Tallinn – Home of Estonian E-Residency
I recently visited Tallinn, the largest city and capital of Estonia. If you are unfamiliar with Estonia, then don’t feel ashamed. You are not alone. It is quite a small place, and Estonians are used to needing to explain where their homeland is located. For the record, Estonia is in Eastern Europe, just across the Baltic Sea from Finland. It is easy to take a short 2-hour ferry ride between Tallinn and the Finnish capital of Helsinki – a trip which many Finns regularly make on weekends, taking advantage of the cheaper alcohol on offer in the bars and nightclubs of their southern neighbor.
If a foreigner has any prior knowledge at all about Estonia, then most likely it will be to do with the weather. Normally, it is cold. People imagine a cross between a German Altstadt and Santa’s Grotto in the North Pole – beautiful Lutheran churches, cobblestoned streets, and snow. (Not to mention, the sight of a bearded, jolly, fat man – probably a Finn who has imbibed too many bottles of Saku beer).
But the weekend I visited Tallinn couldn’t have been any further from the frigid stereotype. During those days in early August, the city was in the middle of a record heat wave. The mercury was nudging 30 degrees Celsius (86 Fahrenheit). Tallinners could never remember anything like it! Everyone was walking around in shorts and t-shirts, and apparently the city’s department stores were unable to cope with the unusual demand for fans and air-conditioners.
But the main reason for my visit wasn’t to wander around Tallinn’s charming old town, or sample the famous black bread and garlic sauce. Pleasant though these were, the purpose for getting my passport stamped in Estonia was to meet the team behind a fascinating program which has captured the attention of the digital nomad world.
A place like Tallinn would ordinarily be far from the radar of digital nomads. People who can live anywhere on the planet don’t normally flock to a place where it snows for 7 out of the 12 months of the year, and where the sun sets at 3:20pm at the nadir of winter. But the reason Estonia has firmly placed itself on the digital nomad map is due to a government initiative, labeled “e-residency”. The e-residency website proclaims that Estonia is “a new digital nation for global citizens”. I wanted to visit Estonia for myself, to find out more about the program and what their motivations were for starting it.
Background of Estonia’s E-Residency
The e-residency program was initially led by a man named Taavi Kotka, who I saw speak at a major digital nomad conference in Lisbon, Portugal in 2017. Though in the employ of the government, Taavi is about as far from the stereotype of a civil servant as it is possible to get. On the stage that day, he was sporting a crisp dress shirt, paired with a stylish pair of jeans – an appearance which provided a clue to his prior background. Before kicking off the e-residency program, Taavi had already enjoyed a successful career in the startup world. At a young age, he rose to become managing director of Webmedia, one of the largest software development companies in the region.
As Taavi explained in his speech, Estonia is not blessed with vast mineral wealth, and nor does it have a large population. As a result, it needs to be smart about how it competes. Similar to a place like Singapore, Estonia’s ambition is to become a hub for startups and fintech. To help achieve this, the Estonian state brought Taavi on board with a license to bring startup-style thinking to government.
E-residency is what Taavi and his team came up with. Just like any good startup would do, they looked around for people with a problem, and then developed a solution that they’d be willing to pay for. Startups do this all the time – but the notable thing in this case is the fact it has a government’s blessing. Governments, of course, normally take the approach of fencing their citizens in with rules and regulations, rather than attract them with a product in the free market.
Ostensibly, the problem that e-residency is trying to solve is the facilitation of running a location-independent business. As German-citizen (and Estonian e-resident) Michelle Retzlaff explained, digital nomads are already living their lives in a way which is simply incompatible with things like regularly checking a mailbox for paper documents, or needing to go to a physical location for some kind of bureaucratic procedure. Digital nomads also abhor complicated regulations.
It results in many nomads being forced to live in a kind of gray-zone, where they are often not fully in compliance with the rules, or find themselves unable to avoid an unwelcome trip to a bank branch or government office back in their home country. Imagine needing to take a flight back from Bali to the United States, just because your bank needs you to visit a branch office, because “sorry, our rules say it can’t be done online”. For digital nomads, this is a real problem. A decent solution is something that digital nomads have been crying out for – hence the intense interest in Estonia’s e-residency program.
Anyone, anywhere in the world can apply, with a simple online application form, a scanned copy of their passport, and a nominal application fee (100 euros, at the time of writing). Hearing Taavi’s speech in Lisbon is what inspired me to become an e-resident. The sign-up process was extremely straightforward, and within just a few weeks I received an email inviting me to pick up my card at the local Estonian consulate office. There, I was fingerprinted, and handed my new card – which looks like this:
The card has a chip in it, which, together with a USB apparatus that came bundled with the welcome pack, allows the card to be connected to a computer.
What Is E-Residency?
The name e-residency is actually a bit of a misnomer, because e-residency is most definitely not an official “residency” in any reasonable sense of the word. It doesn’t give the holder any rights to live or work in Estonia, and it doesn’t make the holder a resident of the country for tax purposes either. Rather, Estonian e-residency is a digital identity card. The main benefit, as far as digital nomads are concerned, is holder can use it apply to open an Estonian company. This opens business access to the European Union, and all administration can be done without actually needing to travel to Estonia.
Evaluation of Estonian E-Residency
To their credit, the e-residency program are very open to feedback and criticism. They admit that the program is still very much in ‘beta’. So, in the rest of this article I am going to provide an honest evaluation. I love what the e-residency program is trying to do, but there is still plenty of room for improvement.
