Tax and Estonian e-Residency; Anyone can become an e-resident, create a company and operate it in the EU

Welcome! This week we will be talking about Estonia, which sits right on the Russian border, just below Finland.

1. Anyone can become an e-resident in Estonia, create a company and operate it in the EU.
2. Digital identity is probably the most significant legal and commercial and political concept we have in today’s world
3. Estonia is a very Digital Society – government services are provided online, including e-health, e-school, e-tax and e-voting.
4. We will be focusing on Estonian e-Residency – As anyone in the world can become one

Estonian e-Residency

1. You receive a government-issued smart ID card that provides digital identification and authorisation.
2. you can digitally sign important documents, access secure services, and make secure transactions – even if you don’t live in Estonia.
3. E-residency does not grant citizenship rights or function as a travel document, but: as an e-Resident, you’ll be able to
   • Establish and run a company online
   • Conduct your banking online e.g. make electronic bank transfers
   • Have access to international payment service providers
   • Digitally sign documents (annual reports, contracts) within the company as well as with external partners
   • Verify the authenticity of signed documents
   • Encrypt and transmit documents securely
   • Declare taxes online

The purpose

1. e-Residency program makes life and business significantly easier for
   • freelancers, digital nomads, business owners, international partners, and any other non-resident who has a relation to Estonia.
2. Great if you want to start a business, expand your business, make investments, or study in the European Union
3. For e-Residents who have established Estonian companies, it is important to note that there is a difference between personal tax obligations and corporate tax obligations.

Tax system

1. You need to pay tax in accordance with tax legislation in Estonia (and Australia sadly)
2. Individual – Property, income, benefits are all taxable at different rules, but there is a flat 20% tax on individual income.
   • Double Taxation Agreement – Avoids paying tax in both, only pay in one – We don’t have one with Estonia so there would be double taxation
   • Only bad part is that we don’t have a DTA with Estonia otherwise we would be able to keep funds invested in the company there and pay no tax on the profits.
3. Companies are taxed at the same rates depending on types of income
   1. An Estonian company entered into the commercial register is regarded to be Estonian tax resident. Salary are different to dividends
   2. Types of tax
      • Corporate Income tax – Not assessed by profits, but only when profits are distributed (as dividends)
        • Dividends: 20% tax rate on assessable payments
        • Different rules apply for the avoidance of double taxation with regards to wages as compared to dividends.
        • if a company is active in a foreign country (not Estonia), the other country may tax income received from there, in accordance with the rules applicable in the tax treaty instead (remember we don’t have one)
   3. Possible double taxation is avoided in Estonia when distributing profits as dividends.
   4. We don’t have a DTA so from what I can see it may probably be double taxed
4. Value added tax – the supply of the goods and services which shall be taxed in Estonia and which VAT rate is 20%, 9% or 0%
5. Social tax – Tax for social security payments
6. Others (customs, duties, unemployment insurances, etc.)

Determining the tax residency – It is murky

1. An Estonian company registered through e-Residency is automatically tax resident in Estonia as according to the Income Tax Act a legal person is a tax resident if it is established pursuant to Estonian law.
2. If a natural or legal person is regarded to be Estonian tax resident, it should also be taken into account whether the same person is tax resident of any other country under the law of the foreign country. In such case the tax residency in Estonia will depend upon the tax treaty between Estonia and the foreign country.
3. Business operated online – you receive income from around the globe, your Estonian OÜ would be tax resident in Estonia.
   • e-resident company can generally avoid double taxation if business activity is conducted abroad. If profits that are taxable abroad are paid out as dividends in Estonia, these profits might not be subject to tax in Estonia.
4. Business operated physically in another country – your company is likely to be taxed there too.

I’d strongly advise e-residents to consult a qualified tax professional in order to determine their tax obligations.

Example

1. If you work in another country and create a company in Estonia
   • Tax rules apply to your company profits in you local country
   • IF the company is managed by a tax resident of the home country, the company would be treated as a tax resident company in the home country

Summary

1. This is a promising sign for the future – Ease of business and ability to access lower taxable environments
2. I see it as a competitive market of taxation
3. If you have a monopoly operating then there is no optimal solution for consumers
4. With tax – Gov is monopoly and we are forced consumers
5. When it is opened up for countries to compete, you start to see shifts in the places companies do business which is a sign of consumer demand

Hope you found this episode interesting…but again, if you are interested, speak to a tax expert before doing anything!