Estonia continues to see its e-Residency programme continue to grow. In the first half of 2023, tax revenue from companies using the e-Residency programme was €37.7 million. That is an increase of 57% compared to 2022 and has already reached 60% of the targeted revenue for 2023.
Tiit Riisalo, the Estonian Minister of Economic Affairs and Information Technology, said, “For an increasing number of foreign entrepreneurs, e-Residency is a convenient way to conduct business in the European Union, providing a digital solution for safe and transparent operation, with low administrative cost.
“Although the maintenance and development of national IT systems is costly, in the case of e-Residency our return on investment is considerably higher. For every euro that Estonia spends on e-Residency, the programme generates 7.6 euros in return.”
More detail on the numbers
The announcement provided further insight into the numbers that were announced.
- €12.6 million was generated by e-Residents engaged in professional, scientific and technical activities
- €10.5 came from information and communication companies
- €3.7 million from administrative and support service activities
- e-Resident companies employed 5,027 Estonian residents, up by 284 compared to 2022.
- Estonian e-Residents established 2,302 new companies, a 6% increase compared to the previous year.
- The largest number of new companies were set up by the citizens of Spain, Ukraine and Germany, with Turkey demonstrating a fast growth spurt, followed by France and Italy.
- e-Resident digital IDs were issued to 5,428 foreign nationals, which is comparable to the annual average in recent years, i.e., approx. 1,000 new e-Residents per month.
- The largest numbers of new applications came from Spain, Ukraine and Germany, followed by Turkey and France, both showing a strong upward trend.
What is e-Residency?
In the mid-2010’s, Estonia set out to create a digital government. It wanted to make it easy to not only digitally create a company quickly and easily, but also to access government services. The creators of the programme wanted to use digital to eliminate inefficiency, which was another driver for digital.
The goal was to attract foreign investors and two groups in particular, entrepreneurs and the increasing number of freelance workers who were becoming digital nomads. Both value their time highly, and therefore, removing the bureaucracy often faced when creating companies, would make Estonia an attractive place to work.
But to allow them to create companies, it was necessary for them to be a resident of Estonia. It was unlikely that many would relocate to Estonia so the idea of an e-Resident was born. When announced in October 2014, there was so much interest that the website collapsed within a few hours.
How successful has it been?
Liina Vahtras, Managing Director of the e-Residency programme, said, “Every 5th company is created by an e-Resident. It is constant at around 350 per month, but we are looking to increase that.”
When talking about the tax take, Vahtras said it was accelerating. In 2020, it was €20 million; in 2021 it rose to €36.2, and in 2022 it reached €50 million. That it is so far ahead of 2022 already, is good news. What also has to be understood here is how that tax is levied. Tax is not paid on corporate profits, only on the dividends that are taken out.
Vahtras also talked about the return on investment for e-Residency companies. Most countries, looking at the tax raised, would see it as not worth the effort. Importantly, Vahtras emphasised that the ROI was 7.6 times the cost. The total costs for running the programme, including those of the Police and Border Guard who process e-Residency applications, was just €6.7 million.
So where are these e-Residents coming from? Vahtras said that the biggest number come from Ukraine (6500). That was closely followed by Germany (6300), Finland (5900) and Spain and China, each with 5000. Other notable countries are the UK (4500), India (4100) and the US (4000).
Why set up in Estonia
There are different reasons for e-Residents setting up companies in Estonia. For many, it is the fact that, as a European country, a company based in Estonia has access to the European Single Market. For those outside of that market, setting up in Estonia makes sense. But that doesn’t explain the large number of e-Residents from other European countries.
One reason for the number of EU residents choosing Estonia is simplicity. The ease with which you can create and manage your business and interact with government services. Compared to other European countries that are far behind in terms of digitisation and simplicity, Estonia offers the chance to save days and even weeks lost to dealing with bureaucracy.
There is also a very vibrant investment market in Estonia. Sandra Saräv, Deputy Secretary General for Business and Consumer Environment, said, “There are over 1,444 start-ups in Estonia, making it number one in Europe. The country boasts 10 tech unicorns who raised €1.3 billion in funding in 2022. That is 26 times above the average for EU.”
Saräv went on to talk about how money created in Estonia tends to stay in country. For example, the founders and employees of Skype are often seen super angels and serial entrepreneurs. People from there went on to launch companies like CRM vendor Pipedrive and mobility company Bolt. The latter raised €600 million in 2022 in additional funding.
There is also a direct employment benefit to Estonia from these companies. Over 10,000 people are directly employed across 1,500 companies alone, although Saräv had no details on the median size of businesses.
A digital marketplace is key
Many countries in Europe and around the world are on their own digitisation journey, although what that means, seems to vary widely. Importantly, most recognise the need for a digital marketplace to offer services. However, in many countries, those services are more about services for different levels of government and not businesses, especially not small businesses and citizens.
This is where Estonia differs. The digital marketplace is highly competitive and addresses everyone. When starting up a business, you can find everything from lawyers to accountants and tax advisors. You can find companies that will help you establish an office and a wide range of other services. For e-Residents operating a company in a different country, this is slick.
Perhaps one of the biggest benefits here is the digital signature system. It is supported and accepted by the Estonian government. It means that you can sign documents without having to be in the country. Compare that to the paperchain demanded by the German government that is seen as a blocker by many small businesses, and it is easy to see why Germans are among those flocking to Estonia to become e-Residents and move their businesses.
Enterprise Times: What does this mean
Governments around the world want to be seen as “open for business”. The question is, what does open mean? Many make it possible to create a company easily, but creating and managing a company are very different things. Estonia has achieved a balance that is beginning to pay off and is delivering tangible benefits for everyone.
There is another element here that Estonia has created that other countries will want to consider. The e-Residency programme is managed by the police and Border Guard. They do a full check on those applying and why they want to be an e-Resident. While not designed as a governance test, think of it from an employer’s perspective. It sets a level of trust in those you employ, especially when they come from a different country.
Now scale that up to the increasing call for greater oversight by regulators of people in key roles. What Estonia is doing, provides a solid grounding for building that oversight. Few countries can get close to matching that foundation.
One further fact that is worth noting. The Estonian budget is just €10 billion, and running its digital infrastructure accounts for around 1% of that. While other countries are spending many times more than that on ineffective civil services, Estonia is a beacon of light for those that support small government and, importantly, its citizens support it.
It will be interesting to see how well Estonia can now build on its successes and how it scales its e-Residency programme.
