How to set up an EU company in 20 min and reinvest your profits tax free with the Estonian E-Residency
Estonia has been the first country in the world to introduce the E-Residency concept, a digital identity backed by the government. This small piece of land on the shores of the Baltic Sea is a world leader in digital governance and is one of the countries more advanced in the world in digital terms.
The Estonian E-Residency, as we will see below, may be a very attractive option both for those who are running an international business independent of location, to enter the Estonian and EU market and to use the technology for secure digital authentication, among others.
In addition, Estonia is one of the most economically liberal countries. Where you can register a company online in less than a day and manage it remotely. With a competitive tax system, where reinvested profits are tax free. Estonia is an excellent location for trade and investment, a growing economy, and a vibrant ecosystem for tech startups, where projects like Skype or more recently TransferWise have been devised.
What is the Estonian E-Residency?
To avoid confusion, I’ll start with what is not the Estonian E-Residency. It is not any type of residence permit, it does not entitle you to live or work in Estonia or in the European Union, it is not a tax residency and in no case, leads you to Estonian citizenship. Neither is a travel document and does not display a photo.
Basically, the Estonian E-Residency is a transnational digital identity card issued and backed by the Estonian Government. Under a platform as a service (Paas), it is a simple and secure system that allows you to use government portals, secure transactions in online banks, encrypt files and sign documents electronically.
The European regulation on electronic identification, eIDAS, states that electronic identification and electronic signatures are legally equivalent to face-to-face identification and handwritten signatures in the European Union, which will be fully interoperable in 2018. As a result, the Estonian E-residency card will serve as online identification throughout the European community next year.
Since launching the program in 2015 until now, Estonia has granted more than 16,000 E-Residencies, and the Government aims to reach 10 million by 2025.
Estonian E-Residency Benefits
With the Estonian E-Residency it is possible to incorporate and manage an Estonian company remotely, open a bank account and use Estonian online banking, access international payment processors, participate in fintech platforms securely, digitally sign documents or contracts both internal and external, verify the authenticity of the signed documents, encrypt and transmit documents securely and file accounting and taxes online in Estonia.
The Estonian E-Residency may be especially interesting for those non-EU citizens who want to do business in the old continent or to set up and manage a business of independent location. Everything remotely. An option to consider for the British, as it is a simple and straightforward way, after Brexit, to keep its operations in the EU without leaving the UK. Maintaining revenues, costs and financial reports in EUR, while the staff is in the UK.
Incorporating a company in Estonia through the Estonian E-Residency, is also an interesting option for digital nomads. With low start-up and maintenance costs, access to the benefits of harmonized EU single market and serve its clients in the EU through it.
In addition, the Estonian E-Residency serves as a secure identification for new business platforms to secure and have encrypted communications among its users, digitize business processes, invest, obtain funding or to market investments in crowdfunding platforms. Possibilities are and will be huge, as for example, now they are working on a blockchain based electronic voting system to allow shareholders of Baltic Nasdaq listed companies, to vote at the shareholders’ meeting remotely, quickly and safely.
As we will see later, the profits of a company in Estonia are not taxed until their distribution in the form of dividends. Ideal for startups, to reinvest their profits tax-free and grow. However, when deciding whether it is really the ideal option in terms of taxation, you should consider whether your country of residence taxes foreign-derived income, how, existence of CFC laws and tax treaties. For these matters, consult a tax attorney, who will give you the right advice according to your personal and corporate circumstances.
How to get Estonian E-Residency
First, fill out the online application form with your personal data, upload a copy of the passport or ID card (EU citizens), explain briefly the reasons for becoming an E-resident and choose a card collection point. Which may be any Estonian diplomatic mission or in Police and Border Guard Board service points of the country. Once the application is sent and the € 100 fee is paid, the Estonian authorities will carry out a background check and approve or reject the application.
Between two and four weeks you will be notified of the arrival of the starter kit containing your digital ID card and a smart card reader, at the chosen collection point. You will have to go personally with your identification documentation and take fingerprints.
