Over the past decade, Estonia’s flagship initiative on the international stage has been our e-Residency programme. However, it is becoming increasingly clear that behind this seemingly straightforward programme lie complex tax concerns for its users. At a time when Estonia has had to acknowledge international reputational damage caused by both the Danske Bank money-laundering scandal and the recently uncovered ammunition-related transactions, it would be wiser to prevent the next blow rather than merely provide material for another hit production at the Drama Theatre.
The e-Residency programme of Estonia has been successfully promoted worldwide as a simple way to establish a company in Estonia in just a few minutes and a handful of clicks, bring business profits to Estonia and benefit from our favourable tax system, under which profits are taxed only upon distribution. But are we giving e-residents sufficiently clear information about the potential tax risks, both in Estonia and abroad, or are taxes mentioned only in passing because the subject is too complex?
To date, 140,000 people from 187 countries have joined the programme and established approximately 43,000 companies in total. As business owners, they also make an active contribution to the Estonian economy every day, both as taxpayers and through their consumption of various services and goods. E-residents’ direct tax contribution over the lifetime of the programme is estimated to be approximately 433 million euros, of which 125 million euros was contributed during 2025 alone.
Where does the problem arise?
An increasingly globalising world brings new challenges, both for Estonia and for the countries where our e-residents reside. Many companies owned by e-residents effectively operate as one-person businesses, in which the owner, management board member and the employee are all the same person. There are no additional employees, no office, clients are generally located all over the world and often there are none in Estonia at all. The owner does everything remotely, from wherever they happen to be.
Like companies established by Estonian locals, many companies owned by e-residents are registered for VAT in Estonia. This allows them to invoice for the goods and services they sell and purchase, while income tax on profits is payable only when profits are distributed. Unlike companies operated in Estonia by Estonian residents, e-residents face two important caveats in this area.
The VAT issue in Estonia
The first problem concerns VAT registration. To be registered as a VAT taxable person in Estonia, a company must carry on business in Estonia. If it does not do that, the Estonian Tax and Customs Board (“EMTA”) has the right to delete its VAT registration. This has already happened to many companies owned by e-residents.
Over the past year, EMTA has focused specifically on reviewing the VAT registrations of such companies and has requested information, among other things, about the location of their management boards, employees and offices. The purpose of these reviews is to assess the companies’ actual links to Estonia. Where it has been established that a company was incorporated in Estonia and holds an Estonian VAT registration but does not carry on actual business activities from Estonia, its VAT number has been withdrawn.
Once a VAT number is withdrawn, any VAT paid on purchased goods and services simply becomes a cost that can no longer be deducted as input VAT. In such cases EMTA has advised e-residents based in another EU Member State to explore the possibility of registering for VAT in that country. Without business activities carried on in Estonia, Estonian VAT number cannot be retained. Registration abroad may be possible, but unlike Estonia, the process takes a considerable amount of time in most countries.
The income tax issue abroad
In addition to the VAT issue, there is another, perhaps even a more pressing concern: corporate income tax.
Generally, if a company’s business is managed or carried out on a day-to-day basis in a country that is not Estonia, that foreign country may have the right to tax the company’s profits. This means that foreign country essentially treats the Estonian company’s profits as its own and taxes them as though they had been earned by a local company.
This is precisely the situation in which many e-residents now find themselves: they have a private limited company registered in Estonia, but the member of the management board and the person actually doing the work, who are often the same individual, are located abroad. Foreign tax authorities are not just standing by. They are actively monitoring the activities of such companies and taxing their profits. Since corporate profits are taxed annually in most countries, tax liabilities are assessed for each year, including retrospectively.
For example, a French e-resident incorporated a company in Estonia in 2023 and has earned total profits of approximately 500,000 euros. The French tax authorities found that, due to the location of the management board member, the Estonian company has had a permanent establishment in France ever since its incorporation. The French tax authorities have assessed income tax retrospectively for the profits of all the years, resulting in the company having to pay 150,000 euros of corporate income tax in France. In addition to this tax liability, interest and penalties of 100,000 euros were imposed for failing to act correctly from the beginning. In some cases, foreign tax authorities have also imposed personal penalties on the management board members of such companies. In the French example, the personal tax risk amounted to approximately 250,000 euros. Thus, profits of around half a million euros gave rise to a foreign tax risk of the same amount. The profit margin is wiped out while stress, pressure and administrative burdens soar.
E-residents are therefore justified to ask: what happened to the promised tax advantage and easy administration? The right answer is that these benefits apply only if the company’s management board and its actual business activities are located in Estonia. If either one is missing, a tax risk equal to the company’s profits is a real possibility.
Can such a risk be eliminated?
The old saying of “measure twice, cut once” is particularly appropriate here. Timely communication and action could help avoid unpleasant surprises. While the relevant risks are described on the e-Residency website, the e-residents themselves do not appear to be sufficiently aware of the risks.
Although every business is responsible for its own finances, more effective communication about the programme’s risk areas should be considered for e-residents. The approach of dealing with a problem only once it arises does not work in tax matters. Once a company has come to the interest of a tax authority, it may already be too late to demonstrate a connection between its business activities and Estonia or to reduce the risk of a foreign tax being imposed.
Although the website of the e-Residency programme provides an overview of both corporate income tax and VAT risks, including recommendations to seek professional advice on one’s own individual risks, this does not appear to be a sufficient preventive measure. Specific recommendations, coordinated with EMTA, could perhaps be added, both on how to relocate the management board to Estonia and how to hire employees for an office located in Estonia. While such measures may create additional ongoing costs for e-residents, they would in fact create more jobs in Estonia, generate additional tax revenue and, going forward, reduce the risk of misunderstandings with tax authorities both in Estonia and abroad.
E-Residency as Estonia’s flagship initiative works only when it has participants. To ensure that the programme continues to generate tax revenue for Estonia, its strengths and weaknesses must be discussed honestly. If e-residents are left with the impression that they can learn about the programme’s actual tax risks only through a professional adviser or when the tax authority comes knocking, this may become another ticking time bomb for our reputation, or a source of inspiration for another successful stage production.
Published in Estonian by ERR on 22 September 2026.
