EResidency
Estonia joined the European Union in 2004 and adopted the euro in 2011 and is the first and only country that has introduced the concept of E-residency since December 1, 2014. The term indicates a particular status that non-residents can enjoy , through which they can obtain a secure digital identity issued by Estonia.
This digital identity, similar to that provided to Estonian residents on their identity cards, authorizes them to use the services provided by Estonian State agencies and private sectors.
The digital Estonian residence is easily obtained. In fact, it can be requested by anyone in the world. Owing to the fact that the E-residency is a privilege and not a right, the request is then evaluated and Estonia reserves the right to refuse the application.
The rights provided by the E-residency are:
– To be able to sign and encrypt documents and verify contracts digitally.
– To be able to create a company in Estonia online 24 hours with a physical address in Estonia guaranteed by an external service and to administer the company from anywhere .
A further aspect of the E-residency in Estonia is that the revenues of the companies are not taxed as far as the gains that are reinvested in the company.
According to the legislation governing the taxation of legal entities in Estonia “Law on Income Tax”, the main difference of the Estonian CIT (Corporate Income Tax) system from traditional systems is that profits are not subject to tax at the moment when they are earned. Instead, taxation is deferred until the distribution of profits. Additionally, expenses not related to business and, therefore, not deductible in traditional CIT systems are subject to tax in the Estonian CIT system.
The distributed profits and payments taxable on the corporate level are not subject to personal income tax on the level of the recipient. Therefore, double taxation is fully avoided.
Regardless, the Estonian tax system does not have any of the features distinctive of tax havens. Firstly, corporate profits are always subject to CIT upon distribution, and the tax rate was 21% in 2008 (20% in 2016). Moreover, there are no isolated so-called ‘ring fencing’ regimes, and domestic and foreign income are treated equally in Estonia.
The tax liability is deferred in Estonia, and distributed profits are tax-exempt at the shareholder level, not at the level of the company distributing profits. Besides being in line with the objective of the Parent– Subsidiary Directive, the Estonian CIT system is generally more advantageous for the individual shareholder than other systems, despite the fact that personal allowances are not deductible from dividend income.
However foreigners who become e-residents of Estonia do not automatically have the right to physical residence. This means that they are required to pay taxes in the state where they live on earnings derived from the company, however, they can enjoy a lower tax in Italy, for example, by not having to pay IRAP.
The application of IRAP depends on the existence of an autonomous organization operating in Italy, classified as stable, as defined in the OECD Model and individual agreements to avoid double taxation signed by Italy (Convention against double taxation between Italy and Estonia made in Rome on 20 March 1997).
Additional benefits that follow from this for Italian residents are the ability to pay taxes in the country of residence, the exemption from tax audits by the Tax Agency and not being able to undergo foreclosure by Equitalia.
Under international law, the taxes are paid in the country where the value was made. For example, if you create a company in Italy with Estonian citizenship, you pay taxes in Italy.
In all this there could be the risk of incurring in the issues raised by corporate inversion. To avoid them, it seems obvious that the person who makes use of the advantages of E-residency must actually acquire the Estonian residence by having a physical address on site.
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