The card will be valid for 3 years, after which you will have to renew and pay another € 100 fee.
Incorporate a company in Estonia
Types of company
The Estonian Commercial Code establishes five business entity forms: private company limited, public company limited, general partnership, limited partnership and sole proprietorship. The private limited company and the public company are the most used forms of entities because the limitation of the liability of the shareholders.
- Private Limited Company (Osaühing) (OÜ): It is the most common company form. Capital divided into shares. Which may be privately negotiated but not offered to the public. The company can be formed by one or more shareholders who are liable for their contributed capital. The minimum capital required is € 2,500, which may be monetary or non-monetary. If the capital is less than € 25,000, it will not be necessary to disburse it when registering the company. The company shall not distribute dividends until the total capital amount has been paid. The company must be managed by a board of directors, which represents and administrate it. The board may have one or more directors, which must be individuals with active legal capacity, resident or non-resident. The OÜ may have a supervisory board if it is established by the bylaws.
- Public Limited Company (Aktsiaselts) (AS): Capital divided into freely transferable shares that may be offered to the public. Shares must be registered with Estonian Central Registry of Securities. The company can be formed by one or more shareholders who are liable for their contributed capital. The minimum capital required is € 25,000. For activities such as those related to financial services, a higher minimum capital requirement may be required. The AS consist of a general meeting of shareholders, a supervisory board and a board of directors. AS must be registered by notary, electronic registration is not possible.
How to register a company
There is no restriction for foreigners on incorporating a company in Estonia. In addition, it is one of the countries where it is easier and faster. In one day, with the Estonian E-Residency you can establish a private limited company without having to visit the country, run and manage it remotely through the Internet.
To incorporate a private limited company in Estonia, you will first have to obtain the E-Residency, which we have explained above.
Any company incorporated in Estonia must have a legal address in the country so you will have to apply for a business service provide, which will provide you one. These providers offer legal, virtual office, accountancy, compliance, nominee directors and shareholders, among others, at reasonable prices. You can write us at [email protected] for further information.
After, you have to register the company electronically in the Business Registration Portal of the Electronic Companies Registry. The system generates all the necessary documents, which can be digitally signed. You will have to pay € 190 fee and in at most two days, the company will be officially registered.
A private limited company may be registered electronically in the Business Register portal only if all persons related can digitally sign and is created without immediate capital contribution or with a monetary contribution done online.
If you want to register the private limited company by notary, you will have to file the bylaws, articles of association, information about communications devices, bank certificate regarding the deposit of social capital and certificate of payment of state fees. State fees through the traditional procedure are € 145.
An incorporated company in Estonia is required to prepare and file an annual report containing the annual accounts and the management report, the profits distribution proposal for the year and the auditor’s report if required.
Certain activities such as construction, agriculture, gambling, education or financial services, among others, require special licenses to operate. If the annual turnover is more than € 16,000, you will have to register as a VAT taxpayer. As well as the hiring of employees, you will have to register them at the Tax and Customs Board. All the procedures mentioned, as well as the tax return, the annual report and other filing requirements can be done online with the Estonian E-Residency card.
- Public limited companies, foundations; and private limited companies meeting two of the following criteria shall be audited annually.
Net turnover of more than € 2 million; Total assets of over € 1 million or more than 30 employees.
- Private limited companies that meet 1 of the following criteria will also be subject to audit.
Net turnover of more than € 6 million; Total assets of over € 3 million or more than 90 employees.
- The financial statements of public limited companies, foundations; and private limited companies meeting two of the three criteria should be reviewed annually by an auditor.
Net turnover of more than € 1 million; Total assets of over € 500,000 or more than 15 employees.
- Financial statements of private limited companies that meet 1 of the following criteria will also be subject to audit.
Net turnover of more than € 3 million; Total assets of over € 1.5 million or more than 45 employees.
Corporate Taxes in Estonia
Corporate Tax Basis
Resident companies and P.E. of foreign companies are taxed on their distributed profits from their worldwide income. A tax credit is usually available for foreign tax paid.
