Currently, residents of Estonia can perform most of their transactions digitally using their Estonian ID card. For example, an ID card allows the following from anywhere in the world through the internet:

  • to securely sign documents digitally,
  • to establish an Estonian company within an hour, register changes and actively participate in company management,
  •  to make bank transfers in seconds, and
  • to file tax returns in Estonia with a few mouse clicks.

Since December 2014 Estonia gives qualifying non-resident foreigners the same digital credentials within the framework of its “E-residency” initiative. Non-residents can use the Estonian digital signature infrastructure and access several of Estonia’s e-government services to perform transactions with the same ease as Estonian residents, regardless of their location. People from both the EU and outside the EU can create a central base in Estonia for doing business in the EU. For instance, a company could be established in Estonia for conducting business in the EU and actively participating in its management while residing in India or the US.

E-residency gives secure access to the successfully proven Estonian digital identification and signature, which under the eIDAS regulation is legally equivalent to face-to-face identification and handwritten signatures in the European Union (subject to counterparty technology limitations until full interoperability in 2018).

This combines well with other features of doing business in Estonia (such as a stable Eurozone economy, easy company registration and e-register, flexible employment relations, a unique corporate income tax system with 0% tax for undistributed profits, as well as an E-Tax Board) to make the country a highly attractive location for all foreigners.

To apply for a digi-ID, interested qualifying foreigners should visit a Police and Border Guard (PBG) office in Estonia, file an application providing biometrical data and pay the state fee. Estonian embassies and consulates will start providing this service during 2015. After receiving the application, the PBG makes the discretionary decision to approve or deny a new digi-ID within 10 working days. If approved, the card will be issued to the applicant in person at the PBG office (or foreign representation when this becomes available). Once issued, the digi-ID is valid for three years.

Currently it is unclear whether public and private e-service providers will indeed offer foreign e-residents the same level of access that citizens and residents currently have. Estonian e-residency does not grant foreigners legal residency or even the right to enter Estonia. The characteristics of the institution and use of the term “residency” to promote the institution could have unanticipated or unintended consequences. In particular, the use of digi-ID may affect interpretation as regards the concept of permanent establishment or determining a company’s place of effective management. Thus, management of an Estonian company from a foreign country may lead to double taxation of company income. The reason for this is that under international tax rules, both the country of registration and the place of effective management may be entitled to collect income tax. To avoid potential tax issues related to e-residency, we advise discussing planned activities and the corporate management model of your company with a tax specialist.

We consider that e-residency is a very interesting institution, worth exploring for foreigners interested in establishing businesses in Estonia and doing business in the EU.

For further information, please do not hesitate to contact our Corporate and M&A or Tax Team.