Estonia is a small country in the Baltic 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 Estonia and share my experience with business registration, compliance, banking and more.
To support Freedom Surfer’s growth, I decided to register it as a full-fledged company, in Estonia. Why Estonia? I looked at all available options, considered all factors and while the US and UK came ahead in most categories, I chose Estonia as I also needed a holding company in a reputable country and an Estonian company would fulfill both roles nicely. Indeed, Estonia’s taxation system makes it a great choice not only for an active business but also for a holding / passive business, provided that certain conditions are met.
Estonia’s taxation system
In nearly every countries, businesses pay taxes on their profits on an annual basis, regardless of what they do with said profits. In Estonia, businesses only pay taxes on their profits when they distribute them (by issuing dividends to shareholders and by covering non-business expenses / fringe benefits). In practice, this means that an Estonian business can be run tax-free, indefinitely, even if it is highly profitable, provided that it never distributes any profits. You can still take money out of the business, as long as you avoid having it labelled as a distribution. For example, you can pay yourself a regular salary (tax-free if you are a non-Estonian resident for tax purposes). You can invest in the financial markets and real estate. You can issue arms-length loans to other companies you own. You can even use your business to cover your travel expenses (subject to limits) if your travels are related to your business activities.
While this sounds pretty good, it is important to understand that only businesses that are Estonian tax residents can take advantage of Estonia’s taxation system. Active businesses run from other countries will, in most cases, not qualify as Estonian tax residents (for example, an Estonian business run from Germany will be taxed as a German business, not as an Estonian business).
So when does it make sense to register an Estonian business? There are three situations in which it does.
The first one is fairly obvious and is if you live in Estonia. The second one is if you are a perpetual traveler. Indeed, if you move around constantly, it will be nearly impossible for any country to make a case that a permanent establishment of your Estonian business was established within its border. The third one is if you need a holding company.
Because Estonia has a decent reputation and is an EU country, and because its headline corporation tax rate is fairly high (80/20 or 25%), a holding company registered there will have access to most markets and products while at the same time being protected from CFC taxation (in most cases). The same cannot be said of holding companies registered in the typical tax havens. In addition to the usual uses for a holding company, you can also use an Estonian company as a pension vehicle or as a substitute for the registered accounts many countries offer to their residents (401K, RRSP, IRA, Super etc). This makes sense given its low maintenance / compliance cost.
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 often rather unfriendly). Indeed, you must file three different types of returns, two of them on a monthly basis and one on an annual basis. The first is the Income and Social Tax return, filed with the Tax and Customs Board on a monthly basis. It is used to report salary payments as well as fringe benefits, gifts etc. The second is the Value Added Tax (VAT) return, also filed with the Tax and Customs Board on a monthly basis (if your business is VAT-registered in Estonia). The third is the annual report, filed with the Commercial Register on an annual basis. It is used to report the overall financial situation of the business, the payment of dividends and changes in activities / ownership details.
Do note that a holding company paying no salaries / fringe benefits, only has to complete an annual report (in other words, it has no monthly filing obligations).
Banking is somewhat of an issue in Estonia. It is a tiny country, with a tiny economy, and a tiny banking sector. Indeed, there are only a handful of “decent” banks and only one that works with non-residents (LHV). If LHV declines your application, you will be stuck using either a non-Estonian business bank account or an EMI (such as TransferWise, Revolut etc) and this will often cause issues with payment processing services (Mollie especially), not to mention the security implications. There is also the issue that no Estonian bank currently accepts remote applications.
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). For example, I have an account with Every-Pay (an LHV subsidiary) and pay 1.2% to process credit card payments with no additional fixed per-transaction fee. I also have an account with Mollie and pay 1.8% + 0.25 cents for credit card payments and less for SEPA direct debit.
The e-Residency card is essentially a secure ID card that can be used online. It is not a requirement, as far as registering an Estonian business is concerned, but will save you a ton of trouble if you have it. Also, if it gains a large enough number of users, and so far it is on the way to do that, it could open very interesting opportunities and greatly simplify the way we conduct due diligence and for that alone is worth getting even if you have no plans to register an Estonian business.
The first thing I did after choosing Estonia as my company’s new home was to book a plane ticket to Tallinn, do note that this was back in 2016. I like doing this sort of things in person, meeting all parties involved, shaking hands. I already knew about LeapIN (now XOLO) 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 with 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 is still 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 following 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 rare setup (only a few banks offer such a feature). 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.
Since then, I have migrated most of my payment processing to Mollie as I like their implementation better. I have also moved away from LeapIN as I found their service to be too restrictive. I have handled compliance on my own for the past few years and that is what I recommend you also do, unless you have extremely complex transactions.
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.