For the past decade, Estonia's flagship on the international stage has been the e‑residency program. More and more, however, it has become clear that behind a simple program lie only complicated tax problems. Since Estonia has already had to acknowledge international reputational damage in the Danske Bank money‑laundering scandal and in recently uncovered shell‑round deals, it would be wise to prevent the next blow rather than provide the drama theater with material for another hit production.

The e‑residency program has been successfully marketed worldwide as an easy way to establish a company in Estonia within minutes, bring business profits here, and benefit from our tax system, where profits are taxed only upon distribution. But do we explain tax risks clearly enough to e‑residents both in Estonia and abroad, or do we only whisper about taxes because the topic is too complicated?

So far, 140,000 people from 187 countries have joined the program and established roughly 43,000 companies. In addition to contributing as owners, they participate actively and daily in Estonia's economy as taxpayers and consumers of various goods and services. The direct tax contribution of e‑residents over the lifetime of the program is estimated at about €433 million, and last year alone it was €125 million.

Where does the problem arise?

A more global world brings new problems both in Estonia and in the e‑residents' home countries. Many e‑resident companies operate as one‑person firms, where the owner, board member, and worker are all the same person. There are no employees, no office, clients are generally scattered around the world, and often there are no clients in Estonia at all. The owner does everything remotely, wherever they happen to be.

Like companies founded by Estonians, many e‑resident companies are registered in Estonia as value‑added tax payers. This allows them to freely invoice goods and services sold and purchased, and profit is taxed only upon distribution. But unlike companies operated in Estonia by Estonians, e‑residents face two "buts."

The VAT problem in Estonia

The first "but" is VAT registration. To be registered as a VAT payer in Estonia, a company must conduct business activity in Estonia. If it does not, the Tax and Customs Board (MTA) has the right to cancel the registration. And that is exactly what has happened to many e‑resident companies.

Over the past year, the MTA has focused on checking the VAT numbers of such companies and has requested information about the location of the board, employees, and office. The goal is to assess the companies' real ties to Estonia and the extent of those ties. If it is determined that a company is registered in Estonia and has a VAT number but no actual business activity takes place here, the VAT number is removed.

Once the VAT number is removed, any VAT paid on purchased goods and services becomes a simple expense that can no longer be deducted. The MTA's recommendation in such cases has been that an e‑resident living in another European Union country should explore the possibility of registering as a VAT payer there.

Without business activity in Estonia, the local VAT number will not be kept. Registration abroad may be possible, but unlike Estonia, in most countries it takes a long time.

The income‑tax problem abroad

In addition to VAT, an even more pressing "but" is income tax.

Under the general rule, if a company's activities are managed or carried out daily outside Estonia, the foreign country may have the right to tax the company's profit. The foreign country essentially treats the Estonian company's profit as its own and taxes it as if it had been earned by a local company.

E‑residents are exactly in this situation. They have Estonian private limited companies, but the board member and actual worker — often the same person — are located abroad. Foreign tax authorities are not asleep and are aggressively checking such companies and taxing their profits. Since most countries tax corporate profits annually, the tax obligation is determined for each year, including retroactively.

For example, if a French e‑resident established a company in Estonia in 2023 and earned about €500,000 in profit, the French tax authority has determined that because the board member is located in France, the Estonian company has had a permanent establishment there since its founding.

France has taxed all profits retroactively, and €150,000 in income tax must be paid. In addition, the company owes €100,000 in interest and penalties for not acting correctly from the start.

In some cases, the foreign tax authority has also fined the company's board member personally. In the French example, the personal tax risk was €250,000. So from roughly €500,000 in profit, the foreign tax risk became €500,000. Profit drops to zero, and stress, pressure, and administrative burden skyrocket.

E‑residents understandably ask where the promised tax advantage and simplicity went. The correct answer is that everything promised applies only if the company's board and actual business activity are in Estonia. If either is missing, a profit‑sized tax risk is a real possibility.

Can this risk be avoided?

Measure nine times, cut once applies here as well. Timely notification and reaction would help avoid unpleasant surprises that are indeed mentioned on the e‑residency website but have not reached e‑residents' awareness.

Although company finances are each person's own responsibility, the program could consider stronger communication about risk areas. The mentality of dealing with the problem only once it appears does not work in tax matters. If a company has entered a tax authority's field of interest, it may already be too late to show ties to Estonia or reduce foreign tax risk.

Although the e‑residency website includes an overview of both income‑tax and VAT risks and recommends consulting advisers, this does not seem to be enough. Perhaps it could include specific recommendations, coordinated with the MTA, on bringing the board to Estonia or hiring employees for an office here.

Although such recommendations may bring additional ongoing costs for e‑residents, they would actually create more jobs in Estonia, increase tax revenue, and reduce future misunderstandings with tax authorities on both sides of the border.

E‑residency as Estonia's flagship works only if people participate. To ensure the program continues to bring tax revenue to Estonia, we should speak honestly about both its strengths and weaknesses. If e‑residents feel they learn about real tax risks only through professional advisers or when the tax authority is already knocking, this could become a new ticking reputational bomb or inspiration for another hit stage production.

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