Thanks to its e-Residency program, Estonia has quickly risen to become one of the most popular jurisdictions in which to register a location independent business. Its marketing effort to promote the program has worked so well that a significant number of people now assume that it is the only country in which one can register a business remotely, even though that is not the case. This post is the first of a series in which I compare Estonia to other countries where remote registration is possible. The goal of this series is to raise awareness of those other options so that you can make a better informed decision when it comes to choosing where you should register your business.
If you are already an e-Resident, registering an Estonian business is both straightforward and quick. It costs 190 EUR and takes 1-2 days. Other than your e-Residency, you only need a local address and an administrative contact. If you do not have one already, you can rent one from a service provider for around 150-250 EUR annually. The problem is that most people are not e-Residents and this means that they have to apply for e-Residency first. This adds at least a month to the whole process, cost 100 EUR and requires a personal visit to an Estonian embassy. If there is no Estonian embassy where you live, you are pretty much screwed.
As the owner of an Estonian company, you will be required to file a tax return every month (when taxes are owed). Any taxes owed also needs to be paid on a monthly basis. Fortunately, this can be done online directly on the government website (which is available in English). To make things easier, the Estonian government has developed its own accounting software that businesses can use free of charge for up to a year. If accounting is not your thing, there are many service providers who will take care of it for you. The cost for such a service starts at around 50 EUR per month.
It is currently not possible, in practice, to remotely open a bank account in Estonia. It is possible, however, to open a “wallet” account with the likes of Holvi or TransferWise Borderless. That said, these services do not offer real bank accounts and they are not based in Estonia either. This may prove to be a problem when it comes to using services that require the bank account and the company to be based in the same country (especially for payment processing). Even worse, they cannot be used for the payment of the share capital (technically speaking, they can but it is a lot of trouble to make it work). A visit to the country is thus necessary in most circumstances. Another issue is that as of 2020, Estonian banks have been closing a large number of e-Resident accounts. This has severely shaken trust in the program and the Estonian government ability to run it.
Most countries tax realised profits, Estonia does not. Instead, only distributed profits are taxed. In practice, this means that any money that stays in the company is exempt while any profits distributed or deemed distributed is taxed at the flat rate of 20%. Salaries paid to non-residents are also exempt as taxes are deemed to be paid in the country where they are received (for example, a Spanish resident being paid a salary from an Estonian company will be deemed to have paid taxes on that salary in Spain). The VAT registration threshold is 16000 EUR. It is important to understand, however, that this only applies to companies whose tax residency is Estonia. Those living outside Estonia need to be very careful about this and should review applicable tax treaties carefully before proceeding.
While Estonia is well known within the location independent community, that is not the case with the general public. Especially outside Europe, where it is often seen in a similar light to the other ex-Soviet republics. This can be an issue, depending on the type of business you intend to run, as potential customers could be turned off by the idea of paying a company which is located in a country that they have never heard about or that they think is disreputable.
Estonia has been doing a fairly good job, so far, with its e-Residency program. It has come a long way since it was first unveiled a few years ago. That said, I am concerned about the lack of collaboration from the local banks and the slow pace of development of a replacement for the physical e-Resident card. I am also concerned at the inability of the government to deal with criminal treats and the impact a major scandal could have on the country (just look at what happened in neighbouring Latvia).
Regardless of whether you choose to register an LLP or LTD, the process is very simple and straightforward. There is no need to apply for e-Residency or any form of UK resident permit. The total registration cost will vary depending on the services you need but is comparable to that of Estonia (150-500 EUR).
As the owner of a UK LTD, you will need to file a tax return every year. Fortunately, this can be done online directly on the government’s website (which is obviously in English). For UK LLP, there is no need to file a tax return, only a blank partnership return (if there is no UK-sourced income). Overall, accounting requirements for small businesses are more relaxed than they are in most other countries and there is no need to hire outside help (unless you have tons of transactions).
There are now several online banks based in the UK with whom UK registered businesses can open accounts remotely. Most offer debit cards, low fees and in-App banking. There are also some very interesting new banks which should start accepting clients in the near future, my favourites being Revolut for Business and Civilised Bank. A large number of financial services companies also offer GBP accounts, the most popular being TransferWise Borderless. These accounts are domiciled in the UK so the mismatch country issue is no concern here.
LTDs are generally taxed on their realised profits, regardless of the origin of those profits, at the flat rate of 20% while LLPs are only taxed on their UK-sourced profits and only if they have a UK permanent establishment (other income is generally exempt). The VAT registration threshold is 85000 GBP but VAT registration only applies to resident companies (non-resident LLPs do not need to register).
Reputation is a non-issue for UK-registered companies.
The UK has been outperforming mainland Europe in recent years in terms of economic growth. Its market is also more international in nature and is an amazing place in which to grow a startup company. That said, Brexit is somewhat of an unknown variable. It is too soon to foresee whether it will turn out to be a net positive for the UK or a net negative.
The amount of time it takes to register a company in Estonia and the UK is fairly similar. That said, in the context of Estonia that is only true if you are already an e-Resident. For the record, it is possible to register without e-Residency but the process is more complicated, costly and it makes remote management nearly impossible.
Cost-wise, both options are similar although ongoing compliance in the UK is likely to be cheaper for most businesses.
In terms of what you can do remotely, the UK is a clear winner. It is the only one of the two that truly allows 100% remote registration and remote banking.
Speaking of banking, both countries have excellent banks. Fees are low and customer service tends to be very good. That said, the UK has an edge here as it is supported by Stripe and PayPal Pro (Estonia is not) and has dozens of large banks versus only a handful in Estonia.
As for taxation, both countries have excellent potential for tax optimisation. The UK has a slight edge, however, due to its much higher VAT registration threshold and its excellent LLP structure.
At the end of the day, both countries are excellent business jurisdictions. There is no “wrong” choice here. That said, it is undeniable that UK has an edge over Estonia and I am saying that as someone who owns companies in both countries. If you want to learn more about Estonia and the UK, feel free to read the in-depth resources linked below.