Estonia's future as an Offshore company jurisdiction

Estonia's tax system and groundbreaking advancements in digital infrastructure and e-governance have made it an attractive place for establishing an offshore company. Estonia is one of the only EU countries that does not generally allow corporate taxation from income that sourced outside the country. Moreover, no tax is payable on locally sourced profits until profits are deemed to have been distributed.

Today, more than 100,000 people are part of Estonia's #eResidency scheme (a government program aimed at non-resident entrepreneurs facilitating business with Estonian entities). This is remarkable, considering the country's population is just 1.3 million.

Potential for more success:

But Estonia is poised for another leap forward. The modernization of the Estonian Commercial Code heralds a new possibility to catalyze success in the global business landscape.

Unlike traditional offshore jurisdictions, Estonia's regulatory framework has not accommodated tax-neutral company legal structures, which are usually called international business companies or offshore companies. Such entities normally differ from normal companies in that they are usually limited in terms of the activities they may conduct in, but not necessarily from, the jurisdiction in which they are incorporated. They serve various purposes, from international trade to asset protection. However, Estonia's Commercial Code lacked provisions for such structures, limiting its appeal to global entrepreneurs.

Estonian company is by default a tax resident in Estonia, and subject to tax on its worldwide profits. However, Estonian company’s income that is earned outside of Estonia (e.g., from its foreign permanent establishments, or as taxed dividends where the company has at least 10% of shareholding), it generally pays no corporate tax and the owners and shareholders receiving distributions of the profits are not subject to income taxes in Estonia.

The reality of the industry of Offshore companies:

Contrary to the picturesque imagery often associated with the term 'offshore,' the reality of the world's largest offshore jurisdiction is far from the sandy beaches and swaying palm trees of Seychelles. This unexpected hub of global commerce is a small American town - Wilmington, Delaware.

More than half a million companies are incorporated in Delaware every year, and it hosts over 60% of the Fortune 500 companies (500 of the largest United States corporations by total revenue).

For non-resident entrepreneurs, the United States offers enticing benefits, such as the absence of automatic exchange of information and favourable tax treatment for certain structures like Limited Liability Companies (LLCs).

An Estonian owner of a Delaware LLC, for instance, can conduct international business without incurring US taxes on foreign income while leveraging US-based amenities like USD banking and digital services, provided certain conditions are met.

Estonia's potential to replicate the success of the United States:

Estonia could replicate Delaware's allure, which stems from its favourable legal environment and robust infrastructure, by introducing its own innovative legal structures. An Estonian LLC, resembling a limited partnership with limited liability but with the possibility to be incorporated with one member, could offer flexibility surpassing traditional business forms like the private limited company (Oü) and herald a more modern alternative to sole proprietorship (FIE), which is currently only available way of doing business for local residents. Leveraging Estonia's thriving e-residency program, which boasts over 100,000 participants, such a structure could position Estonia as a premier jurisdiction for establishing offshore companies.

The success of Singapore and the Netherlands:

Modernizing Estonia's Commercial Code holds the promise of substantial economic benefits. Evidence from other countries suggests that regulatory reforms often lead to an influx of businesses, subsequently driving economic growth. For instance, countries like Singapore and the Netherlands experienced significant increases in business registrations and GDP growth following similar reforms. Singapore's introduction of the Limited Liability Partnership (LLP) structure facilitated the growth of small businesses by providing a flexible and tax-efficient entity for entrepreneurs.

Similarly, the Netherlands' innovation in establishing the BV (Besloten Vennootschap) structure attracted multinational corporations seeking a favourable tax environment and simplified corporate governance. Estonia could empower startups and multinational enterprises alike, offering tailored legal frameworks to support diverse business needs. Such concrete examples demonstrate the tangible benefits of modernizing Estonia's Commercial Code, inspiring confidence in prospective entrepreneurs and investors alike.

Estonia as a hub for international business

Moreover, a comparative analysis reveals that jurisdictions with streamlined commercial laws attract a higher number of entrepreneurs and foreign investments. If Estonia follows suit, it stands to benefit from increased demand for professional services, such as legal, accounting, and consulting, thereby stimulating job creation and fostering a more vibrant economy - a driving force to boost Estonia's vision for a knowledge-based economy.

Additionally, each successful business becomes an unwitting ambassador for Estonia fostering a positive image for the country on the global stage. Favorable legal structures highlight the transformative impact of the pivotal role of entrepreneurs in shaping Estonia's economic landscape and global perception.

In essence, the modernization of the Estonian Commercial Code represents a strategic pivot towards global competitiveness. By embracing innovative legal structures and leveraging its digital prowess, Estonia is primed to carve out a niche as a hub for international business, setting the stage for unprecedented economic growth and prosperity.

The original article is available in Estonian in the business magazine "?rip?ev".

https://www.aripaev.ee/arvamused/2024/03/21/taavi-tammoja-kaasajastame-uhinguoiguse-ja-saavutame-edu-offshore-piirkonnana

#entrepreneurship #eresidents #eResidency