Does e-Residency work? Here’s what the data showsWhatsApp
While it is easy to start an e-resident company online, some have heard about problems accessing banking, some are confused about tax implications, and others just wonder if maybe digital residency is all a bit overhyped.
Estonia’s e-Residency programme has generated heaps of positive headlines around the world and been the buzzword among entrepreneurs in coworking spaces on every continent. But does the Estonian digital citizenship actually work? That’s a question we see a lot online.
Here’s one example of a question we saw recently in the Facebook group for e-residents of Estonia. It’s a closed group so we blocked out the name just in case.
The short answer here is that, yes, e-Residency does work for many entrepreneurs around the world. They can not only start e-resident companies, but access banking, pay their taxes properly, and build successful companies.
Don’t take our word for it though. In this article, we’re going to take you through the data from the last five years of the programme. It shows how e-residents are building successful companies, although it also offers some very useful insights into who benefits most and least from being an e-resident to help you make your own decision about whether Estonian digital citizenship is right for you.
Where the e-Residency data comes from
First, I’ll quickly clarify where we found all the data about e-residents for this article.
Estonia’s e-Residency programme publicly publishes up to date stats relating to the number of new applications for digital citizenship and the new companies that e-residents have created. That’s a very useful overview, but we also want to know what’s going on inside those e-residents’ companies to see how they are benefiting from e-Residency.
Fortunately, Estonia has one of the world’s most transparent business environments so general data about all Estonian e-residents’ companies is publicly available through the Estonian Business Register. That’s part of the reason for why Estonian companies can be trusted globally.
Looking up data about any one Estonian e-resident company is easy to do by yourself. However, Statistics Estonia is also able to separate the data based on which companies were started by e-residents to give us a broader view.
On top of that, the Estonian Tax and Customs Board regularly provides information about taxation, including how much of it comes from companies that were started by e-residents. In addition, Deloitte has published assessments into the programme’s broader economic impact.
Finally, to get an even clearer picture, we at Unicount made our own requests for additional data about e-resident companies from both the e-Residency programme and the Estonian Business Register. They happily obliged.
How many e-residents are there?
At the time of writing, May 2020, there are almost 70,000 e-residents of Estonia – as you can see in the public e-Residency stats dashboard here.
Of them, approximately half are from the European Union, while another large percentage are next door to the EU in Russia, Ukraine, and Turkey. Finland is the top country for applications, followed by Russia, which is mostly due to their strong pre-existing connections with Estonia.
Applying for e-Residency involves background checks by the Estonian Police and Border Guard Board before the status of a digital citizenship can be granted. These checks are fundamentally about answering two questions: 1. Is this person who they say they are. 2. Does this person pose a threat to the Republic of Estonia? That sounds dramatic, but it’s usually as simple as ensuring they don’t have a criminal record and are generally in good standing.
As you can see below, the vast majority of applicants pass these two questions and are granted e-Residency. Those are the blue ones.
The reason for this high pass rate is that the application process is clearly explained as a non-refundable fee that involves these police background checks so the type of people who wouldn’t pass are already quite sufficiently deterred.
A very small percentage are rejected, which you can just about see in pink, while a slightly larger but still small percentage are marked as incomplete, which are in red. What this means is that the police sometimes ask for additional information from an applicant, especially if they find anything that is likely to lead to a rejection, but if they receive no further response from the applicant then it’s marked as incomplete.
The e-Residency programme has now been going long enough for the first cards to start expiring so renewed e-residency applications are also shown in green, which is a great sign of confidence in the programme from existing e-residents. Those renewals started climbing in 2018, three years after the programme was launched, but the Estonian government then decided to help out e-residents by extending the validity period of existing cards from three to five years so all those renewals are from people who missed out on that process. That’s why renewals go down again, but will then shoot back up now after five years of the programme. Well, it would were it not for the fact that it’s difficult to pick up a new card right now due to the coronavirus crisis. If you are in that situation then we advise that you download Smart-ID because that remains valid and provides you with access to e-services for a further three years.
Interestingly, e-residents are also asked for their reason for applying for e-residency, as you can see here:
Almost a third are clear that they want to establish a location-independent company through e-Residency, which is the main purpose of the programme, although almost a quarter also want to bring business to Estonia, which is a bit vague but usually also involves creating their own Estonian resident’s company.
Now let’s take a quick look at the demographic breakdown of e-residents.
I’ll start with the bad news, which is the lack of gender diversity among e-residents. There are almost 10,000 women and about 65,000 men. That means women only make up about 13% of the e-resident community. It’s difficult to say exactly why, although this obviously reflects wider challenges around the world over inclusion of women in business.
Anecdotally, however, it’s worth noting that women play a much larger role in the e-resident community that you’d think from these figures. Some of the most impressive businesses to emerge from the e-resident community have had female founders – from tourism boss Arzu Altinay’s Walks in Europe to tech entrepreneur Vicky Brock’s VistalWorks.