Although it is easy to become an Estonian e-resident, the practical usefulness of it is questionable. As already mentioned, the main benefit for digital nomads and online entrepreneurs is to get an Estonian company. But an e-resident in charge of an Estonian company still needs to have:
- an Estonian physical address, and;
- an Estonian contact person.
Truthfully, these requirements are at odds with the promise to “minimize cost and hassle”. As the representative of the e-residency program explained, these are requirements of all Estonian companies. But unfortunately, it adds a significant layer of expense and bureaucracy – both of which are critical drawbacks for freedom-seeking digital nomads.
LeapIn and others have begun offering the mandated contact person / physical address as a service to e-resident companies. But of course, they aren’t doing it for free. Depending on the provider and the level of service, it costs between 50-100 euros per month – which is a lot, especially for a digital nomad freelancer / solopreneur who might be only making a couple of thousand euros per month in total (or even less, if they’re just getting started, living on the cheap in somewhere like Thailand).
While I was at the e-residency offices in Tallinn, I asked the team whether this contact person and local address requirement might be scrapped in the future. Their answer was “no” – instead, they are looking to bring on board more service providers to try and drive the cost down. Only time will tell whether enough competition will emerge to bring the monthly maintenance cost down to an acceptable level to make e-residency a realistically attractive option to freelancers and solopreneurs.
Another thing I had wondered was whether I could bypass the need for a company, and use my e-residency card (advertised as a “government-issued digital identity”, remember) to simply open a bank account in my own name. Many freelancer / solopreneurs don’t want to bother with all the extra administrative complexity that comes with operating a company.
No dice. I tried contacting Swedbank and LHV Bank, trying to use my e-residency to open a bank account in my personal name and hit a brick wall with both of them. You need to run it through a company – unless you have a job, a rental contract, or some similar tie to Estonia… requirements which are at odds for the main reason most nomads would want to get e-residency in the first place (location-independence).
The monthly running costs make e-residency tough for solopreneurs and freelancers of modest income.
What about for larger online entrepreneurs for whom 50-100 euros / month is not too significant? In that case, there is a different cost. Namely, Estonia’s tax on dividends of 20%. Estonia only taxes income withdrawn from the business, rather than on annual profit. Certainly, a 20% tax on dividends is not the highest in the world – it compares quite favorably to many European Union countries – but nor is it the best. And if an online entrepreneur is going to go to all the trouble of setting up a company in a different country, they are naturally going to look for the best possible deal, not just an “okay” one. There are plenty of options which offer lower tax rates. To name just a few: Hong Kong, Bulgaria, and almost anywhere in the Caribbean.
Tax competitiveness is naturally a very touchy subject – Estonia has been clear that they don’t want to be called a “tax haven”. But the reality is that tax optimization is a very hot topic among digital nomads. Just as anyone picks and chooses products and services based on price, digital nomads are doing the same when selecting which country to incorporate in. To put it bluntly – digital nomads are aggressively shopping around for low tax rates. To some people, this kind of tax optimization seems like “hacking the system”, but to digital nomads, it’s not so different than looking for the best deal on their electricity bill. They have the choice, so they look for the best bang for buck.
But tax minimization is not why people are using the Estonian e-residency – it’s much more about ease of use – using their online platform to do business paperlessly, remotely, and securely.
Why Digital Nomads Are (Still) Excited About E-Residency
Despite the shortcomings, Estonia’s e-residency program still deserves to be lauded for being forward-thinking and embracing the new entrepreneurial economy. Even though, anecdotally, not many online entrepreneurs are choosing to run their companies through an Estonian e-residency setup, the digital nomad community is still abuzz, because of what suggests the future might hold.
With Estonia, we see a nation-state which has at last recognized that digital nomads exist. Not only that, they have created a product to cater to them. Even if imperfect, many nomads see this as a huge step in the right direction. Many have gained e-residency purely because they are interested in being an early adopter, even though they don’t intend to use it to open a company.
It seems to be the first step of unbundling the services of the nation-state – in the same way that communication providers unbundled broadband Internet from a landline telephone line. Consumers can pick and choose the best-in-class operator for each the individual service they need. Company formation, banking, residency, passport, physical location… no longer does a global citizen need to have everything all in one place. This has been the domain of the jetsetting super-rich for a long time – but now, any freelancer can do it, even with minimal capital.
It all points to countries needing to compete with each other for the business of location-independent entrepreneurs. Businesses have always needed to offer the best products, customer service, and lowest fees. E-residency is an example of a government deciding that they must do the same.
During my trip, the Estonian e-residency representative revealed that they were receiving many delegations from other countries interested in implementing e-residency programs of their own – naming Kazakhstan, Azerbaijan, and Lithuania as specific countries with programs of their own in the pipeline. No country’s model will be exactly the same – but that is, after all, how free-market competition works. It isn’t hard to imagine that certain e-residencies will compete based on premium service, others will compete based on ease-of-use… and yes, others will compete based on price. The result being: better choice for the individual consumer who can choose whichever model suits them best.
And as Taavi Kotka said that day in Lisbon 2017, when I saw him present: “Estonia was the first, but they won’t be the last.” And, in a nod to HBO’s Game of Thrones: “winter is coming for those countries that don’t adapt”.