For businesses looking to expand into and across Europe, the UK is currently the place to be: 40% of top global companies with a European HQ call London their home. For many US businesses, Britain is the English-speaking gateway to the rest of the Continent, with a low tax base and easy access to European trade.
Following Brexit, that enviable position is under threat.
Estonia, for one, is looking to capitalise on uncertainty over the UK’s position with their e-Residency programme. Launched in 2014, this novel legal status allows overseas businesses to take up virtual residency in the country. 1,000 businesses have already registered for the scheme - a result, say the programme’s creators, of upset caused by the UK referendum vote and the Panama Papers scandal.
e-Residency is an intriguing option for US businesses looking to expand into Europe - but how does it work, and what will it mean for post-Brexit Europe?
What is the Estonian e-residency?
e-Residency, say the programme’s creators, is “a transnational digital identity available to anyone in the world interested in administering a location-independent business online.”
Once they reach the age of 15, every Estonian is issued with an ID card, giving them access to around 4,000 different online services: banking, voting, registering businesses, paying taxes and more. These ID cards - and certain services - are now available globally. With the e-Residency programme, “digital citizens” from elsewhere in the world can enrol via a quick and simple process, giving them the right to operate a location-independent global business, registered in Estonia.
Advantages for non-EU businesses
To continue trading with EU member states, the British government must look to adopt one of five different trade models following the Brexit vote, taking UK-based businesses into these new trade relationships. Businesses holding Estonian e-Residency, however, will remain within the EU’s legal framework and be able to trade freely with other European businesses. US firms looking to expand to Europe also have the added bonus of a clear tax framework and minimal bureaucracy.
For many US businesses looking to expand across the Atlantic, opening a European headquarters is a necessary but difficult undertaking. e-Residency offers a possible solution. Businesses registered with the scheme can be administered online outside Estonia, with secure access to banking and company data online. Operational costs can be kept to a minimum.
Estonia’s simplistic tax laws can also benefit US businesses seeking a European presence. The Estonian government charges a flat rate of 20% income tax and 20% corporation tax - the latter on distributed profits only. If, however, profits are reinvested into the company rather than distributed to shareholders, there is no corporation tax to be paid.
The eResNetwork online forum offers a valuable introduction to the e-Residency framework. In one thread on the site, a Bulgarian resident with a business registered with the programme has outlined the other benefits of using Estonia as a European base, including its high ranking on the World Press Freedom Index, clear tax and labour system, cultural openness to concepts including crowdfunding, and more.
Disadvantages of the programme
Companies seeking e-Residency require a physical office address within the country. Many Estonian firms act as virtual office providers.
The other major disadvantage of choosing Estonia is a comparative lack of capital. While you’ll find angel investor group EstBAN and some smaller venture capital firms for pre-seed investment, capital is more easily accessed elsewhere in Europe. For those seeking US investment only, however, this should not be a problem.
What the scheme means for post-Brexit Europe
The e-Residency programme’s founders claim that the Brexit vote has boosted adoption, with applications from the UK growing tenfold in the two weeks following the vote. UK firms holding Estonian e-Residency will still be able to trade in euros, avoiding sterling fluctuations over the coming months.
According to Kaspar Korjus, head of the e-Residency project, the team are expecting a further increase in applications from UK businesses as Brexit negotiations continue. “It all depends on what specific decisions and agreements are made as to the results of the referendum”, he said in August. “Today there are still a lot of loose ends. We believe that e-Residency will become the main tool for the British to continue their businesses in the EU. It’s wise for an international company to keep at least one body in the EU, and Estonian e-Residency is the cheapest and most convenient way to do it.” For US businesses looking to make the leap to Europe, it’s an option that warrants serious consideration.
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