Alex Antonuk:
— Hey, friends, I’m Alex Antonuk, and this is Built in the Digital Republic, a podcast about Estonia, its tech talent, and its place on the global digital landscape.
Today, we’re talking about Estonia as a jurisdiction and an operational hub for foreign startups. Is it really a good place to register a company, launch a tech initiative, or bring in a local team? Or do the authorities just have good PR experts?
We’ll try to look at this from different angles, from strategic business considerations to practical details, pitfalls, and the unique tools of Estonia’s e-government.
Joining me is Hendrik Hindov, partner and senior advisor at AnsonBaer. He is our guest and guide for today’s topic.
AnsonBaer has been around for more than 15 years, focusing on financial and business consulting. They’ve helped companies, including tech, launch in Estonia and make the most of the country’s tax and legal system. In 2019, AnsonBaer was ranked second in Estonia for fastest growth in accounting services, according to the business newspaper Äripäev.
Hard to think of anyone better for this topic than you, Hendrik. Welcome.
Hendrik Hindov:
— Hello. Nice to be here and discuss with you these topics.
Alex Antonuk:
— Always great to have you. So let’s dive in. We all know Estonia as one of Europe’s most advanced digital states – open to foreign business and startup culture. But does it have a convenient jurisdiction? How does it stack up against the rest of the EU, Delaware, or other popular hubs – both in terms of upsides and downsides?
Hendrik Hindov:
— From my perspective, I think that Estonia is one of the best jurisdictions in the world to incorporate and to manage your business. But of course, it has its downsides and I’m not a very big specialist on other jurisdictions. I have heard and read about them, but I don’t know a deeper insight on this.
But as you said, Estonia is a well-recognized digitalization leader at the government level, and that definitely helps with management and opens possibilities for foreign ownership. The main advantage for foreign entrepreneurs is Estonian e-residency, and that’s something we really can’t skip over.
E-residency is your access to Estonian electronic systems that you can use, for example, Estonian government services. And what is most important is that it can’t be mixed with residency or tax residency. It’s e-residency, and it’s a different story. Residency means that you have a real presence in Estonia, and tax residency means that you are a registered taxpayer in Estonia. So these are like a first introduction to Estonia.
Alex Antonuk:
— Okay, yeah, we’ll talk a bit more about e-governance a bit later. Okay, that gives us a picture of Estonia in a global context, but let’s get practical.
If I’m a foreign startup founder landed here today, the first big decision is the entry point. Which route would you recommend? Incorporation, partnership, or M&A, or hiring contractors? And could you share one short case from your practice?
Hendrik Hindov:
— Let’s say, basically, if you are a startup, probably the best solution for you is incorporation. But partnerships, contractors, and acquisition of a local Estonian company are also options on the table. It really depends on your business model.
Incorporation usually means starting from scratch. And the question is, at what stage you are with your project, and whether you need additional capital at the moment, or you already have your first investors on board, and whether it’s pre-seed, the first round, or the second round.
These are the questions that need to be answered, and then we can give you a better recommendation on what would be the best solution.
Partnerships with Estonian IT companies and startups are quite a good option as well, because at the moment the startup scene is not in the best condition. There were investments in startups that didn’t work out, and many companies are now looking for some kind of solution for their business. Acquisition of Estonian startups is also a question of capital and how well they suit your current business.
Contractors are another option. Do you need subcontractors providing services or selling some IP? This is also possible.
At the moment, we are mostly servicing startups that are incorporated. We have helped them with incorporation, and usually they are founder-based, founders plus initial investors. Some of them are moving to their first financing round, raising capital and adding new investors to the cap table.
So different stories, but overall I see that activity in this market is coming back at the moment.
Alex Antonuk:
— Okay, okay. Thank you for this answer.
And now let’s talk a bit about e-government, as we already mentioned it before. So, about e-government in practice, which initiatives and products – like e-ID, e-signature, X-Road, or e-Residency – actually save time and money, and which might be overrated?
Hendrik Hindov:
— I would say that the starting point for foreign entrepreneurs and private persons is e-residency. E-residency provides you access to Estonian governmental services. That means that you can enter, for example, the Estonian business register, tax department, migration portals, and so on.
