Estonia is doing a good job marketing its e-Residency and possibilities to register an e-Resident business in that EU country. Despite the latest security problems with the ID cards, e-Residency has been a success with over 20 000 applications. There has been discussion of what you can actually achieve by being an e-Resident of Estonia. One benefit is a smooth process of setting up a company in EU. However, there are problems involved.
There are some important aspects which should be considered when a foreigner is planning to go on with the company registration. Applying for a personal e-Residency is convenient and easy but it’s only e-Residency, not more. As it is stated quite clearly on their webpage, e-Residency is not a citizenship or a tax residency. However, e-Residency makes it possible to start founding the company in Estonia which takes at first only a few minutes. The first problem is the need for a local legal address and the second one is opening a bank account. The address can be quite easily obtained via some local service provider but the bank account is trickier.
The company needs to have a bank account and the traditional banks have very strict regulations of who can open an account and for what reasons. For example, the legislation in order to prevent money laundering puts the banks in a difficult position everywhere. That’s why it is impossible to open a bank account in Estonia without an actual visit to the bank and without a reliable business plan. Even if you have a meeting at the bank, it does not necessarily mean that your new company will get the bank account opened . Your company needs to have understandable and reliable local relations in Estonia. If the main reason for founding a company in Estonia is to minimise corporation tax it is quite sure that you will not succeed with the bank. There is a good side of this bank control, though.
There are dozens of good and bad reasons why some people want to register their company in Estonia. If it is due to taxation, it can very easily be a bad reason. First of all you have to understand the distinction of your personal taxation and corporate taxation. Your first point of personal taxation is the country where your personal tax residence is. Normally that is the country where you live. The place of personal taxation is usually quite well understood. There is more misunderstanding with the corporation tax system, which is very appealing in Estonia. The current flat rate of 20% (decreasing 2018) is payable only when the profits are distributed out of the company.
The real tax risk concerns the country who can tax your company. If the business is physically in Estonia (shops etc.) and the management lives in Estonia there are not really any uncertainties. No other country has a right to tax the company. However, the real situations with e-Residents’ companies are much more complex. The business is often international online business and the company owners/management live away from Estonia. The highly possible outcome is that the company is initially taxed normally in Estonia but the tax authorities of another country raise an interest in the income of the company. In theory, that would not normally cause double taxation since Estonia has tax treaties with several countries, which prevents the double taxation. However, it causes a huge administrational mess in practise. What was meant to be a light and smooth process becomes a nightmare of more complicated accounting, double tax returns and on-going correspondence with the tax authorities. As a summary: costs!
Thus, if you are already having troubles with opening a bank account at a traditional bank (SEB, Danske, Swedbank, LHV) you will most likely also face problems with tax authorities. We are fully aware that e-Residence organisation has come up with alternative solutions with the local bank problem but the risks described above remain. At the same time you might be left without some very beneficial bank services.
Digibalance is a true fintech company who still works in co-operation with the banks, not against them. For example our effortless and affordable AutoAccount bookkeeping service utilises the data which is easily available from the traditional European banks. The mostly automated routine bookkeeping sends your crucial financials to be available on your phone using our DigibalanceApp mobile application. Learn more http://www.digibalanceapp.com/
