Digital residency could nullify the worst-case scenario of a no-deal Brexit for small companies and entrepreneurs, according to Ott Vatter, managing director of Estonia’s e-Residency programme. “E-residency can be a solution for some companies due to the uncertainty,” he tells Finextra Research.
While much of the uncertainty around Brexit has lifted in recent months since the Conservative Party’s decisive victory at the end of 2019 and most of the negotiations are likely to centre on jurisdiction over fishing waters and regulatory alignment, small business owners who depend on frictionless trade between the UK and EU fear that they will end up as collateral damage should the talks not proceed positively.
E-Residency is an ID initiative which allows entrepreneurs or small business owners to register their company in Estonia and get access to the country’s public e-services, while managing the business from anywhere.
Vatter states that interest in the programme continues to increase. “The beginning of this year was definitely the point where we had the most interest, and it seems companies are starting to understand that they might have some obstacles and that this is indeed a situation that will influence their business.”
To date, 3,297 British companies have "become e-Residents", of which 2,793 have done so since the end of 2016, which the programme attributes to concerns about the UK’s departure from the European Union.
“Most of these are from service-based industries and are very small companies - one or two-man businesses - or freelancers, such as copyrighters, photographers, and even journalists.” With the post-Brexit transition period set to expire at the end of 2020, the clock is ticking for the two parties to establish a trade deal, meaning fears of a no-deal could escalate as the year goes on.
“I think the pickup of people and companies applying for e-residency is just starting,” Vatter says. “People know there might be some obstacles along the way if they want to transact and trade in the EU.”
Vatter describes e-Residency as a key to “Estonian digital services. ‘Estonians’ have enjoyed the digital life for 15 to 20 years and a few years ago we decided to rev this up with this programme, give digital identity to non-nationals, allowing people to create an EU-based company from the comfort of their own home.”
Offshore but online
Estonia’s e-Residency programme has been given a boost this week by the announcement that Tallinn-based startup Xolo has rolled out an application to digitise the process of setting up a bank account in the country, which Vatter deems “great news.”
Whereas previously, new e-residents would have needed to visit Estonia at least once to set up a bank account, this can now all be carried out remotely.
“We advise everyone to use a service provider like Xolo, because they will help you to find a virtual address, do all the bookkeeping and create a situation where you can focus on your business, and not administration,” he tells Finextra.
Xolo’s service only caters for single-person companies, which would be slightly restricting for partnerships or other small businesses. “Other service providers are available,” Vatter adds.
Estonia also comes with the attraction of 0% corporate income tax on retained and reinvested profits, while the tax on dividends is a competitive 20%. This is likely to trigger fears over accusations of offshoring for companies from other jurisdictions registering there, but Vatter disagrees.
“In Estonia, you do everything via digital identity, which leaves a footprint,” he says. “We are very transparent about yearly economic reports, which are public information so anybody can access it, so you can’t really hide your assets in Estonia.
“If you were looking to offshore your assets, there are better ways to do it offline rather than leaving a digital footprint behind.”
E-Residency is granted to applicants as private individuals and allows them to create a company which would be officially domiciled in Estonia, and by extension the European Union.
Vatter stresses that this type of solution is not for everyone, particularly companies whose business interests will remain largely in the UK, though it would nonetheless be something to look at for anybody with an EU footprint.
“It’s not wise to have two legal entities for bureaucratic purposes, as that will just make your life more complicated,” he says.
“But if it’s a service-based business where you have customers in France, Germany and so on, you transact in euros and you need to report in line with EU VAT regulations, it might be a nice solution.”
Set up in 2014, e-Residency was the first digital initiative of its kind and has since been replicated by several other countries, with fellow EU members Lithuania and Portugal, announcing programmes of their own in recent months.
“We take this as a compliment,” Vatter says. “We have to ensure we keep up the same level of service, but I think that other countries following suit creates a big shift. People no longer work for the same company for 50 to 60 years, they work for multiple companies in different positions and different places, so there should be multiple countries that service for these ‘virtual citizens.’”