A cool place to plant your business flag: Estonia
Estonia is a small country in the Baltics that literally turned 100 years old last year. It emerged as a ruined former Soviet republic, and now it’s proud to be a thriving EEA member. it’s got over 1,500 islands and has a ton of beautiful churches, castles and fortresses. Oh, and it’s also where all digital nomads open their businesses. 😛.
From the comfort of your own home, you can get an Estonian e-residency and open an Estonian business. Pretty cool, huh? Let’s dive into the pros and cons.
Full disclosure: I have not opened a business in Estonia, but I have several friends who have and I even recorded an episode with the Micropreneur, a Spaniard who helps people set up their Estonian businesses. This is also for my own research 🧠
Pro 1: It’s all digital
The biggest reason digital nomads and people who have more international businesses love the Estonian business model is because everything can be done online. You literally go to the government’s website, pay 100€, sign some online documents and bam, you’ve got an e-residency. You don’t have to be an EU citizen. But you’ll be setting up an EU company.
You get a digital card and a specific number, which allows you to do business. But beware: an e-residency does not mean tax residency or citizenship. This means that you cannot say you live in Estonia (unless you actually move there) and you cannot say you have a passport from Estonia (coz it ain’t a passport). 👀
Getting the e-residency is primarily to open a business in Estonia. The Estonian government got clever and decided they wanted foreign investment in their country. So they encourage you to open a business there. Not only will it be an EU company, but you will be completely location independent and allow your business to grow completely remotely. It’s all pretty low cost and once you got the e-residency, setting up your business is also all done online. Even online banking is done online - you can go to Estonia and do it physically, or simply use digital banks such as Holvi, Transferwise or the one I’m a big fan of Revolut Business.
Pro 2: No income tax on profit
No, Estonia is not a tax haven. Corporate tax is 21%.
HOWEVER. You are only taxed on the money you take out the business 😛. This was a little confusing for me at first so let’s use an example to explain.
I open a business in Estonia. It makes 10,000€ of profit in 2019 (a lit business 🔥). I decide to keep those 10,000€ in my Estonian business account for future expenses, to buy more online software, to hire more freelancers. So I pay 0€ in tax.
In the year 2020 I make 20,000€ of profit 🔥. I decide to keep 10,000€ and leave 10,000€ in my Estonian bank account. I will be taxed 21% only on the 10,000€ I decide to take out and put in my British bank account.
That is pretty awesome, however if you are a tax resident in a country which taxes you on your worldwide income (Spain, UK, France, Germany, etc), they will want a piece of that too. Luckily, Estonia has double tax treaties and you won’t have to pay another 20% (or whatever income tax is) within your country. However, you will still have to declare and file (a pain, yes I know 🙄)
But as you can imagine, this can be extremely beneficial if you are someone with a high income… more on that later.
Pro 3: Great for investments
This 0% tax on reinvestments is actually much more beneficial than you might think at first sight (although I still need to test this). How? Investments.
I could set up a business in Estonia that is primarily for investments. This would mean that as my investments grow every year, I would not have to pay any tax on them as long as I reinvest them. So as my portfolio of ETFs and index funds keep growing and making me an average of 7%, I won’t have to pay any tax until I sell and take them out. Pretty sweet.
If you’re in the UK, the £20,000/year tax free ISA is amazing - make sure you’re maxing that out before heading to Estonia.
But if you’re in a country like Spain, which taxes you on you investment profits every single year no matter what, setting up camp in Estonia is a good option.
I’m only writing this Pro 3 as a suggestion, I haven’t done it myself. In order to invest with an Estonian company you would need to find a brokerage that accepts corporate accounts from Estonia (Degiro and Interactive Brokers are an example) and you would need to file the correct tax returns.
Con 1: Tax treaty with your own country
So yes, there are a few cons to setting up shop in Estonia.
Since an e-residency is not a tax residency, you will still have to pay taxes in your own country. Although Estonia has double taxation treaties, this all depends on the country you’re living in. If you live in the UK and earn under £46,360 per year, your income tax is 20% so you won’t have to pay anything extra to the HMRC (although you still have to declare). However if you earn more than that, your income tax is 40%, meaning you’ll have to pay 21% of the income you take from your Estonian business and 19% to HMRC. No escaping the income tax. 🤷♀️
But this is where flag theory comes in. If you set up your tax residency in a country like Portugal that does not tax you on foreign income, then you only pay the 21% to Estonia and that’s it. Boom shakalaka. But obviously, you have to be willing to do that 😉.
Con 2: Costs
Compared to other countries, setting up a business in Estonia is very cheap. The e-residency costs 100€, and setting up the business itself is 90€. However, if you are setting up a Limited company, then the minimum share capital is 2,500€ - and although you can defer this payment, you won’t be able to take out any money until you put in the share capital.
The reason I put this as a con is that if you’re just making a few hundred every month as your side business (as I am), you have to be ready for that 190€ and not being able to take our your profits for a while. Setting up a business in the UK costs 12€ - as a sole trader you will pay regular income tax on your earnings, as a corporation you will pay 19% tax (although you’ll have to pay over £700 for someone to do your tax return every year). What I’m saying is be very aware of the costs of setting up shop in your own country versus in Estonia. If it’s beneficial to stay in your country, then there is no reason to switch over.
In Spain you have to pay at least 275€ EVERY MONTH to be self-employed. So you can understand why a Spaniard would want to set up shop in Estonia.
Setting up a business in Estonia is great for those who are planning to live in different countries and being location independent - this is why digital nomads love Estonia so much. Estonia doesn’t care where you’re living, as long as you pay the 21% on distributed profits. And the very important thing to take into account here is the Estonian government’s mindset; they want foreign investment, they want something that benefits digital nomads and they really are trying to build a system that works in the modern world. This mindset of innovation and practicality is life-changing - which is why we feel comfortable putting our money and businesses in Estonia, we are confident they won’t implement some self-employment tax like the Spanish. 🙄
As I said before, I am planning on setting up Financially Mint in Estonia, since I will be living in different countries and don’t want to be filing tax returns in the UK. Once that happens, I’ll let you know how it goes 😉.
