Estonia is a small country in the Baltics region of Europe. It has become famous in recent years for its booming tech sector and innovative taxation system. It also is where I have registered Freedom Surfer. In this article, I explain why I chose it and detail my experience running an Estonian business.
Freedom Surfer has been growing steadily over the past few years. To support that growth, I decided to register it as a full-fledged company, in Estonia. Why Estonia? I looked at all available options and considered all factors. The five that won the day for Estonia were payment processing, compliance, banking, taxation and e-Residency.
It is crucial for a business to be able to accept payments cost efficiently. On this front, Estonia is miles ahead of most other countries (thanks to EU laws on payment processing). With Freedom Surfer, I currently pay 1.2% to process credit card payments and there is no additional fixed per-transaction fee. I get paid within 24 hours and do not have to put up with security holds or reserves.
Compliance can take a serious toll on a business and the entrepreneur behind it. That is also true in the context of Estonia where the rules are very much European (heavy and business-unfriendly). That said, if you use your Estonian company the right way (pay no salaries, no fringe benefits and do not register for VAT), compliance is not something you will have to worry about as there will be no need to file monthly returns. You will still need to file an annual return but that takes a few hours at most and only once a year. See the Business guide to Estonia to learn how to take money out of your company without paying salaries, fringe benefits or dividends.
Banking can be a major challenge for an offshore business, especially if it is registered in one of the less-reputable jurisdictions. The reason for that is that there simply is no good banks in most of those jurisdictions. You have to bank in another country and this means complying with often nightmarish KYC requirements. This is not a problem in Estonia where there are excellent banks and opening an account is easy (or used to be, see the Business guide to Estonia for more details). As an added bonus, most Estonian banks offer free SEPA transfers and a debit card that can be used online.
Estonia is no tax haven. It is, however, one of the few EU countries where it is possible to run a profitable business entirely tax-free. Here is why: income is not subject to taxation until it is distributed. This means that as long as you avoid distributing income, you will pay no income tax. You can still take money out of your company, simply avoid having it labelled as a distribution. Your company can also cover your travel expenses (subject to limits) if your travels are related to your business activities.
The e-Residency card is essentially a secure ID that can be used online. In and of itself, it is nothing revolutionary. That said, if it gains a large enough number of users, it could open very interesting opportunities and greatly simplify the way we conduct due diligence. To those who ask me if they should get the card, I say: do not get it for what it is today, get it for what it could be tomorrow.
The first thing I did after choosing Estonia as my company’s new home was to book a plane ticket to Tallinn. I like doing this sort of things in person, meeting all parties involved, shaking hands. I already knew about LeapIN so as soon as I landed in Estonia, I dropped by their office and hired them to register my company. Within 24h the company was registered and a meeting at the largest local bank (LHV) was arranged. I met with the bank manager a few days later and the account was opened on the spot, in what still is my shortest business bank account opening meeting ever (less than ten minutes). I have to warn you however that while opening the account took only minutes, receiving my debit card took weeks. I also opened an account with Swedbank, a Swedish bank with a local presence in Estonia. Opening the account there took an hour and was also done on the spot. In both cases, my debit cards were sent by mail to LeapIN’s office. I had FedEX pick them up from there and deliver them to me.
Once the business was registered and my bank accounts opened, I left Tallinn. Remotely, I setup a payment processing account with Every-Pay. The way it works is simple, when you open an LHV account you inform your banker that you would like to use their payment processing service. When your account is activated, they make you an offer. In my case, they offered to process all transactions at the rate of 1.2% (no other fees). If you accept their offer, they setup the account and send you your unique API keys. You can then install their plugin (if you use wordpress, woocommerce etc) or code your own implementation. Transactions processed before 23h59 are deposited into your business bank account at 13h on the next day, seven days a week. So far I am very happy with the service and customer support has been excellent. I have not noticed any problem with declines (although the rate is slightly higher than it would be with a US / UK / Canadian gateway).
I have also setup a business TransferWise account and linked it to my LHV bank account. LHV uses TransferWise to process their non-SEPA transfers, an interesting and fairly unique setup. Once both accounts are linked, you can literally send transfers from the online banking portal in one click. LHV charges no fee to use the service, you only pay the usual TransferWise fee. This has proven to be very useful and is a feature I would like more banks to implement.
Important to note
When I received my Swedbank debit card, I noticed that transactions were limited to 640 EUR per day. I tried raising the limit online but failed and was told that it can only be done at a branch (unless you have a resident ID card or mobile-ID). With LHV, I was able to raise my limit online without any problems (to 25000 EUR per day). This is something to keep in mind if you need a debit card with a high limit and cannot visit a Swedbank branch in the weeks after you receive it.
As of 2018, banking in Estonia has become a major challenge for e-Residents. There have been reports of the banks closing as many as three quater of all accounts. This is a worrying situation that must be taken into account when deciding whether to register a business in Estonia or elsewhere.