Less than half a year has passed from e-resident concept winning the development ideas’ contest organised by the Estonian Development Fund. From December 2014 the nationals of foreign countries can apply for an e-resident’s digital identity card for 50 euros. The Estonian Police and Border Guard Board’s service point has to be visited twice for this – first to identify yourself and thereafter to receive the document. E-residency can be applied for in Estonian embassies hopefully already next year. The authors of the idea, the Development Fund as well as the government have to be recognised. Already before the issuing of the first e-resident digital ID Estonia has received positive global media coverage and more people know the Estonian IT success story.
The business environment will improve for non-residents
Everyone who has done business in foreign countries knows well how much time waiting for paperwork wastes. The risk of fraud is added to it – falsifying signatures when sending papers to the commercial register and the bank for hijacking a company is possible in for example Sweden and Great Britain. Estonia is an oasis in this respect; the rest of the world operates in the old-fashioned way with the support of post and paper. Difficulties for a foreigner without an Estonian ID card when dealing with administration in Estonia are nothing special in this respect, unlike the Estonian digital signature and e-state.
The slogan of e-residency, hassle-free country, sounds alluring first and foremost to those entrepreneurs who work with clients globally, offering services in electronic channels.
A chance to get the necessary services from the Internet gives an entrepreneur the freedom to enjoy the Estonian e-state behind a laptop in beautiful places of the world. No envelopes with documents, searching for a one-day return flight to Tallinn or mandatory meetings with officials and bankers.
Situation today
Observing yourself is a difficult activity. Under the Estonian Ministry of Economic Affairs and Infrastructure Deputy Secretary General Taavi Kotka’s management all possible contacts of the e-resident with Estonian state authorities and service providers are mapped. His saying, that e-residency is merely a key for which we also have to offer a house, is correct. The aim is an attractive business environment, which would attract investments and create additional income in the form of e-residents’ taxes and consumed services. At the same time it is also a wake up call for thinking about residents. The state also has a duty to review everything that Estonian entrepreneurs have been saying for long. The bottlenecks of e-resident entrepreneurs may overlap with local concerns.
Likely bottlenecks for an e-resident entrepreneur
1Office has a long history of serving non-resident entrepreneurs doing business in Estonia. We see that there are some clear bottlenecks for the regulator to consider before e-residency can be a success story. There is a list of things which might undermine the concept of e-residency for non-resident entrepreneurs.
Opening a bank account online
After the founding of a company the next necessary steps as a rule are opening a bank account and applying for a VAT number. Today Estonian banks are not yet ready to serve e-residents where an e-resident wishes to open a bank account over the Internet after receiving a digital ID from the Estonian embassy in London. According to the banks the obstacle is mainly the Money Laundering and Terrorist Financing Prevention Act 2007. The law does not allow a digitally identified private client to make transfers in a larger amount than 2000 euros per month and even that domestically. The banks are not ready to apply digital identification for opening the e-resident’s company’s account before additions in the law and the directions of Estonian Financial Supervision Authority.
Getting an Estonian VAT number online
Getting an Estonian VAT number has become increasingly difficult over the years also for Estonian residents due to a wave of frauds. Non-resident board members must consider an invitation for coffee at the office of the Tax Board. After getting excited about e-residency it quickly turns out, that from visiting the Estonian embassy in London and founding a company on the Internet everything becomes increasingly complicated. It also deserves to be noted that on absence of VAT-taxable domestic supplies the e-resident entrepreneur has an expectation for the return of input VAT. An overpaid VAT claim arises as the company has expenses in Estonia taxed with local VAT but lacks output VAT. The practice of the Estonian Tax and Customs Board so far is the presumption of domestic output VAT for the retention of the VAT number. In case of a monthly refund claim for input tax an Estonian company exporting services into the EU will get frequent checks with it.
Selling and buying shares in Estonian private limited companies
Today the sale of company shares happens digitally only for shares registered in the Estonian Central Register of Securities. In other cases yoy must visit a notary or prepare notarial letters of authority for the representative. Authorisations sent by post have to bear an apostil in certain situations, obtaining an apostil is of a different level of difficulty by country. E-residents are in as bad a position as Estonians away from Estonia when selling or buying shares.
Use of multiple online platforms
Today the use of different platforms is necessary for an entrepreneur in communicating with various state authorities. For the expected e-resident and domestic entrepreneur the payment of taxes, registration of economic activity and registration of employees could be integrated into the Company Registration Portal. The receiving of binding preliminary rulings on taxes should also not be excluded from there. Various more and less translated environments must be changed into one well-working entrepreneurs’ portal, which would also be available in many languages.
Convenience of payment of state fees
The question about the justifiability and the convenience of payment of Estonian state fees will also arise for an e-resident. State fees cannot be paid by credit card or PayPal and making a payment from a bank located outside the SEPA European payment area is a large waste of time and money. For example Great Britain, not to mention the USA are not located in the SEPA area. A binding preliminary ruling of the Tax Board costs 766.93 euros for an entrepreneur and registering a private limited company online 185.34 euros. In Great Britain registering a company costs 15 pounds and it can also be paid by credit card. Transactions made over the Internet work on credit cards in the whole world.
How do we improve the business environment?
After the removal of the bottlenecks suggested based on the experiences of 1Office’s non-resident clients the work has only just begun for the legislator. We have to ask ourselves why anyone should want to do business in Estonia? Approaching it realistically we can immediately exclude that the entrepreneur will come to Estonia for the attractive local market or the abundance of investors. If we want to become similar to Luxembourg we have to do what they have already done and even better. This all takes us to taxes, which can no longer be a taboo. Between Estonia and Luxembourg there is Latvia, where it is possible to distribute interim dividends, a ceiling of social tax applies for high-earners and transfer of shares is income tax free for holding companies. Currently Estonia only has to offer a strange obligation to declare transactions exceeding 1000 euros and the absence of corporation tax on retained profits. On payment of dividends however the income tax in Estonia is higher than in many European countries.
World Bank Doing Business rankings
The World Bank Doing Business rankings shows what still needs to be worked on. The aim phrased by the Ministry of Economic Affairs and Infrastructure to reach the 15th place by 2020 is not very ambitious. On the continuous comparison of the similarities of Estonia and Singapore what Singapore’s authorities have done for the first place of the Doing Business rankings is left out of the discussion? Motivating the legislator to substantial work is the greatest value of the e-resident idea for the Estonian entrepreneur.
Big picture
The establishers of the standards and their sellers win. Making the digital ID and mobile ID the standard of Europe or even the world is Estonia’s big opportunity. In case of e-residency as the start-up of the government the regular rules have to be followed, scaled and sold in all possible ways. The victory of Estonian technology should not end with issuing the e-resident’s digital ID in embassies. Banks enabling Internet payments in various parts of the world could offer clients to log in with an Estonian smart card or mobile ID. Today outside of Estonia clients are sent codes and large PIN calculators in post.
Tax race of the countries in Europe
The possible success of the e-resident project is not unnoticed by other countries and there will definitely be imitators. The success of e-residency is closely tied with the attractiveness of the tax environment and there the competition is tight. After the crisis in Europe the wish of the great powers to reduce the competitive advantage of small countries in the form of offering a more favourable tax environment is ever clearer. The harmonisation of the tax basis in the EU would reduce Estonian chances for standing out. The European e-resident SMEs also need to foresee the danger that it is in the interest of the tax board of the home country to set the actual location of the management as the permanent establishment of the Estonian company and thereafter tax the company.
Author
Ivar Veskioja
Country Manager
1Office UK