Non-resident companies are taxed on income derived from Estonian sources through withholding tax.
Corporate Taxable Income
Non-distributed profits are tax-exempt, including active, passive income and capital gains. Profits distributed (dividends, shares buybacks or profits distributions through capital reductions) or deemed to be distributed (transfer pricing adjustments, payments unrelated to business activities, gifts, donations…) are subject to taxation.
Corporate Income Tax Rates
Distributed profits are taxed at a flat rate of 20% of the gross amount.
Government has announced that tax will be lowered to 14% for companies paying dividends to legal persons on a regular basis, but details have not been disclosed yet.
Profits tax applies to dividend distribution and there is no additional tax on dividends received. Redistribution of dividends may be tax exempt if recipient holds at least 10% of shares or votes of the subsidiary, and is tax resident of Estonia, EEA, Switzerland or dividends/foreign P.E. profits have been subject to tax on source. The exemption does not apply to dividends received from residents of tax haven jurisdictions.
Stock dividends are tax exempt.
Capital Gains are taxed when distributed at the standard tax rate.
Profit tax are paid on dividend distribution and there are no withholding taxes on dividends paid to residents and nonresidents.
Interest payments to non-residents are not subject to withholding tax, but those paid to residents are subject to a withholding tax of 20%.
Royalties paid to non-residents are usually subject to a withholding tax of 10%, unless rate is reduced under a tax treaty. Royalties paid to associated EU and Swiss may be withholding tax exempt under the EU royalties’ directive, provided that certain requirements are met. Royalties payments to resident individuals are subject to a withholding tax of 20%.
Rental payments to non-residents on immovable and movable property located/registered in Estonia are subject to a withholding tax of 20%, unless tax rate is reduced under a tax treaty. Rental payments to resident individuals are also subject to 20% withholding tax.
Payments on professional services to non-residents are subject to a 10% withholding tax. Those paid to residents of tax haven jurisdictions may be subject to 20% withholding tax. Withholding tax is not applicable if services are conducted outside the country or from a resident of a country where Estonia has concluded a tax treaty with.
Losses are not deductible.
Both domestic and cross-border transactions with related parties must be conducted at arm’s length. If not, then the subsequent transfer pricing adjustments are treated as hidden profit distributions and subject to profit tax. Companies except SME’s are required to prepare transfer pricing documentation. SME’s that has conducted transactions with tax haven entities must prepare transfer pricing documentation.
There are no thin capitalization rules in Estonia.
Controlled Foreign Companies
Only individuals are subject to CFC rules in Estonia.
Social Security Contributions
Employers contribute 33% to the social security fund and employees contribute 2%.
Value-added tax applies on the sale of goods and services at a 20% rate. Certain goods and services such as books, periodicals, hotel accommodation or certain pharmaceuticals are subject to a reduced rate of 9%.
Estonia is part of the European Union, and therefore trade between Estonia and other EU countries is free from customs duties. Products imported from outside the EU are subject to the EU customs duty tariffs.
Buildings are not subject to property taxes. Lands are taxed at a rate between 0.1% and 2.5% on the assessed value.
There are other taxes such as excise taxes on certain products, gambling tax, heavy good vehicles tax, stamp duties and several local taxes. There are no taxes on transfer and inheritances.
Estonia has concluded tax treaties to avoid double taxation with Latvia, Norway, Denmark, Sweden, Lithuania, Finland, Germany, United Kingdom, Poland, Netherlands, Iceland, Czech Republic, Canada, France, Ukraine, Belarus, Moldova, Ireland, United States, China, Kazakhstan, Italy, Austria, Belgium, Armenia, Malta, Portugal, Croatia, Switzerland, Spain, Hungary, Romania, Turkey, Slovak Republic, Slovenia, Luxembourg, Singapore, Georgia, Israel, Bulgaria, Greece, Azerbaijan, Israel, Macedonia, Isle of Man, Albania, South Korea, United Arab Emirates, Jersey, India, Bahrain, Cyprus, Mexico, Thailand, Turkmenistan, Uzbekistan and Vietnam (still not in force). You can check Estonian tax treaties at incorporations.io/estonia.
