Last update: September, 2017
Dateline: Tallinn, Estonia
In the wake of the Soviet Union collapse, Estonia was faced with the task of building a new kind of nation. Technological development in the late 90s was ushering an unprecedented economic boom and society began to go online almost overnight. As a country focused on building itself for the 21st century, Estonia undertook pioneering efforts to make business more efficient, transparent — and digital.
This tiny European country, which many people would be hard-pressed to find on a map, has continued to offer new solutions for entrepreneurs. Its vibrant startup scene, charming cities, and a trusted foothold within the EU make Estonia a growing powerhouse — despite a population of just 1.3 million.
In late 2014, the media was abuzz about this unlikely place. Everyone from CNBC and The Atlantic to Vice.com and the startup world were talking about a process that Estonia was calling “e-residency” — the first time such a process had been offered by any country in the world.
The notion was different: creating a “digital nation” that allows its e-residents to access special resources for managing their companies.
As we frequently discuss second residencies and second citizenships here at Nomad Capitalist, I thought it was important to discuss the Estonian e-residency program and help you determine whether getting one is worth it for you.
Are you interested in expanding your options for conducting business online in a secure way? How does registering a company within an hour sound? Working within a high-tech society that understands digital nomads? Then Estonian e-residency may be for you — read on to see what it is and isn’t, how it works and how it might fit into your nomadic strategy.
What Estonian e-residency is and is not
To begin, let’s start with the basics. Estonia’s e-residency is not a path to citizenship, nor is it a legal residency. You can’t use an e-residency to move to Estonia and live there full-time as a bona-fide resident.
E-residency in Estonia does, however, allow you to sign documents, start a company in Estonia, open an Estonian bank account and conduct business — even order prescriptions. What’s more, your e-residency card can be used as a “digital signature” that’s valid anywhere in the EU.
With e-residency, you can also use online services in Estonia like government websites or online banking. Bank transfers and managing a company registered in Estonia (including submitting Estonian tax returns) can be done easily from wherever you are located.
As the program takes shape, things are getting easier, and more attractive. For example, the e-resident card will be recognized as an online ID for all EU countries by 2018. The Atlantic, for instance, reports that it can be used as a digital ID to buy a ticket on a German train. It can even be used to send encrypted emails to other e-residents.
E-residency is not a way to get out of paying taxes in your home country. It will not grant you a step towards citizenship or serve as a valid travel document. In summary, the electronic residence is best suited to those who either want to bank or run a business in Estonia, or both—and can be an attractive tool for nomads wanting to increase their freedom and options digitally.
Why is Estonia a new safe haven?
I have talked about before why Estonia is one of my seven “new safe havens”: up-and-coming countries that are good for planting your flags and protecting your money. I first came to Estonia a few years back and, despite the freezing late March temperatures and relatively high prices for the region (Finland absorbs the best talent and drives up prices), I found the place to be quite innovative.
In Estonia, practically everything is online. The government is planning to move its entire infrastructure to the cloud both as a move toward further efficiency and as a “just in case”.
They can afford to do that because the government is far from bloated, to begin with. My lawyer here tells me that most of her clients from around the EU are amazed at how easy it is to do business here.
And a lot of business is being done here. Estonia is not only the birthplace of Skype, but the home of one of my favorite new money transfer companies, Transferwise. Taxify is another company headquartered in Estonia that is making waves in the ride-hailing industry, and many more Estonian startups are quickly vying to become “the next Skype”.
There’s a reason business is booming: companies that re-invest their profits rather than distribute them can avail themselves of Europe’s only 0% tax rate. If you do distribute profits, the tax code is so simple a five-year-old could explain it. On top of that, corporate tax rates are slowly going down.
Estonia has a unique income tax system where corporate income tax is charged on profit dividends only, and is capped at 20%. As long as you keep your profits within the company, you will not have to pay any corporate income taxes. And, Estonia has a flat 20% tax on individual income that does not apply to personal dividend income.
It doesn’t take long to realize that Estonia is interested in shaking things up and being a government that values efficiency—making it highly compatible with the Nomad Capitalist lifestyle. Hence the rise of the Estonian e-residency.
How does e-residency in Estonia work?
E-residency is perfect if you want to do business in Estonia, but not actually live there. This is especially valuable if you want to bank in Estonia. Unlike banks in the United States and most bankrupt Western countries that require you to show up just to sign some silly form, even if you’re already a customer, e-residency allows you to sign digitally from anywhere on earth. It’s perfect for international businesspeople and digital nomads.
Essentially, Estonian e-residents are given chip cards that allow them to use Estonian public resources, sign documents securely, and encrypt files. Estonia’s digital infrastructure is extensive and banking online, making transactions, and registering companies using this method is among the quickest and fuss-free digital nomads can get.
