Estonia’s E-residency: How digital citizenship can make you transparent

Estonia is a small country but it has very attractive tax system, the possibility to easily manage your business and a good international reputation. Those who enjoy cooler temperatures will find Estonia’s climate very attractive: its average yearly temperatures of 6°C and highs of 17.6°C will please any cold weather lovers.

There are not any big metropolises in Estonia. The largest and capital city is Tallin with 440,000 inhabitants, followed by Tartu with 93,000 inhabitants.

Estonia is particularly popular among those who work remotely and digital nomads, and it remains a highly regarded destination. This is illustrated by the list of start-ups that have used the E-residency in Estonia (E-Residency). Hundreds of companies are listed there and offer their services remotely.

In this article, we do not want by any means to speak badly of Estonia, but we do think that it is important to explain clearly its disadvantages too. Too many businesses fall into the marketing traps of Estonian E-residency, despite the fact that there are much simpler and more advantageous solutions.

On the other hand, Estonia offers interesting possibilities, and the most important thing,  – and this should be emphasised – is that if we compare it to the rest of the EU, Estonia is much simpler and less bureaucratic than nearly all of the other member states – although there are some complications here as well.

Estonia’s e-Residency pioneers digital business administration

E-residency in Estonia allows you to easily create a business in the country and manage it completely digitally.

For those who want to live outside of the EU, but need or want to maintain a link with it, E-residency in Estonia is an option which allows for this.

By submitting the application on the official website, you will receive your “digital residence card” within three to eight weeks. The cost of the application is around 120 euros.

Estonia proudly claims to have one of the fastest start-up processes. For example, in 2022, an E-resident set up his company in 15 minutes and 22 seconds. It is a shame that you often have to wait more than a month to get the documentation that makes you an E-resident. We think that 43, 215 minutes for a start-up is not exactly a record that you should be proud of.

What are the advantages of E-residency?

The advantages are obvious: whoever needs a business inside the EU, whether it is for the recognition of invoices from other EU states or simply for the reputation that comes with an “EU company”, can do so in Estonia without much effort. The costs of setting up a business are very low, in theory, but in reality, they increase tremendously due to the necessary registered office, accounting obligations, etc. In the end, an Estonian company is always more expensive than an US LLC.

Naturally, another advantage is the company’s entirely digital administration. With a residency permit, all matters related to your company can be handled 100% online. Tax declarations, banking transactions, digital signature of coded documents, and use of Estonian services… none of this will be a problem for you.

However, this is also common in many other countries, even without E-residency. The administration of the American LLC’s can also be done entirely remotely and notarisations in the US can be handled easily and conveniently through short video calls.

The typical corporate tax does not exist in Estonia: only profits are taxed at 20% at the time of withdrawal (in other words, it is a deferred corporate tax). If you reinvest your profits, you do not pay any tax, nor if you pay yourself a salary. We have analysed in depth how this salary option works in our article on Estonia in 2021, which is still relevant.

In any case, you will be limited in the amount you can pay yourself as a salary: it cannot be more than €10,000, at least without paying taxes. Moreover, the tax-free salary has nasty fiscal consequences that can trigger hypothetical taxation in the country from which you are doing the work for your Estonian company. For both reasons, the American LLC is clearly superior to its Estonian counterpart.

More details on this are provided in the article linked above.

Does E-residency have disadvantages?

E-residency in itself does not have any disadvantages, apart from its costs, which are acceptable. On the other hand, its great advantage is that it is located in Estonia, which is not necessarily better than other European jurisdictions, such as Romania or Bulgaria, for example.

The biggest disadvantage – and maybe something that most people fail to understand – is that the digital residency card does not come with a permanent residency permit. For EU citizens, this causes no major concern, since they can move freely around Estonia and stay as long as they want. The only problem would be the 183 day rule, which would oblige them to pay taxes in Estonia.

However, for people with other nationalities, the subject of residency permits is very important and must be taken into account. E-residency is just a digital identity document with which you can run your business, but it is not valid for residency in the country.

