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  • Writer's pictureGalactic Advisors

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?

What is Estonia e-Residency?

How to apply?

Why would anyone want to apply for Estonia e-Residency?

What about tax?

A. Tax in Estonia

B. Tax in India

a. Residency in India and POEM

b. Business Connection in India

c. Tax Treaty

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