries, plus Ukraine and Turkey. Full list of countries.
Why is Estonia a great place to do business?
Estonia is considered to be the most advanced digital society in the world. This statement already creates paths to understand the advantages of starting a business in the country.
The country has always caught my attention. The quality of life and the incentive programs for freelancers and online entrepreneurs were the main points of attention.
It is also the first country to offer an E-residency, a program that started in late 2014 and already has more than 70,000 e-residents around the world. For these and other advantages (which you will discover throughout the article) I decided to get an Estonian tax number.
So, I started doing a lot of research and found out that it is possible to open a company in Estonia, even though I don’t have a physical residence.
The process is not complicated and can be done through E-residency, which provides a digital residence and identity.
In addition, the country has a competitive and encouraging atmosphere. The government, in turn, is very supportive of entrepreneurship. Sounds like a dream, doesn’t it? But I still have a further list of favorable reasons to present:
- Tax policy and low tax rate;
- A highly educated and entrepreneurial-minded population;
- A well-developed telecommunications infrastructure;
- Possibility of opening accounts in online and traditional banks in the country;
- Ease of filing tax returns;
- E-residency program to speed up and facilitate even more the opening of a company in Estonia.
The list and the other reasons given clarify that opening a company in Estonia can be a good business. I confess that I was quite excited when I started to find all this out. That is why I started the E-Residency and company opening process even without ever having visited the country.
What is E-residency in Estonia?
E-residency is a program that the Estonian government has created to provide anyone in the world with an “electronic residence” in the country.
But how does it work? Relax, I’ll explain it better.
First, you need to understand that, despite having this name, it does not provide legal residency in the country. The card only works as an identification to be able to carry out different legal procedures in the country, including opening and running a company.
The program began in 2014 and Estonia was the pioneer in offering this new form of residency. One of the goals is to break down digital borders and also attract businesses and freelance workers, with an offer of lower fees and taxes than most countries.
This opens up opportunities for anyone in the world to have the opportunity to acquire some rights in the country.
The whole program is administered by the Estonian government, which brings greater security to those who are interested in taking part. But basically, you will have a national identity card.
By becoming an electronic resident of Estonia, you can register a company in the country and open a European bank account. It will then be possible to run a company without ever having set foot in the country.
Who is E-residency for?
The E-residency program is mainly targeted at digital business entrepreneurs and freelancers who want to start a company and have a “company number ” in the country. See in more detail for whom it is designed:
- Remote workers who provide services 100% online;
- Those who have a company with high growth potential;
- Digital nomads who want a way to manage their business remotely.
- For people who don’t have Estonian citizenship, but want to have some opportunities to undertake business in the country legally.
I realized, after listing these four items, that the program is perfect for my lifestyle and remote working.
What are the advantages and disadvantages of E-residence in Estonia?
To put together all the information passed so far, I decided to create two lists. The first one I will show you the main advantages of E-residency and the second one the disadvantages.
I hope that with all this information, you can get a clearer picture about the program. Let’s check it out:
- Reduction of bureaucratic issues for opening a company in Estonia
Ease of business management;
- The company will be seen by the country as a national company;
- Most of the processes can be done over the internet, including managing the company.
- Need to find a physical address in the country (Remember that Xolo can solve this problem in a simple way);
- No tax exemption in the country of fiscal residence;
- The whole process does not guarantee citizenship, but the possibility to open a company in the country;
- Risk of double taxation.
It is good to emphasize that the last item is illegal, and the entrepreneur must be very attentive. For, if this occurs, you should seek your rights.
Frequently Asked Questions
Is it safe to open a business in Estonia?
As mentioned earlier, Estonia is one of the safest countries in the world. This is because it has been investing heavily in digital security technologies after having digitized its entire system.
Anyway, I often asked myself: Can I keep my data safe with just this kit?
Yes. With the Kit you get a card with a high-tech cryptographic chip and with the USB you can connect a computer.
Is Estonia a tax haven?
No. Opening a company in Estonia is not about not paying taxes. What happens is that the country has a clear and intelligent tax system, in which you only pay tax on what you actually use.
It is not necessary to pay tax on all money that is not distributed as benefits. All money generated by the company and invested in it is tax exempt.
However, if you need to receive the money you have to pay the tax.
Conclusion to open a business in Estonia
E-residency is a great way to start a company in Estonia. In fact, it is the only way if you do not live in the country. Furthermore, the whole ease of being able to do everything online is a great relief for those who are constantly on the move. I believe this is the main highlight of the Estonian government.
Although it may seem that everything is done magically, there is a bit of a long process from applying for e-residency, to completing the process of opening a business. It is not so fast, as there are deadlines that we have to wait for, and in total it ends up taking a little longer than expected.
In my experience, it is essential to have a company to help in the entire process. As I said before, I ended up choosing Xolo due to its good reputation, and so far, I have nothing to complain about.
During the process, many questions arise and having someone to explain all the details is important. I don’t think it would be worth doing it alone, considering the time I would lose looking for so much information.
Of course, we must also highlight the tax part, being much simpler to understand and with lower rates than in most countries. It is worth clarifying it that Estonia is not a tax haven, and even if less than other countries, taxes do exist and must be paid correctly.