Another disadvantage could be that you need a physical address and a local contact in Estonia in order to start a business there. This is not really a huge problem, as even the Estonian government itself claims that this requirement can be obtained through service providers. The costs – less than €100 per month – are not bad, but they only remain affordable for freelancers in highly automated processes such as those at Xolo.Io. For more complex business structures such as e-commerce in the EU, you would pay between €500 and  €1000 a month if you want competent support. Our partners in Estonia offer similar rates.

E-residency is valid for 5 years, after which you must pay a fee of €120 if you want to renovate it. Unfortunately, this is not all…

The transparent citizen

Those who want to apply for or extend their E-residency need to fill in an extremely extensive questionnaire. The Estonian government claims that the application can be completed within 30 minutes if you have all the necessary documents… and this is exactly where the problem with the application lies.

This process requires very, very specific information which has nothing to do with a “digital residency” nor should it be anyone’s business.

Estonia announced that practically anyone can get a residency card there, regardless of their origin. You may ask yourself why they ask such specific questions. When applying for or renewing a residency card, you will have to give certain information that may lead you to ask yourself if the paperwork will be approved in the end.

Here we will show you an extract of the questions that you have to respond to in order to successfully complete your application. Of course, we could not help but comment them…

Extract of the questions from the questionnaire (and our comments)

Please list all the banks/credit institutions where your company holds accounts

In both our blog and our consultations we preach the need to diversify and live according to the flag theory. Of course, this includes having bank accounts in various countries, all to protect your wealth and becoming opaque. What surprises us the most is that it is none other than Estonia that is asking for this type of information.

Digital residency is all well and good, and always adds to the attractiveness, but using it to get as much information as possible from the applicant does not speak well of this “easy-to-apply-for E-residency”. Their competitor Palau does it much better in that regard.

[By the way, if you want to know where the best place to deposit your money is, here is a link to our encyclopaedia of international banking, which gives an overview of where your money is safest].

Please list all other payment institutions whose services your company uses, such as Wise, Paypal, Paysera etc. (if applicable)

The reason for requesting this information is extremely questionable. If someone really wanted to avoid taxes in Estonia, they are not going to give honest answers to questions like this one.

Does your company operate with virtual currencies?

Maybe the Estonian government only wants to know if it should accept cryptocurrencies as a means of payment, but this question could also be considered as a trick question. At the end of the day, the aim of using cryptocurrencies is also to maintain certain anonymity when making payments. In fact, for many people this is the fundamental reason to use them.

The truth is that this question also does not give us an image of a country that is very open with applications. If your intention is to do the right thing and answer honestly, at this stage, you may start to doubt whether the application will be approved or not, or whether you should go ahead with it.

Your social media accounts

It is normal to ask for personal data in processes like this. However, they should be limited to name and contact details. My social media accounts have nothing to do with E-residency and starting a business. It gives the impression that they are taking every opportunity to get information about the applicant and check whether he/she is “worthy” of Estonia’s “very attractive E-residency”.

Unfortunately we see no other reason for asking this question other than to investigate the applicant.

Your CV

What format should your CV be in? The typical boring, tabular CV that you have seen so many times before? A creative and colourful PowerPoint with transitions? Or maybe an American style CV, like the ones used by top consultancies?

Do you also have to include primary school education or are the “last relevant stages” enough?

All these questions are perfectly valid, because the true question here is why do I have to provide a CV for an E-residency application. Apply is exactly the right word, because not everyone gets it… and the more information you give them, the harder it will be to get it.

Educational background

Although you have already responded to this question when you give them your CV, you will have to break down your studies again. Why? I have no idea. Maybe they reject people from poorer countries that maybe have not had any type of education or schooling?

The principal of E-residencies is very simple: people from all over the world are welcome here to run a digital business without having to be physically present in Estonia. At least, that was the Estonian government’s idea, because if people are pre-selected on the basis of their “education” from the very start, then they are throwing away everything they stand for. Moreover, successful entrepreneurs, in particular, do not usually have an academic background.

Work experience

None. I am a student from Myanmar and I want to expand my online business in the EU. Who cares!

With every question I read, I cannot help but throw my hands in the air. Again, it is unclear if this point will be included in the evaluation, and it will most likely be rejected. Do you have to have work experience to run an online business?