Open a Bank account in Estonia
In Estonia, the banking sector is relatively small and concentrated. Consolidated banking assets represent 112.86% of GDP. It consists of 16 banks, 6 national and 10 controlled by foreign capital, of which 4 have more than 90% market share. The total assets of the national banks represent only 8.91% of the consolidated banking assets.
The sector is in good health, as reflected in the last Global Competitiveness Report 2016-2017 of the World Economic Forum. Scoring 4.8 out of a maximum of 7.0 and ranking 22 out of 138 economies. The strength of the banks was evaluated at 5.8 (28th), reliability and financial market confidence scored 5.2 (23rd). In addition, Estonia is the least indebted country in the European Union. At the end of the third quarter of 2016 the debt represented 9.6% of its GDP, far from 91.7% of the Eurozone average.
Non-residents may open a bank account in accordance with the criteria and internal policies of each bank. The Estonian parliament approved in 2015 an amendment to the Money Laundering and Terrorist Financing Prevention Act, allowing the opening of bank accounts remotely. Although, legally possible, right now most banks may require you to show up physically in the bank branch. This may change in the future with the application of information technology facilities for identification, such as video bridge.
The Estonian E-Residency itself does not represent any guarantee when opening a personal bank account. It is advisable before flying to Estonia, be sure that the bank will be willing to open your account. You may be asked, in addition to the passport, the reason for opening the account, proof of origin of funds, bank statements, reference letters from other banks or existing clients, CV and a real connection with the country. At Flag Theory, we have access to several Estonian banks, where our introduction may allow you to open a bank account.
Estonian banks will be more likely to open corporate accounts to companies doing business in Estonia or the EU or to companies directly owned by E-residents. Accurate accounting and a solid business plan with clear objectives are factors that may positively influence. When opening a corporate account, banks may require passports of shareholders and directors, company bylaws, certificates of incorporation, certificates of good standing issued by the commercial register, a copy of the articles of association and a list of clients or potential customers.
In addition to EUR, it is possible to open accounts in several currencies and multi-currency accounts are also available. Accounts come with a debit card. Currently with the low-interest ECB policy, Estonian banks pay interest on term deposits as low as 0.30% on average, in line with other EU countries.
Both local and international banks offer a full range of financial, insurance, accounting and legal services at substantially competitive prices.
Banking in Estonia is mostly done digitally, being one of the most advanced in the world. Services and interfaces are safe and of great quality. Up to 98% of banking transactions are carried out over the Internet. The accounts are compatible with electronic payment providers and merchant solutions. Banks are currently working with fintech global companies developing innovative e-banking solutions, which will be launched during this year.
Estonia has started to undertake the first OECD’s automatic exchanges of information (AEOI) following the CRS (Common Reporting Standard) this present year. Estonia has also an intergovernmental agreement (IGA) Model 1 with the U.S. to report US taxpayers accounts since 2014 to participate in the US Foreign Account Tax Compliance (FATCA).
If you want to bank in Estonia, through bankaccounts.io, we can facilitate opening a bank account in the following banks:
- Swedbank, SEB, Nordea Bank, Swedish banking groups based in Stockholm with more than 75% market share.
- Danske Bank, a Danish banking group, with a 9% market share
- LHV Pank a local banking company with a 3% fee, used by Transferwise for its SEPA transactions in euros.
- Vesobank, an Estonian local bank.
- Citadele, a banking group from Latvia.
- Scania Finans, a Swedish banking group.
You can click on the bank’s name to apply and fill the form or email us at [email protected] for further information.
Invest in Estonia
Looking back, Estonia became independent from the URRS in 1990, which led to a hard transition from the socialist model to a market economy. With hard recessions throughout the decade linked to the Russian crises, with a small parenthesis between 1995 and 1997, where public investments led to a moderate growth.