Now, these other services and products that you mentioned are mostly supporting or sub-products of e-residency, like e-signature or e-ID. And what you can do with your e-residency is that, basically, after applying for e-residency, the Estonian Police and Border Guard Board will verify your identity and assess your suitability to use these services. So, basically, after that you can get access to Estonian e-services.
And usually, for entrepreneurs, the starting point is the Estonian business register, where you can register Estonian entities. Second is, of course, the Estonian tax board, where you need to declare your taxes and probably register as a VAT payer, which is quite a common need for active companies. And, of course, submit monthly or annual reports and tax declarations.
For that, Estonian e-residency is also used. Later, since Estonian company shares are mostly transferred through a notary, you can also use the Estonian e-notary system and make transactions online from your place of residence or wherever you are. Also, it’s quite common in Estonia to sign most documents with your e-signature, and all these contracts are digitally signed.
So it’s quite useful. If you don’t have it, it’s also possible to operate through powers of attorney, representation, and so on. It’s possible, but again, sometimes you have extra costs for sending documents and verifying them, and you lose time on postal services and on formalizing everything on paper.
So it’s quite useful. I say to many of my clients, actually, what is e-residency? It’s like a metro ticket: you can get in, use it, and ride the trains, but you don’t get the right to live above ground.
So that’s a simplified explanation of Estonian e-residency.
Alex Antonuk:
— Yeah, that’s a good example. Very easy to understand. And yeah, it seems that the bureaucracy in its usual offline form has been reduced to a minimum in Estonia.
Hendrik Hindov:
— I would say that bureaucracy still exists, but handling it is faster, more open, and traceable. You can always track when you send something, whether somebody has replied, if they have received the documents, and so on. And if you use the systems, you can always check the status of your process. This is important here.
Alex Antonuk:
— Well, sadly, even a digital state can’t fully protect from the joys of operational bureaucracy. So let’s start with the basics. What can a non-resident realistically expect when opening a bank account?
Hendrik Hindov:
— If you want to open a bank account in Estonia, you should have at least Estonian e-residency. Even better is if you have physical residence in Estonia, which means you are identified by Estonian authorities. If you don’t have either, it’s quite impossible to open a bank account in Estonia. In practice, opening a bank account starts with showing the bank that you have some kind of real representation in Estonia. Do you have an office, employees, or partners? This is a key factor. Plus, banks usually ask for additional documentary evidence or make inquiries to verify all your claims. They might also ask about your business plan and business model.
These must be logical and understandable for the banks. So this is a brief overview of opening a bank account in Estonia. In our experience, it usually takes three to four weeks to get it all done.
If you have an Estonian residency card, usually the online application is enough. But today, a resident’s visit to the bank is still required.
Alex Antonuk:
— Okay, thank you for this detailed answer. And Hendrik, let’s try to give at least a general action plan or kind of checklist.
Say a UK startup comes to Estonia – what are the first three months like? Which documents do they need, which steps are critical, and what common mistakes should they watch out for?
Hendrik Hindov:
— It’s quite difficult to give an absolute and complete list of steps and documents that we need. The first step is, of course, incorporating. There are other forms as well, like opening a branch or a representative office.
They have their own nuances, and let’s not go deeper into that – we can cover it in another podcast. But in general, first, it’s about who the founders are. The founders’ background and documentation must be well presented. Then, if there are corporate structures behind them, or if you already have investors, venture capitalists, or others, their background also needs to be documented. Ultimately, beneficial owners must be disclosed.
Of course, if incorporators and founders have e-residencies, it helps a lot with identification. And there are parts of incorporation that can be done online and parts that must be done on paper. Even if they don’t have Estonian e-residency, everything can be done on paper.
It’s a little more time-consuming, as you need apostilles, stamps, and all the paperwork in order, but it’s not an obstacle. It mostly affects the speed.
The next question is what kind of team you want to bring here, and whether you can get startup status for your Estonian entity. This also affects immigration questions for employees who want to relocate and who don’t, and how to set up the organization in Estonia. Banking options must also be considered, because for Estonian companies it’s relatively easy to open accounts with virtual banks and payment service providers.
Then other questions arise: would you like to transfer assets from the UK to Estonia, or contribute capital in a tax-efficient way? Should it be as an equity investment, a revenue-sharing model, or something else? These matters usually come a little later and should be considered within the first three months.
You also need to think about financing operations, essential contributions to operations, whether multiple shareholders need a shareholders’ agreement, and whether employees have bonus programs or other arrangements.
