Estonian e-resident companies may face tax risks — ERR News
In Estonia, approximately 43,000 companies established by participants in the e-residency programme may face tax risks in the countries where their owners actually work. This is stated in a column by Linell Raud for ERR News. According to the data cited in the article, around 140,000 people from 187 countries have joined the programme and established approximately 43,000 companies.
The author estimates the direct tax contribution of e-residents over the entire duration of the programme at approximately €433 million, and at €125 million for the past year. Many such companies are one-person businesses: the owner is simultaneously a board member and an employee, has no office or staff in Estonia, and works remotely from another country.
Checks on ties with Estonia
Raud identifies VAT registration in Estonia as one of the risks. According to her, in order to retain this status, a company must conduct economic activity in the country. Over the past year, the Estonian Tax and Customs Board has checked the VAT numbers of such companies, requesting information about the location of the management board, employees, and office.
If there is no actual activity in Estonia, the tax authority has the right to cancel the VAT registration. In that case, VAT paid on purchased goods and services becomes an expense that can no longer be deducted. E-residents who live in another European Union country are advised to consider registering for VAT in their country of residence.
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Profit taxation abroad
The author also draws attention to the risk of profit being taxed in the country where the company is actually managed or where its day-to-day operations are conducted. Under the general rule cited in the column, a foreign tax authority may in such a case consider that the Estonian company has a permanent establishment in its territory and tax its profits under local rules, including retrospectively.
As an example, Raud cites a French e-resident who established a company in Estonia in 2023 and earned approximately €500,000 in profit. In this example, the French tax authority determined that because the board member was based in France, the company had a permanent establishment there from the time of its incorporation. The assessments amounted to €150,000 in corporate income tax and €100,000 in interest and penalties; the author also notes a possible personal tax risk of €250,000 for the board member.
In Raud's view, the e-residency programme could more actively inform participants about these risks and provide recommendations on locating the management board in Estonia or hiring employees for a local office.
