Estonia e-Residency: Should you set up your Company in Estonia?
A lot of clients have come to us with the idea of setting up a company in Estonia. Let's look at how the Estonia e-residency works, who should apply, whether it makes sense from a tax and compliance point of view.
Let's get started!
What's covered?
Why would anyone want to apply for Estonia e-Residency?
a. Residency in India and POEM
b. Business Connection in India
What is Estonia e-Residency?
Estonia e-residency allows foreigners to obtain digital residency in Estonia, without actually living there.
E-Residency enables digital entrepreneurs to start and manage an EU-based company online.
Estonia is the first country to offer e-Residency – a government-issued digital identity and status that provides access to Estonia’s transparent digital business environment.
E-Residency allows digital entrepreneurs to manage business from anywhere, entirely online.
As an e-Resident, you'll be able to:
Establish and run a company online
Conduct your banking online e.g. make electronic bank transfers
Have access to international payment service providers
Digitally sign documents (annual reports, contracts) within the company as well as with external partners
Verify the authenticity of signed documents
Encrypt and transmit documents securely
Declare taxes online
How to apply?
Estonia e-Residency's website has some excellent information on how to apply alongwith a series of explainer videos. Linking to the website here.
Why would anyone want to apply for Estonia e-Residency?
Having an Estonia based company can definitely have it's advantages including:
Ease of doing business
Being a EU company might appear to be more reliable than an Indian company
EU regulations might be easier for business's to operate than Indian regulations
The main reason is of course perception. Being an Europe (EU) incorporated company can definitely be a significant positive for a lot of startups and businesses.
Advantages for startups:
Easier fund raising
International investors may be more willing to invest in an EU incorporated company rather than Indian company
Easier access to US and Europe markets
Galactic Note: If you are a startup or an investor and need assistance with deal advisory, feel free to contact us. We're happy to help!
What about tax?
A LOT of people are under the impression that if they set up a Company in Estonia, India will not tax their income. Unfortunately, tax laws don't work this way.
Let's break this down into parts:
A. Tax in Estonia
This is why everyone is considering Estonia - There is no corporate income tax on retained and reinvested profits.
This means that Estonian resident companies and the permanent establishments of foreign entities (including branches) are subject to 0% income tax for all reinvested and retained profits.
If you do distribute dividends, a 14% tax applies. This also seems more reasonable to people than the ~25% plus tax at slab rates on dividend in India.
Note: Tax is 14% on dividend, only if distributed to a legal person. Otherwise, tax is 20%.
Dividend paid to Non-Residents is not even subject to withholding tax.
B. Tax in India
Unfortunately, this is where things start falling apart if you look at this from a tax point of view.
Bear with us, we're going to get slightly tech