Back when this first began, within a day of its announcement, people from 168 different countries had signed up to get notified of launch — and thousands applied once the process began taking hold. Famous holders of Estonian e-residency include German Chancellor Angela Merkel, Japanese Prime Minister Shinzo Abe, Venture Capitalist Guy Kawasaki, and The Daily Show Host Trevor Noah.
How to apply for e-residency: a step-by-step guide
Applying for e-residency is easy:
- Read more from the official e-Residency website at https://e-resident.gov.ee/.
- Go to https://apply.gov.ee. There, you’ll find an online application form. You’ll need to upload your photos, describe your purpose for applying, and pay the 100 euro e-Residency state fee.
- Once your application has been submitted, you’ll need to wait about 10 business days for the background check to be completed.
- After you verify your identity at the pickup location, you’ll get an e-Resident starter kit which contains your digital ID card and a smart card reader.’’
E-residency is getting more and more popular. As a case study, in 2016, we interviewed Sebastian from Wireless life who has obtained e-residency for himself. (You can read the full post here).
He said: ‘’The process for becoming an e-Resident was pretty straightforward. It took about two months, from filling out the application to picking up my ID card at the Estonian consulate in Shanghai.
“After paying the fee of 50 Euro (now 100 Euro), the Estonian Police and Border Guard Board performed a background check and notified me one month later. Another month later I shook hands with the Consul, picked up the ID card and downloaded the software for the ID card reader to activate my resident card.’’
How to make use of Estonian e-residency
While I’ve written before about the positive aspect of doing business in the country, Estonian companies are NOT for everyone. Entrepreneurs with good cash flow should NOT use them. Certain entrepreneurs with a fast cash churn rate, however, SHOULD consider them for their 0% tax on non-distributed cash.
Estonian e-residency can be obtained online, although before the process required you to be in Estonia in person for a week or so. If you’re looking for an excuse for a vacation, you could work in a trip down to Riga, Latvia or Vilnius, Lithuania while you wait, or your card can be delivered to the nearest Estonian embassy for pick-up once ready.
Once you have obtained your residency, your card will be set up with a PIN and card reader that enables you to securely sign documents and log into various services. Banking services exist in English, Estonian and Russian, and can often be multi-currency and very modern so that you can make transactions move in your business more quickly.
Regarding physical residency, I do have an excellent attorney here in Tallinn who can help you get legal residency if you want to start a company and actually live here. However, you would need to actually live here a good part of the year. If that appeals to you, Estonian citizenship would be available after eight years of continual residence and some knowledge of the language.
Banking with Estonian e-residency
I have written specifically about banking with e-residency in this post, but let me sum it up here. Banks in Estonia are excellent and well-capitalized. While Latvia has become the new banking hub for wealthy Russians after the collapse of Cyprus, Estonian banks are even better.
On top of that, unlike the empty piggy bank that is the FDIC, Estonia’s government is also solvent. The place hasn’t issued sovereign debt in years, and they actually balance their budget. E-residency removes the restrictions and other problems caused by borders, especially for US persons tired of being denied for banking due to FATCA.
Currently, there are only three banks that are open to e-residents. Two of the banks — SEB and Swedbank — are based out of Sweden and will charge you several hundred euros just to open an account with them.
Fortunately, the third bank is my favorite bank in Estonia and is much more open to nomads. In fact, I consider LHV to be the best bank in Estonia. While it is not a big bank, its small footprint means a lower overhead and more affordable banking for you.
The other benefits of banking with LHV is that the institution is accustomed to working with customers remotely and does not require considerable investments of time and money in order to open an account for foreigners. It is one of the only banks in the country that will accept investments in the Estonian and Baltic stock market as sufficient justification for opening an account.
E-residency allows you to set up an Estonian company from anywhere in the world. While having an offshore company in the European Union can have its downsides, it can also have a lot of upside for many entrepreneurs.
If you have a start-up or growth company that eats up cash, Estonia allows you to compound your gains by not taxing you until you actually pay yourself. It is also easier and cheaper to set up an Estonian company than an Irish company that taxes all profits at 12.5%. You don’t even need to be in Estonia to manage your Estonian company, as e-residency allows you to file and pay taxes from anywhere as well.
Estonian e-residency has become easily one of the most revolutionary developments to come out of this small Baltic state. For digitally-based entrepreneurs looking for better efficiency and reliability in their business, it may prove the right fit—but it’s not for everyone.
If you want to learn more about whether e-residency should be part of your nomad strategy, reach out here and stay tuned for more on developments in the digital residency and international banking world.
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