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21st Aug 2018

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Estonia wants e-residents to pump money into its economy

  • There are some 120,000 businesses in Estonia. Some of them have been founded by e-residents from outside the country (Photo: Peter Teffer)

Estonia, a country of 1.3 million inhabitants, wants to provide almost 10 million people worldwide with electronic identities in the next 7.5 years.

Adam Rang, head of communications for Estonia's e-residency programme, admitted the goal is “quite ambitious” for one of the EU's smallest member states.

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  • German chancellor Angela Merkel (l) became Estonia's 11,867th e-resident last year, when then prime minister Taavi Roivas gave her an e-residency card (Photo: Government of Estonia)

“But we are a startup, we need ambitious goals,” he told journalists, who were visiting Tallinn last week on a press trip organised ahead of Estonia's presidency of the Council of the EU.

The programme currently has around 20,000 e-residents. They have so far set up 3,256 companies in Estonia, and half of them are completely new businesses.

Acquiring e-residency in Estonia allows people from all over the world to set up a company that has access to the EU's single market.

According to Rang, the scheme is particularly popular among freelancers, consultants, e-commerce businesses, and “digital nomads”.

Most applicants come from Finland (14.5%), Russia (7.5%), Ukraine (5.9%), US (5.8%) and the UK (5.3%).

Brexit

The week in which the British voted to leave the EU in June last year also saw a record number of applications for e-residency, 797.

Estonia's e-residency programme could be a solution for some UK businesses after Brexit.

“If you run a fish and chips shop, you don't need this. You don't need access to the EU market, you don't need to trade in euro,” said Rang, who himself is British.

“However, if you are working above the shop, as an online entrepreneur, as a marketing consultant, if you sell your services online, then suddenly it becomes a lot more attractive.”

Ukraine

He also recently noticed a big increase in interest from Ukraine (7% of e-residents' companies), a non-EU country, where access to international payment services is a challenge.

Most founders of new businesses through the e-residency scheme came from nearby Finland (8%).

“The word has spread [in Ukraine] that e-residency is a great way to open a PayPal account in a country which is restricted from PayPal and a lot of other services,” said Rang.

Digital payment company PayPal did not respond to a request to comment, but Rang said the Estonian system is “trusted by PayPal”.

Before applicants are accepted as an e-resident, they have to pay €100, which will be spent on a background check.

“If you think this is a scheme where you can hide away, you are going to be very disappointed,” said Rang.

Siim Sikkut, ICT adviser to the Estonian government, later added that applicants are checked against blacklists from Europol, Nato, and the EU.

“If there is any hint that you have something shady in the past, even if it is just a hint, just to be safe, you are not going to be an e-resident,” said Sikkut, Estonia's chief information officer.

There is no appeal process for applicants who have been put on some blacklist wrongly.

“E-residency is not a right. it is basically an opportunity. We don't have to give you an e-residency,” said Sikkut.

Even German chancellor Angela Merkel, who received e-residency last year, was subject to a background check by Estonia's Police and Border Guard – although she did not have to pay the €100 fee.

Not in it to become a tax haven

Rang and Sikkut both denied that the e-residency programme is an attempt to transform Estonia into a tax haven.

“We are not in it for the tax money,” said Sikkut, noting that Estonia is much more interested in the additional money that's being pumped into the economy.

According to Sikkut, companies set up through the e-residency programme have spent around €6 million in the Estonian economy, by paying for local services such as banking and accounting.

Becoming an e-resident does not automatically make you an Estonian citizen or taxpayer – individuals still have to pay taxes where they reside.

Some tax money is entering the Baltic state's coffers, though.

According to a press officer for the Estonian Tax and Customs Board, companies set up by e-residents have paid a total of around €1.5 million in labour tax since the programme started 2.5 years ago. The figure is only a tiny portion of Estonia's annual tax revenue of some €7.5 billion.

Those companies should also pay corporate tax, but in Estonia that only happens once the dividend is paid out. The corporate tax rate then is 20 percent, although it will drop to 14 percent next year in some cases.

But Sikkut noted that Estonia's corporate tax rules have been around since before the scheme, and even before it joined the EU.

Sikkut also said that Estonia did not have a target for the number of companies set up by e-residents, but Rang said they are hoping for “exponential growth”.

“What's going to happen when there's more e-residents than citizens? To be honest, I don't know, we don't know. That's a national conversation that Estonia needs to have,” said Rang.

Number of companies could increase sevenfold

Moreover, if Estonia does indeed reach 10 million e-residents by 2025, and the share of e-residents that set up a company remains what it is now, Estonia could see an additional 852,200 enterprises set up.

That is seven times as many as Estonia's current number of registered companies. Is the Estonian state prepared for that?

Ruth Paade, head of the revenue department of Estonia's tax board, chose not to elaborate when EUobserver asked whether her office was prepared for a sharp increase in companies that would need to be audited.

“We hope we don't need more staff, because we have very good e-solutions,” she said.

It also seems that Estonia has not yet put much thought into the fact that an explosion of new companies could also mean a necessary increase in oversight activities.

After all, in many cases in EU law, the country where a company is registered is responsible for its market surveillance.

“The vast majority of these businesses have very small liabilities, because they do tend to be online consultants,” Rang told EUobserver.

“It does raise a lot of interesting questions, to which we don't have all the answers yet,” he added.

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