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Where to register: Estonia vs US

Thanks to its e-Residency program, Estonia has quickly risen to become one of the most popular jurisdictions in which to register a location independent business. Its marketing effort to promote the program has worked so well that a significant number of people now assume that it is the only country in which you can register a business remotely, even though that is not the case. This post is the second of a series in which I compare Estonia to other countries where remote registration is possible. The goal of this series is to raise awareness for those other options so that you can make a better informed decision when it comes to choosing where you should register your company.

Estonia

Registration

If you are already an e-Resident, registering an Estonian company is fairly straightforward and it takes only a few days. The registration fee of 190 EUR is also very reasonable. Other than your e-Residency card, you will need a local address and an administrative contact. If you do not have one already, you can rent one from a local service provider for 150-250 EUR annually. If you are not already an e-Resident, however, you will have to apply first and this will add at least a month to the whole process, cost 100-120 EUR and require a personal visit to an Estonian embassy or collection point. If there is no Estonian embassy or collection point near where you live, you will have to travel to one to complete the process.

Compliance

An Estonian company is required to file a tax return every year. Fortunately, this can be done online directly on the government website (which is available in English). If VAT-registered, a monthly VAT return will have to be filed. If you have local payroll, a monthly payroll return will also have to be filed. If run from another country, there may also be compliance requirements there. If accounting is not your thing, there are many service providers who will take care of it for you. The cost for such a service starts at around 50 EUR per month.

Banking

It is currently not possible, in practice, to remotely open a business bank account in Estonia. It is possible, however, to open an EMI account with the likes of Wise and Revolut. These services are fantastic in their own right but they are no replacement for real banks and this may prove to be a problem when it comes to using services that require the bank account and the company to be based in the same country (especially for payment processing). A visit to Estonia is thus necessary in most circumstances. Another issue is that Estonian banks have been closing a large number of e-Resident accounts, for reasons explained in this article.

Taxation

Most countries tax realised profits, Estonia does not. Instead, only distributed profits are taxed. In practice, this means that any profits that stay in the company are exempt while any profits distributed or deemed distributed are taxed at the rate of 80/20 (or 25%). Salaries paid to non-residents are exempt as taxes are deemed to be paid in the country where they are received (for example, a Spanish resident being paid a salary from an Estonian company will be deemed to have paid taxes on that salary in Spain, same for social security). The VAT registration threshold is 40000 EUR. Only Estonian VAT-liable sales count towards the threshold. It is important to understand, however, that this only applies to companies run from Estonia or whose tax residency is Estonia. Estonian companies run solely from other countries, or with PEs in other countries, will generally be liable to tax in those countries, as explained in my place of management rules guide.

Reputation

While Estonia is well known within the location independent community, that is not the case with the general public. Especially outside Europe, where it is often seen in a similar light to other ex-Soviet republics. This can be an issue, depending on the type of business you intend to run, as potential customers may be turned off by the idea of paying a company which is located in a country that they have never heard about or that they think is disreputable.

Future trends

Estonia has been doing a fairly good job, so far, with its e-Residency program. It has come a long way since it was first unveiled a few years ago. That said, I am concerned about the lack of collaboration with the local banks and the slow pace of development of a replacement for the physical e-Resident card. I am also concerned at the inability of the government to deal with criminal threats and the impact a major scandal could have on the country, its banking system and reputation (just look at what happened in neighbouring Latvia, after a number of money laundering schemes came to light).

United States

Registration

My favorite entities in the United States are the Wyoming LLC and New Mexico LLC. The information shared here will be based on those two. The process to register them is very straightforward as it can be completed remotely, there is no need to present any ID or to apply for e-Residency. The total registration cost will vary depending on the services you need but is comparable to that of Estonia (200-500 EUR). Usually, it takes no more than a week to complete the process (including the EIN, the tax ID issued to US businesses).

Compliance

LLCs treated as disregarded entities (typically, LLCs with one owner) do not have to file any returns in the US, provided they have no US ECI (income from work performed in the US). An information return (5472) must be filed on an annual basis but its scope is fairly narrow and filing it does not create any US tax liability. LLCs treated as partnerships (typically, LLCs with multiple owners) must file a partnership return in the US but the return is only required to report US ECI (income from work performed in the US). No information return (5472) has to be filed by LLCs treated as partnerships. Salaries paid to non-residents are not liable to tax in the US and do not have to be reported. There is no VAT regime in the US.

Banking

There are a number of banks based in the US that accept remote applications from non-resident owned LLCs. Most offer debit cards, have low fees and some offer credit cards. It is also possible to remotely open accounts with a number of EMI, including Wise. The larger US banks (Chase, Citi, Bank of America, Wells Fargo etc) all accept non-resident owned LLCs but they also all require an in-person visit.

Taxation

US LLCs are fairly unique, as far as taxation is concerned, in that they can elect to be treated differently depending on their individual circumstances. In most cases, an LLC with one owner will elect to be treated as a disregarded entity while an LLC with multiple owners will elect to be treated as a partnership. Because those are both deemed transparent from a tax perspective, the individual tax circumstances of the owner(s) will instead be used to determine tax liability and this means that if the owner(s) is(are) non-resident(s), and no work is performed in the US, no US tax liability will be created (even if the LLC has US-based clients). If the owner(s) resides in a tax haven / country(ies) that does not tax the types of income generated via the LLC, the LLC can in practice be run entirely tax-free. This is obviously a major advantage over Estonia.

Reputation

Reputation is usually a non-issue for US-registered companies.

Future trends

The US economy has been performing very well in recent years, growing faster than most other developed economies. It remains the largest economy in the world, larger even than the entire European economy combined (2022). Companies registered in the US will always benefit from the enormous size of its domestic market as well as the availability of sophisticated business services.

Comparison

The amount of time it takes to register a company in Estonia and the US is fairly similar. With that said, for Estonia that is only true if you are already an e-Resident. For the record, it is possible to register without e-Residency but the process is more complicated, costly and it makes remote management nearly impossible.

Cost-wise, both options are similar although ongoing compliance in the US is likely to be cheaper for most businesses.

In terms of what you can do remotely, the US is a clear winner. It is the only one of the two that allows true remote registration with remote banking. Plus, the number of services (such as payment processing) available in the US is significantly higher than in Estonia.

Speaking of banking, both countries have excellent banks. Fees are low and customer service tends to be very good. With that said, the US has an edge here thanks to its very competitive credit products and investment tools / brokers. It also allows for native USD banking. Considering that the USD is used for over 80% of all cross-border transactions worldwide, this is a major plus especially if your business is not EU-focused.

As for taxation, both countries have excellent potential for tax optimisation. The US has an edge, however, due to the flexible treatment of its LLCs.

Final words

At the end of the day, both countries are excellent business jurisdictions. There is no “wrong” choice here. It is undeniable, however, that US has an edge over Estonia and will be a better option for most businesses.

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