It was from the 2000s, where local and foreign investment, industrial reconversion, investment on new information technologies together with a responsible public spending policy and the investment of EU cohesion funds in productive sectors rather than subsidies, led to an average annual growth rate of 7% between 2000 and 2008. The standard of living increased from 45% of average GDP per capita in the EU27 to 67% in 2008. Estonia joined the European club in 2004 and until 2008 was one of the community economies with higher development and growth rates.
Between 2007 and 2008 began another via crucis, the story is known. The global economic crisis increased insecurity, a decline in private consumption, a decline in private investment and demand for real estate. Culminating in 2008 with a collapse of export capacities and non-availability of credit. Recession lasted until the next 7 years. GDP declined -14.7% in 2009, -7.6% in 2011, -5.2% in 2012, -1.7% in 2013 and -2.9% in 2014. Except for 2010, where an increase in public spending and confidence among investors generated by the Eurozone entry made possible a growth of 2.5%.
It was from 2015, where Estonia definitely regained the growth path (1.1%), which consolidated last year (2.5%). Driven mainly by an increase in domestic demand, industrial production and exports. For the next two years, the trend is expected to continue and it has been forecasted a 3% growth.
After two years of deflation, in the second part of 2016 inflation started to grow. Although the year average inflation rate was 0.16%, the trend is upward with year-on-year increases of more than 2%. Driven by rising natural resource prices such as oil, falling unemployment and rising wages, and hence of consumption.
Regarding interest rates marked by the ECB, these continue at 0% and are expected to remain at least for the remainder of the year.
Unlike other EU economies, the Estonian government has always maintained prudent budget policy. Even in the years of strong recession the budget deficit barely exceeded -2% (2009-2011) and -0.3% (2012-2013). In 2014 onwards, budget surpluses returned. Estonia is the country with the lowest public debt of the entire OECD’s. Currently (Q3 2016) only 9.6% of its GDP. To give you an idea, in 2016, the European average of public debt was 88.8% of GDP. In US was 108.25% and the Japanese of 250.35%.
Estonia is one of the most liberal and competitive economies in the world. Ranking 1st in the International Fiscal Competitiveness Index 2016 (Tax Foundation), 12th in the Doing Business 2016 Ranking, 9th in the Wall Street Journal’s Index of Economic Freedom 2016 / The Heritage Foundation, 1st in the Freedom House Internet Freedom 2016, 30th in Global Competitiveness Report 2016 and 23rd in Transparency International’s Corruption Perception Index 2016.
Investment Opportunities in Estonia
Estonia is in a prime location, at the crossroads between Europe and Russia. In one of the fastest growing European regions, the Baltic Sea. Covering from the Scandinavian developed economies, northern Germany, growing economies such as the Baltic countries and Poland and bordering the huge potential market of Russia.
Estonia has a very favorable legislative framework for foreign investment. Moreover, it accounts for 83% of GDP. Mainly Finnish and Swedish (more than 50%), with a large number of Estonian subsidiaries operating as outsourcing centers.
In addition to its strategic location and its membership of the EU, with the benefits that it entails. Estonia has a highly skilled, multilingual, well-educated and flexible labor force. Considerably more affordable comparing with Scandinavian countries or Germany. Currently the average gross salary is € 1,146.
Reinvested profits are tax free. As we have seen, it is possible to create an online company in less than 20 minutes, low running costs and almost all banking operations can be done online.
As downsides, Estonia has a very small domestic market and purchasing power is lower than other countries in the region. In addition, Finnish and Swedish products dominate the market, so depending on which sectors it is difficult to penetrate.
The IT sector is one of the most attractive, Estonia has one of the most developed telecommunication and digital infrastructures in the world that offer a superior environment for business operation. The IT areas with the highest growth are: fintech, cyber security centers, security software development, systems integration and defense software, mobile security and wireless security. Estonia has an innovative talent pool, with a strong international reputation for know-how and innovation.