Age is a bit more interesting. Despite the media stereotype of location-independent entrepreneurs and startup founders as young people, the average age of an e-resident is 42. In fact, the average age of anyone starting a business tends to be in the 40s. This comprehensive study from the US also says the average age of someone starting a business is 42, while the average age of a successful startup founder tends to be 45.
So, what does all this data about e-residents tell us about how Estonian digital citizenship is working? Well, not too much. We can see e-residents broadly reflect the business community globally and that it’s steadily growing, but we now need to figure out what’s actually happening with their companies.
When the e-Residency programme was launched, the goal was to get 10 million e-residents by 2025. It’s good to get started with an ambitious goal like that, but the programme soon realised that measuring the number of new companies created by e-residents is actually far more important because that reflects how many people are actually benefiting from the programme and not just those signing up.
How have e-residents been creating companies?
According to the latest data, e-residents have now created just over 13,000 new Estonian companies. That’s an impressive number. We did a few more calculations on broader Estonian data and discovered that means one in six new Estonian companies founded last year in 2019 came from e-residents.
And this doesn’t include Estonian companies that were created by citizens or residents, which e-residents then joined afterwards as owners or directors.
By the way, the period between collecting a digital ID card as an e-resident and establish a new company with it tends to be about six months, but can often be much longer. That makes sense because when someone is thinking about starting a business then applying for e-Residency can be the first and simplest part of that journey. At Unicount, we’ve also made the process of starting an e-resident company as simple as possible in 3 minutes, even if you’re not yet trading or need accounting. However, not everyone knows that yet!
But what are these companies up to? We put in an additional request for a breakdown of e-resident companies by field of activity. Here it is:
The categories are a bit broad, but as you can see in the largest two of them, e-residents are overwhelmingly involved in selling services online. The third category is very broad because it encompasses all forms of physical goods sales, as well as repair of motor vehicles. However, that is the next largest category simply because many e-residents are involved in e-commerce using business models such as drop shipping. To be honest, there aren’t many e-residents repairing motor vehicles for a living.
That’s not too much of a surprise, especially for anyone who has spoken to the e-resident community. If your business can operate entirely online already then it makes sense that your administration is entirely online too by registering the company in Estonia. Selling products or services online also makes issues like banking and taxation considerably easier. I’ll quickly explain why.
Banking providers, including the Estonian bank LHV, really like serving single shareholder companies selling services online because it is easy to do due diligence on them and monitor their activities so they know everything is above board. These types of companies have a very clear digital presence and their transactions are easily understandable. That’s very different compared to a company operating offline where the bank has very little oversight about what they are actually doing.
As for taxation, that can get complicated when you are operating an international business regardless of its size or whether or not you are using e-Residency. Estonian e-resident companies run from abroad pay their company taxes to Estonia by default, but that must then be changed to the country where there is a permanent establishment. If there is no permanent establishment and no other country can fairly claim the company’s taxes, such as is the case for many digital nomads selling services online, then those company taxes can be paid in Estonia. This isn’t an Estonian rule, but the international convention. If you have any doubt about your tax obligations though, always consult a qualified tax consultant.
We can also look at the breakdown of where e-residents are creating their companies from. People in Ukraine are the most entrepreneurial in the e-resident community, followed by people in Germany, Russia, then Turkey. Note that this is based on residency not citizenship. The majority of e-resident companies are created inside the EU by e-residents in other member states.
Things get even more interesting when we compare e-resident applications by country to e-resident company formations by country:
As you can see, these don’t quite correlate.
People sometimes sign up for e-Residency because they think it’s a nice idea, but we can tell much more about the usefulness of digital citizenship based on who is starting e-resident companies. This is very much dependent on which country you are coming from because that affects what problems are being solved for you compared to registering a company locally.
Take the US, for example. It’s 7th on the list for applications but then drops down to 11th for company formations. For US citizens it is actually quite complicated to own companies and bank accounts abroad so perhaps many of them realised it wasn’t that easy due to that. China, India, and Japan are all lower down too, perhaps because the value of operating in the EU market for many is still not as valuable if you are physically far from your customers there.
There are also some countries you won’t see on the list, which are those labelled as high risk or monitored in the fight against money laundering by the Financial Action Task Force. Residents of those countries are severely restricted from accessing international banking. If your country is on the list then sadly it’s not worth applying for e-Residency. The good news, however, is that the list gets updated regularly and countries are quickly removed once their government meets international standards.
Take note of the countries that skyrocket up the list too though, like Turkey and Ukraine. These countries are home to many entrepreneurs who highly value their EU market next door, but also face significant challenges if they register their company locally, such as access to payment providers. For them, e-Residency is not just a nice idea but absolutely essential for building a growing business with customers and partners outside of their home country.
The popularity of e-Residency within the EU also surprised many people, but it really shouldn’t.
If someone needs an EU company then there is little difference from a customer perspective about which EU country it is registered in. From an administrative perspective to the owner though, there are vast differences in the ease of establishing and managing companies across different EU countries with Estonia comparing very favourably on a range of issues, including the fact that Estonian companies can be run entirely online from anywhere.
Ok. So we’ve established that there are lots of e-residents with lots of companies, but none of this actually proves that e-Residency works. For that, we next need to find out how those e-resident companies are performing. Are they actually growing?