Personal bank accounts

Okay, I am warning you that things are starting to get really nasty. Which of my 14 bank accounts all over the world should I declare? All of them, or only the ones that are “in the clear?” Do I also include the bank balances and statements?

Do not forget that it is not compulsory to start a business in Estonia. You can also simply apply for E-residency to become part of the “community”. However, personal bank accounts are, forgive the redundancy, a very personal matter, and should remain so. What happens is the Estonian government consider one of the given bank accounts as “not good”? Will you be rejected? As you can see, the application is extremely exhausting.

Please state whether you use virtual currencies for personal purposes, and if yes, please specify the purpose(s) in more detail

In our opinion, this is the most cheeky question in the entire questionnaire. First you are asking me if my company uses virtual currencies, and now we go one step further to a personal level, and you even ask me what these cryptocurrencies are used for. Well for the dark web, obviously. Why else?

The question only intends to find out whether someone does dishonest things on the Internet, but… who decided what is more or less immoral if this is the case?

It is clear that they are trying to avoid criminals obtaining E-residency. No nation in the world wants to have “criminals” or “terrorists” in or around their territory.  Naturally, Estonia also carries out a background check, but the government should use the official means for this, and not force the applicant to expose all his or her personal data.

Have you ever been refused a visa (by any country)

Estonia wants to be the pioneer of digital residencies, but does it matter if a country has refused me residency? This does not give a great image of Estonia, and I refer to the same example as before: maybe you come from an Asian country and a western country has refused your visa. Situations like this are not unusual. Not everyone is blessed with an EU passport and can freely move almost anywhere in the world with almost no barriers to entry.

If the answer to this question determines if the E-residency application is approved or not, we cannot do anything but question the meaning of this residence. In itself, it has nothing to do with a residence permit in the strict sense of the word.

Has an entry ban ever been imposed on you (by any country)?

Same principle as the previous question. For EU citizens, this question will be completely irrelevant, but here we are talking about entry. The fact that you have been refused entry in another country at some point in your life should not affect you getting E-residency in Estonia. At the end of the day, E-residency does not give you a residency permit in the country. The main idea is that the businesses can operate entirely digitally in the EU from anywhere in the world.

For us, this is another clear attempt to make the applicant as transparent as possible to see if they are “good material” for Estonia – without getting into whether the answer to the question is relevant or not -.

As you can see, the so called “cool countries” that advocate for a “new digital nation for the world” in reality have the most strict requirements. E-residency has existed since 2014. Maybe they took their premises seriously at the time, but is it no longer possible for them to put them into practice? The fact is that Estonian shell companies are currently under great pressure from other EU member states, and many banks in the European Union no longer open accounts for Estonian companies. It is logical that the Estonian government is trying to counteract this situation.

Registering a company in Estonia continues to be very interesting for certain business models and also for those who need a holding company in Estonia. However, you should also undoubtedly be aware of the limitations of this option.

By the way, you may not know this, but you can also start a business in Estonia the traditional way without E-residency (in fact, the company creation times are similar), or you can also take over an already existing company and start immediately.

Estonian companies offer certain advantages, especially for e-commerce of physical products in the EU market, for businesses with income from royalties in the EU and the US (for optimisaton of withholding taxes), for compliance with EU directives (especially data protection) and as a holding company.

However, in nearly all the above cases, the American LLC’s have similar advantages without any of the Estonian disadvantages.

Now, if after reading this article you have decided that you do not need a company in Estonia, we would be happy to help you with the transfer of your business to an American LLC. Tehrefore, if you do not already have E-residency, you could be spared from this inquisitive questionnaire that we were commenting on before. The only personal information that will be asked of you to set up an LLC in the United States will be a scanned copy of your passport, and only if you want an EIN (which, by the way, is necessary to open bank accounts in almost all banks).

On the other hand, if you have decided that Estonia is the best option for you and you need a personalised solution there, you can contact us so that we can provide you with the details of our partners.

And, finally, if you are not sure and still have doubts whether the Estonian OÜ and E-Residency are good options, you can book your Denationalize.me consultation here.