Estonia has a growing startup ecosystem in Tartu and Tallinn. Currently, there are over 400 startups, which have raised capital for more than € 102.5 million in 2016. With 40 deals and an average of € 2.5 million per deal. The peer-to-peer money transfer service, Transferwise, was the one that raised more capital with € 23.5 million. Following Starship Technologies, a small self-driving robotic delivery vehicles startup, which raised € 16.5 million and the cloud-based sales software, Pipedrive, which attracted € 16 million.
In addition, Estonia is the second country in Europe, after United Kingdom, in alternative funding per capita. This last year € 12 million were raised on crowdfunding platforms, € 24 per person. Estonian E-Residency card holders can invest in these platforms, signing contracts digitally. With certain requirements in some cases such as hold a local bank account or a securities account. The most popular platforms are Crowdestate to finance real estate projects, Fundwise, an equity crowdfunding market for small businesses, Investly, get financing with advanced billing, Bondora (loans) and Estateguru (secured property loans).
Estonia is an investment destination of shared services. Both large multinational and small companies are settling shared services centers such as customer services, IT services, finance or logistics.
The presence of industrial parks in ports for manufacturing activities that offer great logistics as a nearby port, a nearby railroad and a good road network. Together with experienced, skilled and cost-efficient laborers. Makes Estonia an interesting investment environment in the manufacturing of fabricated metal products, industrial machinery and equipment, manufacturing of transport equipment or toolmaking. Currently there are 4 free trade areas in the in the northern coast ports of Muuga; Paldiski and Sillamäe as well as in Valga in the south-east. Where non-EU industrial equipment may be imported duty free.
Other sectors with attractive investment opportunities are tourism, biotechnology and green industries.
Invest in Real Estate
Foreign citizens and companies have the same rights than locals to acquire property in Estonia. There are certain limitations for non-EU citizens, who cannot buy property on the islands of Saarema, Hiiuma, Vormsi and Muhu, nor forest or agricultural land of more than 10 hectares.
In Estonia, as everywhere, the real estate market depends on the location. Most demand is in Tartu and Parnu, and especially Tallinn, the major cities. The average price of sq.m in Tallinn is € 1,590, while in the overall country it is just over a thousand euros. Considerably affordable compared to the European capitals.
After two years with a buoyant real estate market, with annual price increases of over 8%, in 2016 the market cooled somewhat. But this 2017 has started very strongly due to the improvement of the economic situation and optimistic forecasts, unemployment reductions, wages increase, loans’ favorable conditions with low interest rates and a rental price increase. The demand for real estate in Estonia and particularly in Tallinn is increasing and this is reflected in the indicators. The number of apartment transactions in the capital during the first quarter of 2017 was 19% higher and mortgage loans increased by 22% compared to the previous year.
Although the loan balance has increased by 5.6% year-on-year, well above economic growth, consumer incomes are also increasing and the solvency requirements demanded by banks to lend are high. This is why the proportion of bad loans in 2016 was only 0.6%.
At present, long-term rental yields in Tallinn are between over 5% and 6%, well above the European average. The price of the rent is rising among other reasons by the decrease of long term rentals availability. Many investors are offering short-term rentals for tourists, where despite the seasonal phenomenon, yields may be higher.
With respect to taxes, there is no property tax for buildings, nor are there any transfer or inheritance taxes. Capital gains are included in the personal tax and corporation tax base, both at a rate of 20% (paid when distributed as dividends in the case of companies).
Living in Estonia
Estonia is a small country of 45,000 sq km located on the Baltic Sea, bordering with Latvia to the south, Russia to the east, the Gulf of Finland to the north and the Baltic Sea to the west. With just 1.3 million people, it is one of the least densely populated countries in Europe. Its capital is Tallinn, which is the cultural and economic center of the country, where about 400,000 people live. Tartu and Narva, with just over 97,000 and 67,000 inhabitants, respectively, are the second and third largest.
The official language is Estonian, although Russian is widely spoken and especially among young people, there is a great knowledge of English.
