How one tiny country has attracted enough virtual residents to fill a city
In late 2014, Estonia launched its e-residency programme, becoming the first country in the world to offer government-issued digital identities to individuals wanting to establish and run an EU-based company from anywhere, online.
Over the past seven years, the programme has targeted entrepreneurs, business owners, freelancers, and digital nomads. As of mid-February 2022, Estonia has almost 90,000 e-residents from 177 countries, who have started over 20,000 companies, 4,700 of which were founded in 2021.
Innovation
"I recently had a chat with someone from the council of Tartu, the second biggest city in Estonia. We were talking about numbers, and they pointed out that the number of Estonia's e-residents will probably exceed Tartu's population this year," says Lauri Haav, managing director of Estonia's e-Residency programme.
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Haav says the initiative has now entered a phase of what's known in the business world as "hockey stick growth." Many of the companies have become mature enough to hire new employees and become profitable; as a result, tax income from the programmedoubled year on year in 2021 to €32.5 million.
There are several factors that can be attributed to 2021's record results. For starters, the lockdown prompted people all over the world to figure out new ways to live and work. Estonia's e-Residency programme proved to be one such way.
e-Residency has also entered new markets. Prior to April 2021, the application process was long and laborious, involving lots of documents and thorough background checks by Estonia's Police and Border Guard. This process would be followed by a trip by the applicant to the Estonian embassy to provide fingerprints. Only once this process was complete would applicants receive their e-Residency 'kit' and ID card.
This process has now been streamlined. Estonia doesn't have an embassy in every country, so the programme started a cooperation with an international visa service provider who could facilitate this, explains Haav. "This has allowed us to launch our service in Brazil, South Africa, Singapore and Thailand."
IT, online marketing and e-commerce are the most popular fields for e-Residency businesses, owing to the fact they are not location-bound. "Maybe you're living on the island of Bali and operate your business from there; maybe your business partner is from Ukraine, your customers are based in Germany and maybe another shareholder is based in the US," explains Haav.
"We actually have such examples…e-Residency is international, cross-border, and virtual."
This flexibility is what prompted Vicky Brock to become an Estonian e-resident in 2019 after she co-founded Vistalworks, a company that provides tools, data, and intelligence to tackle illicit web trade, the previous year.
"As many of our clients are government agencies and law enforcement bodies across Europe, we couldn't risk being unable to trade with the EU, so we decided from the outset that we needed a European base," Brock tells ZDNet.
Brock and her co-founders had considered other countries to set up shop, but settled on Estonia because of the flexibility of its e-Residency system, its fair and transparent tax laws and company ownership environment, and its commitment to anti-corruption practices. For a tiny nation of just 1.3 million people – representing less than 14% of the population of the UK capital of London – Estonia is also home to a vibrant and thriving startup ecosystem.
Open for digital business
Although the e-Residency programme can be viewed as a convenient way for non-EU entrepreneurs to establish businesses, Haav says approximately 50% of applicants are from the European Union. Russian citizens make up most e-residents, followed closely by Finnish and German citizens.
Haav believes Estonia's welcoming business environment is what makes the country so appealing to entrepreneurs. "In some countries, there is still this traditional thinking that being an entrepreneur is risky, and you shouldn't start a company unless you have a million in your pocket as a starting capital," he says.
"We don't have this attitude in Estonia as it's easy and cheap to start and run a company. In many countries in the EU, it's much more difficult: it involves a lot of bureaucracy, and you have to invest quite a lot of money, time and other resources".
After achieving a PhD degree in applied physics at the Netherland's Delft University of Technology in 2017, nano-material scientist Santiago Cartamil-Bueno set to figuring out how to put his scientific and engineering knowledge to use.
He tried to become an entrepreneur in Germany, but the language barrier and the bureaucracy proved too much. He eventually applied to Estonia's e-Residency programme after spotting a post about it on LinkedIn. "I registered with only my phone and with permission from my wife," he tells ZDNet.
Cartamil-Bueno has since established a consultancy, research, and development company called SCALE Nanotech, which is registered in Estonia but operates mostly in Germany. The company is growing steadily and has benefitted significantly from Estonia's tax system, as there is no corporate income tax on reinvested profits. "Estonia's cash-flow tax system vastly helped my startup to grow through profit reinvestment during the critical early stage," he says.
When the e-Residency programme was launched in 2014, the hope was to have 10 million e-residents by 2025. This was revised in 2019, when they created the e-Residency 2.0 white paper. Since then, the focus has been on improving the quality of the service and ecosystem around it.
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With the number of e-residents and companies growing in the thousands, this growth has required a greater focus on security. To tackle this, more has been invested in the screening process, including the information required from applicants and how data is shared with governmental offices, which now involves Estonia's Police and Border Guard Board, Tax and Customs Board and the Financial Intelligence Unit, amongst others.
For security reasons, applicants still need to provide their fingerprints in-person – the technology isn't quite there to facilitate this remotely, says Haav. "Obviously, there are a lot of commercial-grade solutions in the market, but no government-grade solution yet, which would suit the requirements of the Estonian Police and Border Guard."
Regardless, Haav believes the entire application process will become digital within the next few years. In the mean time, all the indicators suggest the e-Residency programme will continue to grow: "If there are more people, they will start more companies, the older companies will mature, and the whole ecosystem will continue evolving."
Brock is also optimistic about the future. Two of Vistalworks' founding members have now moved to Estonia and become full residents, and in 2021 the company opened an office in the capital city of Tallinn.
"The surprise, perhaps, was how easy it has been and how quickly we became part of the hugely vibrant Estonian technology startup ecosystem," says Brock.
"I didn't ever expect I would be spending an hour a day studying Estonian for fun, but I choose to do that because I do feel part of Estonia and I want to stay here and build my business here."