These are the questions that everybody asks.
Alex Antonuk:
— Yes, that’s right.
And before we finish, Hendrik, I’d like to run a short lightning round. A few quick questions, where I’d ask you to give brief practical answers.
Okay. For early stage startups, one quick tip for handling the EU VAT One-Stop Shop without losing margin.
Hendrik Hindov:
— I would say that from the EU side, this is quite a good initiative. But it doesn’t concern electronic services as much, because permanent establishment is quite determinable. Where your office or subsidiaries are located, where you are registered as a VAT payer. And you use this one-stop-shop solution to declare VAT in the right countries. But with goods, entrepreneurs usually encounter more trouble.
The general rule is that you have to be registered as a VAT payer in the country from which these goods are dispatched to consumers. And sometimes the country from which the goods are dispatched is not Estonia. So, by the general rule, you must be registered in that country. That means that, yes, you can use an Estonian company, but you have to carefully consider your distribution channel network and how you operate.
Also, consider logistics to ensure it isn’t interpreted the wrong way. Otherwise, it works quite well – you don’t have to be registered in every EU country and file VAT declarations in all 27 countries.
So it’s a good solution, but there are some small nuances you have to keep in mind.
Alex Antonuk:
— That’s clear. Okay, the two most common mistakes newcomers make around compliance, KYC, AML, or IP. And how to avoid them?
Hendrik Hindov:
— Mostly in compliance and KYC, what I see is that people are not very keen to disclose their business details. Usually, we don’t see any issues with entrepreneurs who come with a very clear plan of what they want to do and how they want to do it. But if you don’t know what you want to do, it’s quite hard to explain it to the banks. And who your business partners are, and so on. Basically, the more information you have, the better. And when you make a selection, decide what is really relevant and what is not.
What you also need is the source of funds – where the capital you use for your operations comes from. Then, who your business partners are and what their background is.
Cash issues are rare nowadays, as few people use cash in large transactions. We also sometimes meet difficulties with clients from third countries – not from the EU. There isn’t much expertise in Estonia on countries from the other side of the world, so complications can arise.
But in general, I don’t see it as impossible. Sometimes there is a lot of explaining and communication errors. But if you have, like I said, a clear understanding of what you’re doing and with whom, and how your business is financed, then it’s quite okay.
Alex Antonuk:
— Okay, that’s clear. Yes, so prepare as much information as you can about your company. And then everything will be easier.
Okay, so let’s move on to the next question. How do governance tools – like SHA, vesting, drag/tag rights, or ESOP – help keep management stable in a young company?
Hendrik Hindov:
— These are highly recommendable. But if it’s newly incorporated businesses that are growing, and the founders and key personnel are quite focused on achieving results, you probably don’t have much time to start discussing, rethinking, or getting into internal conflicts. People in this field often have a lot of experience with startups and can transfer ideas from one project to another.
So, I think that the more you can think in advance and put on paper, the better. These are private documents, they are not disclosed to the public.
By formalizing these documents, you don’t give away any business secrets. There are some points that might be good to include in the articles of association and perhaps even in the founders’ agreement. I see a lot of this in practice.
But for young entrepreneurs starting their own business, it’s important not to waste too much time on internal bureaucracy and not to lose focus on the real problems, which are how to get started. So it’s always a matter of considering how far to go.
Alex Antonuk:
— Yeah, that’s true. Okay.
And to wrap up, for which types of companies and tech projects is Estonia a perfect fit? And for which is it less suitable?
Hendrik Hindov:
— Quite a complicated question to answer. Software as a service is quite okay. Cybersecurity is growing quite fast.
We have seen a lot of recent investments in the military sector. Mostly, defense startups are growing.
And I would say that for some businesses, Estonia is not the best option. For example, I know better jurisdictions for payment service providers, it’s less complicated. But again, I wouldn’t exclude anything if there is a good reason behind it.
So I would say the key question is, for a certain field of activity, how is it regulated? And what is your business model? How well do they match with each other? I wouldn’t exclude anything, but yes, depending on what we’re talking about, certain advantages exist.
Alex Antonuk:
— Hendrik, thanks a lot for your expertise and honest insights. I’m sure many of our listeners found this helpful. It’s always great talking with you.
Hendrik Hindov:
— Yeah, thank you. It was an honor talking to you and hopefully we meet again.