The climate is characterized by a very cold winter (from 1°C to -6°C on average), a short cold rainy spring (from 3°C to 10°C), a relatively warm and dry summer (14°C to 17°C), and a cold autumn (3°C to 10°C). There are significant differences between the coastal and continental climate. Due to its latitude, in winter there are days with less than 6 hours of light and in summer more than 20 hours.
Tallinn is known for the medieval neighborhood of Vanalinn, a World Heritage Site. Full of mansions and medieval churches that are filled with tourists in summer. The city, despite being small, has great entertainment activities like theaters, cinemas, galleries, cultural activities and nightlife and has good public services and accessibility. Tallinn is a very safe city with one of the lowest crime rates in Europe. In addition to have not much traffic, being one of the least polluted cities.
Tallinn’s public transport network, is formed by buses, trams and trolleybuses. Which are almost free for residents, who can acquire a magnetic card which costs € 2.7. For non-residents tickets cost between € 1 and € 3 depending on the route. Regarding the country, it is relatively well connected with a network of railways and buses. Estonia has 5 airports. The largest is Tallinn, which currently connects the city with Athens, Berlin, Vilnius, Amsterdam, Brussels, Oslo, Warsaw, Edinburgh, Paris, Geneva, Salzburg, Helsinki, Frankfurt, London, Istanbul, Manchester, Dublin, Girona and Barcelona, many of them with seasonal flights. The other airports connect with regional destinations.
Education and health are mostly public, with a relatively good level. Private supply is limited, and in most cases, are linked to the public system. The telecommunications infrastructure is modern, with high-speed Internet access, as well as many free access points throughout the country, such as parks or beaches.
Estonia has many natural areas, such as natural parks, forests, rivers, lakes and shores where you can do outdoor activities such as canoeing, hiking, sailing, cycling, camping or cross-country skiing (country is mostly flat with highest peak just 318m).
Estonians like all Nordics tend to be reserved people, not very expressive, honest, sincere and direct.
Regarding the cost of living, it is considerably lower than in the EU-15 countries. According to Numbeo, not including rent prices, Estonia is on average 25% cheaper than Germany, 30% cheaper than France and 15% cheaper than Spain. The rentals are considerably low, on average 38% cheaper than Spain and 45% cheaper than in France and Germany.
Residence Permits and Citizenship in Estonia
Temporary Residence Permit
EU citizens have the right to settle, live and work in Estonia. Non-EU citizens may apply for a temporary residence permit if they settle with a spouse, close relative, family reunification, to study, work or do business. In order to qualify for temporary residence, it is necessary to have medical insurance and proof of income twice the level of subsistence in Estonia. In 2017, the subsistence level is € 130 per month.
To obtain temporary residence to do business, the foreigner must fulfill one of the following requirements:
- Participation in a company or operate as sole proprietor or invest in a business activity in Estonia, investing at least € 65,000 (€ 16,000 if self-employed). The capital stock, the subordinated liability and the amount of the fixed assets registered can be considered as investment. The permit has a duration of 5 years, renewable.
- Establish a startup with the aim of developing and launching a business model with such great, innovative and reproducible global growth potential that it will contribute substantially to Estonia’s business environment. The project must be previously evaluated and approved by an expert committee of the Ministry of the Interior. In this case, the minimum income to apply for the visa is € 130 per month. The residence permit has a duration of 5 years, renewable.
- Make a direct investment of at least € 1,000,000 in a company registered in the Estonian trade register investing primarily in Estonia or in an investment fund, from which most investments are made in Estonia. The amount invested must be maintained throughout the period of residence either in the same investment or in another that meets the requirements. The investor may not be required to have a place of residence or register the place of residence in the Estonian Population Register. The permit has a duration of 5 years, renewable.
Temporary residence permit application fee is € 160 if requested in Estonia, or € 180, if requested abroad.