This is something the e-Residency programme is also now very interested in. After switching their goals from number of e-residents to number of companies started by e-residents, they then decided to start measuring the growth of those companies in order to ensure e-residents are getting the most value from the programme.
How are e-resident companies performing?
Let’s start with Estonian tax data. A company can only pay taxes if it is earning revenues so this figure is a useful indicator of whether their companies are growing.
The Estonian Tax and Customs Board has revealed that e-residents have paid more than €35 million directly to Estonia in the form of taxes and state fees, including more than €15 million last year alone. That’s a 12% increase from the previous year.
That’s quite impressive, but it’s also far from the complete picture. You see, not all e-resident companies are required to pay taxes to Estonia anyway but we also want to know how useful e-Residency is for companies with a permanent establishment elsewhere. But this figure does at least show why Estonia is so keen to support the continued development of the digital citizenship programme and provide a good service to entrepreneurs around the world. The state fee for an e-resident application only covers the administrative costs of actually processing the application, including those cumbersome police background checks and issuing the cards. For Estonia to benefit from its own investment in offering an e-Residency programme, e-residents have to not just start successful companies but also grow them.
Part of that return on investment then comes back to Estonia in the form of those taxes mentioned above, although e-residents actually contribute a far larger amount to Estonia by simply doing business with other companies based in Estonia. An independent report by the global accounting firm Deloitte discovered that e-Residency generates a far bigger return for Estonia when e-resident companies simply do business with other Estonian companies that are physically based here. The most obvious example of that is accounting. There are literally hundreds of Estonians working in business services to support e-resident companies and they can only do that when those companies can trade.
If e-residents can’t access banking or overcome other challenges then they can’t return any benefits to Estonia. For all these reasons, Estonia really wants its e-residents to generate as much profit as possible through their companies, even if they don’t pay taxes to Estonia. In fact, we’ve had several changes of government in Estonia since the e-Residency programme was launched and different rival political parties have been responsible for the programme. Yet all of them have demonstrated the same commitment to serving e-residents and investing in the programme, which shows how well e-Residency works.
So what is the total revenues earned by all e-resident companies over the past five years in which the programme has been available? For that, we
Drum roll, please….
Yes. E-residents have earned more than €1 billion in revenues so far, which is larger than the GDP of 14 actual countries.
The first full year of the programme in open beta mode was 2015. That year, e-resident companies received a combined €72 million from customers around the world. Last year, that had grown exponentially to €532 million, which is more than half of their total combined revenues so far.
The state can’t determine whether or not you as an e-resident will build a successful company and neither can we at Unicount. However, we can make it as simple as possible for you to establish and manage an EU companyn and give you the best possible chance to build a global business – as has already been done with more than 13,000 businesses.
Does e-Residency work? Yes. The data shows that the e-Residency programme has grown steadily over the past five years with new applicants and also new companies by those successful applicants. But the reason we know Estonian digital citizenship works is because those 13,000 companies have been growing exponentially where it matters most – their revenues.
E-Residency is not for everyone, but it’s working for thousands of entrepreneurs already. Still don’t believe me? Then head on over to the e-residents of Estonia Facebook group, which now has more than 15,000 members. You’ll notice that the people who tend to benefit the most and are generating those impressive revenues through e-Residency are entrepreneurs who are:
- Selling goods and services online
- Are location-independent (or at least plan to move and don’t want to keep registering a new company in a new country)
- Operate alone as a solo entrepreneur or freelancer
- Speak English
- Value the EU market
- Need access to financial services that may not be available to locally registered companies
In contrast, the people who benefit the least and are most likely to have issues accessing banking are:
- People with larger companies that have fixed offline locations, particularly those involved in manufacturing
- Those involved in financial services, including any company trading crypto
- Residents of jurisdictions defined as high risk or monitored on anti-money laundering measures by the Financial Action Task Force
- People whose companies demonstrate poor governance, legal compliance or fail to provide appropriate oversight and clarity of business operations and goals
So, actually, benefiting from having an Estonian company as an e-resident is very similar to benefiting as a citizen or resident. Estonia’s business environment is ideal for the same types of entrepreneurs.
It’s a common misconception is that e-Residency provides some kind of ‘virtual company’, but it’s already normal for citizens and residents to run their Estonian companies online. In fact, we dug a bit deeper into the data to show that.
There were just over 20,000 new Estonian companies created in total last year, and 77% of them were founded as one person companies, like most e-resident companies. As you can see below, 95% of all Estonian companies were established online using a digital ID. Most of that is through the state’s Business Register, but a growing proportion also comes through the Business Register’s API service, which is used by the private sector services providers like us here at Unicount.
Thanks for reading.
We hope you enjoyed this deep dive on e-Residency data. If you’d like to start your own Estonian company then Unicount is the simplest way to do it. Check it out at Unicount.eu.
We have an user-friendly online company formation service that’s been developed for citizens, residents and e-residents of Estonia. It takes just 3 minutes to get a company set up. We can then include you in our figures for our next update on e-resident stats!