Startup Life/Future of Work/Places/ Founders flee to Estonia’s digital paradise Sifted talks to some of the 56,000 people who have applied for Estonian e-residency, and finds out why they love it. By Christina zur Nedden 12 March 2019 \Fintech Could digital CFO tools be the way ahead for financial management in startups? By Aruni Sunil 23 March 2023 Startup Life/Future of Work/Places/ Founders flee to Estonia’s digital paradise Sifted talks to some of the 56,000 people who have applied for Estonian e-residency, and finds out why they love it. By Christina zur Nedden 12 March 2019 With 12 guides, over 600 tours sold and plenty of positive reviews, Arzu Altinay’s company Walks in Istanbul was going well. Then the business started to go very wrong. The political atmosphere in Turkey started to change around 2015 and there was a a bloody coup attempt a year later. Tourism dried up. Altinay, who had been a professional tour guide since 1998, lost the vast majority of her customers. When PayPal stopped operating in Turkey in 2016, even those still wanting to pay for her tours couldn’t. “I was desperate because my business died immediately. I’m a single parent and had no money coming in.” Altinay knew that she had to move her company outside of Turkey. “The business was working, it just wasn’t working in Istanbul”. But anywhere she looked – the US, UK, Netherlands, Germany, Denmark or Canada – there were barriers to launching a tourism startup. That’s when she stumbled upon Estonia’s e-residency programme. The programme website, with a snazzy blue design and easy-to-read explainers, seemed to be the solution to all her problems. “Do you want to run a trusted, location-independent EU company? Is your business online? Do you want access to the EU single market? This beautiful blue page had all the answers to my questions!” says Altinay. Altinay immediately applied and today is running tours with her new business Walks in Europe in 16 cities in Europe. “E-residency saved my business and my family.” Arzu Altinay is one of over 56,000 people from 160 countries who applied for e-residency in the first four years since Estonia launched the programme. Not all of the 6,000 founders who have established their business through it have a life-changing story such as hers. But those interviewed by Sifted all describe it as revolutionary. Digital nomads Michelle Retzlaff is a typical e-resident entrepreneur. The 27-year-old German works as a location-independent software engineer in Australia. She spends 9 months a year abroad, having lived and worked in over 40 countries so far. Until Summer 2017 she operated as an “Einzelunternehmer” (solopreneur), the simplest form of business entity in Germany, but still confusing enough that she had to hire a tax consultant who charged her €1,000 for her end-of-year declaration alone. As a digital nomad, she found it increasingly hard that she was legally required to keep and store all invoices on paper and to check her physical mailbox in Germany regularly. The overwhelming bureaucracy kept her from focusing on her actual business. “I wanted a simple, safe and affordable business and personal setup to be able to focus on my business and personal life.” Christoph Hübner has similar frustrating experiences. He remembers all the times he got physical letters from the German Finanzamt which he missed and then ran into trouble. “Estonia offers all things administrative digitally and paperless. As a digital nomad this is a dream come true,” the 36-year-old serial founder from Berlin who currently works from Chiang Mai, Thailand says. After spending a week in Tallinn in 2017, he decided to base his personal holding company in Estonia. Similarly, Michelle Retzlaff did the same with her software company. The ease of the process was astonishing to both of them: The application process is a simple online form and costs €100. After the Estonian police does a background check, you pick up your digital ID around 4-6 weeks later at an Estonian embassy or in Tallinn. After that, starting a company takes as little as 20 minutes. It would have taken months in Berlin, not to speak of all the advance payments and obligatory chamber of commerce membership fees. “What I like most about the Estonian way is this idea of government as a service. This is something completely lacking in Germany,” says Hübner. What does Estonia get out of it? “We like to have friends all over the world,” says Mari Aru, secretary of economics and trade in the Estonian embassy in Berlin. Gaining independence in 1991 after being occupied by Germany, Sweden and the former Soviet Union, Estonia had to find a way to join the modern world. Lacking industry or natural resources the government settled on IT. “It was a combination of historical chance and necessity,” says Aru. Digitalisation progressed fast. As early as 2002 the national ID was digitalised and taxes were done online. In 2003 the government started operating paperless. Estonians have been able to vote online since 2005. Today, 99% of government services are online, the only exception being marriage, divorce and buying real estate. This has financial advantages: “As a small country counting only 1.3m inhabitants, we don’t have the human resources to build a bureaucracy, [so] it’s cheaper to have a digital administration,” says Aru. The government finds that since tax declaration have been made easy “people use it more and actually pay more taxes”. Based on this experience, launching international e-residency in 2014 was an easy step that made Estonia bigger in economic terms, bringing in more tax money from all over the world, and strengthening its diplomatic ties. According to Aru, the programme has already brought in more money than it cost. Still, the e-residency programme is young. The programme celebrated its fourth birthday in December and will only be completed in 2025. Initial difficulties, such as having to travel to Estonia to open a bank account, have been resolved (since January 2019 you can do it online using fintechs such as Holvi). But other questions persist: For instance, there still seems to be confusion about what kind of rights the digital ID encompasses. While it does give access to Estonian services digitally (such as doing your company’s reporting) and the ability to sign documents online it does not enable its holders to travel to the EU physically. Estonia, with its 20% flat rate tax for companies, has to regularly defend itself against the accusation of being just another tax haven. “The main reason for running your company in Estonia is the digital emphasis on it and access to the European market,” says Aru. “Companies still have to pay taxes in the country where they actually generate value.” Despite Estonia’s administration being more straightforward than other countries’, every e-resident with a business still needs to do bookkeeping and get a physical address in Estonia. That’s where service providers come in. Ignacio Nieto Carvajal is a Spanish software developer and entrepreneur currently based in Bali who has a company helping people to run their startup through e-residency. Called “Your company in Estonia”, it aims to build a perfect setup for founders registering the company, applying for a European VAT number and handling all the bookkeeping and taxes. Service providers such as Carvajal’s or the market leader LeapIN are much cheaper than hiring a tax advisor in most European countries. Carvajal’s decision to help others establish their business in Estonia stems from his personal frustration with the Spanish government’s handling of freelancers and startups. “In Spain you have to pay a monthly freelancer fee of €340 if you own a company. Even if you make zero revenue that month.” Since becoming an e-resident, moving his app-developing company Digital Leaves to Estonia and launching “Your company in Estonia” Carvajal feels in control again. “Estonians run their country like a tech startup. I can encrypt and sign a document and send it you, I can easily do my taxes online, I don’t have to hire a notary, check my physical mailbox or walk anywhere.” And paying taxes is even more fun because Estonia’s government does not tax profits that are reinvested, only dividends. “Estonia encourages businesses to grow first before making them pay. That is so important for people starting out who just want to focus on their business instead of becoming a specialist on bureaucracy and taxes.” Related Articles With €2.7m Iceland’s star therapy startup is springing into Europe By Kitty Knowles Click here to read more Inside Personio: Europe’s most valuable private HR tech company By Miriam Partington in Berlin Click here to read more The solution to the talent crunch: recruiters helping rival recruiters? By Miriam Partington in Berlin Click here to read more Should startup employees set their own salaries? By Miriam Partington in Berlin Click here to read more Most Read 1 \Startup Life UK government to reform ‘equity for visas’ residency application system 2 \Fintech Is Revolut really worth $33bn right now? 3 \Startup Life Techstars unexpectedly pulls out of Sweden mid-programme 4 \Deeptech The other funding gap: it’s not just unicorns that are leaving Europe 5 \Deeptech ‘There’s going to be a bloodbath’ — is generative AI a bubble?