In Estonia, the issuance of residence permits is subject to the annual immigration quota, which cannot exceed 0.1% of the Estonian permanent population in one year. This will not apply to American or Japanese applicants or to citizens applying for residency to do research or study.
Permanent Residency in Estonia
A non-EU citizen may apply for permanent residence in Estonia if he / she has lived in Estonia with a temporary residence permit for 5 years, his / her place of residence has been entered in the Estonian population registry, has health insurance, has permanent legal income (€ 260 / month) and has an Estonian language B1 level.
Citizenship in Estonia
It is possible to apply for citizenship by naturalization once you have lived in Estonia with a residence permit for at least 8 years, 5 of which must have been with a permanent residence permit. In addition, it is required a language proficiency and a Constitution and the Citizenship Law examination, a permanent legal income (€ 260 / month), the place of residence has been registered and the applicant is loyal to the Estonian state.
Estonia does not recognize dual citizenship for naturalized citizens. Anyone that become citizen by naturalization must renounce his or her previous nationality.
Residents are subject to personal income tax on their worldwide income. Non-residents are subject to income tax on their Estonian-source income.
An individual is tax resident in Estonia if his or her place of residence is Estonia or stays more than 183 days in a calendar year in the country.
Employment Income, capital gains, investment income, rental income and royalties are subject to personal income tax. Certain capital gains such as those from the sale of a personal residence property are tax exempt. Certain investment income and capital gains derived from qualified securities may be exempt from tax, provided that are reinvest.
Interests received from Estonian and EEA accounts are tax exempt.
Interest paid from certain accounts by European Economic Area (EEA) (including Estonian) banks or EEA branches of non-EEA banks to resident individuals is also exempt from income tax.
Qualifying foreign employment income, domestic dividends, qualifying foreign dividends, qualifying bank interest, and certain qualifying capital gains may not be subject to personal income tax
Personal income is taxed at a flat rate of 20%. Certain pension payments are taxed at 10%.
Deductions and Allowances
There is a personal allowance of €2,160
Unemployment insurance contributions, contributions to compulsory accumulative pension scheme, and certain obligatory contributions to foreign social security schemes may be fully deducted from tax base.
Certain bank and leasing interest paid to buy personal residence, certain educational expenses, certain gifts and donations, and certain payments to personal pension schemes may be deducted, subject to limitations.
20% deduction is available of rental income from immovable property.
Getting the Estonian E-Residency and incorporating a company, is definitely an option to consider for digital nomads, and more if they do or want to do business in Europe. Register the company remotely in less than a day and at a low cost, minimum bureaucracy, carry out all paperwork and tax returns online and not pay corporate taxes, as long as profits are reinvested. If you are British or non-EU, it may be an interesting option to start or maintain your business in the Union. In addition, Estonian E-Residency digital authentication will be valid throughout the European Union in brief.
You may also be interested in do bank in the country with the least debt in the world and with the most advanced digital interfaces and services. If so, we can introduce you to the best banks in the country. You can apply for your Estonian bank account at bankaccounts.io or email us at [email protected] for further information.
Estonia is another option for those looking for an ideal environment to develop a tech-startup, seek funding or invest in innovative projects. The scene is vibrant and proof of it, is that, despite being a country of less than 1.3 million inhabitants, there are more than 400 startups and this past year have raised capital of more than € 100 million. In addition, if your startup is approved by the Ministry of Interior, you will opt for temporary residence of 5 years, after which you can apply for the permanent. Those looking for a second passport, Estonia is not the ideal place. In fact, it takes 10 years of residence (5 temporary + 5 permanent) and renounce your current citizenship.
Whether you want to immigrate, incorporate or open a bank account in Estonia, you can do it now or compare it with other options at passports.io, incorporations.io and bankaccounts.io. You can also consider joining our PT Society, where you will find key information to internationalize for real investors and entrepreneurs. If you need customized advice, you can check how we can help you or write us at [email protected].
This article is not legal or tax advice. We have access to a global network of qualified attorneys and tax advisers who can give you the proper advice for your specific case and circumstances. Contact us for further information.