Estonia’s e-Residency Is Awesome And Sucks, Too

May 4, 2024

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17 min read

If you’ve read my recent rant about how painful it is to found a company in Germany, you probably realized that I was quite annoyed about bureaucracy in Germany at the time – what you didn’t know, however, was that I was also looking at founding a company in Estonia via its e-Residency, or moving my current one there.

Estonia? What? Yeah.. okay, let’s take one step back.

Estonia has a program called “e-Residency”. While other people on the internet go into huge detail into what it is and what you can do with it, I’ll just condense it down for you and say the TLDR is that it’s a chip card with a card reader for your USB port, coupled to your identity, and it allows you to authenticate yourself online (via a browser extension) to use Estonian government services. The most common use case is to found a company in Estonia. This probably goes without saying, but one huge benefit is that you can do everything online, very much in contrast to the German process, where you e.g. have to show up in person so that a Notary Public reads out your incorporation documents to you.

Now – why would any human want to found a company in Estonia, you ask? Simple: It’s very digital, and it’s very founder-friendly. If you think those things don’t sound like much, let me tell you, it easily makes up the 99% of pain you experience as a founder, especially in Germany. So, if the “founder’s UX” is good, like Estonia offers it to be, that’s a really good proposition.

Except that’s it’s not.

Why?

I’ll leave you with this cliffhanger for a second and tell you what’s actually good about Estonia’s e-Residency:

Everything is online. You just need your fancy e-Residency chip card and a card reader. You can run your business entirely from your browser. Wow.
0% profit tax. Your company only gets taxed when you pay out dividends – those get taxed at 22% (raised from 20% in 2025). If you “leave” money in the company however, it doesn’t get taxed. This is huge for startups which want to grow (which covers, like, 100% of startups at the beginning).
Pretty cool ecosystem. There’s a small bunch of companies which have specialized on serving e-Residents for e.g. bookkeeping and tax advice, everything at reasonable prices, fairly automated and, of course, digital.
If you’ve ever tried to find a tax advisor and bookkeeper in Germany, you know that this is worth a lot.

So all of this is great. But.. now about the drawbacks. You see, it’s essentially in the fine print which people tend to not be aware of. The main problem is that of permanent establishment. What the hell?

Let’s look at an example: You are me. This is easy to illustrate because I know myself pretty well, at least that’s what I tell myself under the shower:

You’re a founder who lives mostly in Germany and is therefore taxed in Germany. You found an Estonian company via your e-Residency. Your company does digital stuff, like consulting and selling software.

The Estonia e-Residency Permanent Establishment Situation, And Hell

Now here’s the problem: Because you, as the CEO, are mostly in Germany, your company actually “operates” in Germany, and is therefore taxed like a German company, too (the fancy term is “permanent establishment” in the double taxation agreement).

To say this is hell is probably an understatement. Because now your taxation likely looks like this:

Do your Estonian taxes. Probably quite easy, because it’s digital and only dividends are taxed anyway. Still, you need to do your bookkeeping etc.
Do your German taxes in addition to that. This is likely hell, because you have to probably do stuff like estimate how much of your business activity was in Germany (all? some?), possibly do your bookkeeping again based on German requirements, and then pay German tax on top.

One of the biggest problems on top is probably that you need to hire a tax advisor who knows international tax law and has experience in Estonian and German tax. The main problem with that is that finding pragmatic tax advisors is already a huge challenge, and you’re now narrowing it down to a tiny subset of tax advisors on the planet, so the challenge just became even huger. Also, for whatever reason, doing “international tax stuff” always seems to be a blanket reason for tax advisors to charge huge hourly rates, which makes no rational sense to me.

So.. hell.

Solving The Permanent Establishment Problem

What are possible solutions to the permanent establishment problem around Estonia’s e-residency? I’ve done a fair bit of research, and I’ve found three viable solutions. Let me preface that with my opinion that all of them probably work, but none of them are great.

I’ve also updated this article with some suggested solutions by other people and the reasons why those don’t work (further below). But let’s talk about the solutions which work first:

Solution 1: Don’t Live In Any Country, Tax-Wise

This is the “digital nomad scenario”: You’re never spending e.g. more than 180 days in any country, and therefore you aren’t taxed in any country any more (greatly simplified, do your own research, too!).

By the way, this doesn’t work for US citizens. More on that below.

Assuming you’re not a US citizen and a digital nomad: You’re free to found your company in any country, and Estonia is a pretty good choice because you can do everything digitally and the taxation is pretty good.

You avoid the permanent establishment problem because you don’t live in any country.

Technically, you could choose countries with even better taxation, but at the (potentially huge) cost of shadiness. Dubai and Singapore come to mind: In Dubai, laws might change and you still need middlemen to set up stuff for you, and in Singapore you have to hire a Singaporean managing director, because companies always need a Singaporean managing director. So you need to pay a company which provides a managing director on paper who also “manages” like 500 other companies.. shady.

Estonia is cool because it’s not shady: You own 100% of your company, and you’re the only managing director.

Solution 2: Move To a Country With Tax.. Flexibility

If you think that moving countries every <180 days sounds stressful, I agree. Another solution could be a country with tax “flexibility” which simply doesn’t care much about your permanent establishment situation.

Like Thailand before 2024 (it changed now): Any “foreign” income, including income from your Estonian e-Residency company, would not be subject to Thai tax, as long as you don’t move the funds to Thailand within one year. If you think this sounds very vague, probably every digital nomad and their Thai dog will agree with you. So the procedure was to just leave your money in an overseas bank account and set yourself a reminder to move it to your Thai bank account in one year’s time. Or, you know, just don’t move it at all and spend it with your overseas credit card in Thailand every day.

Vague.

So here, you technically have a permanent establishment in the country you live in, but it’s just that that country doesn’t tax your company. This would enable you to run an Estonian e-Residency company, but solely due to the fact that your current country doesn’t check on you.

To be clear: I’m not ranting about Thailand here (Thailand is actually pretty cool) – I’m just pointing out that countries exist with weird tax schemes which don’t cover foreign income. If you now think this is only limited to developing countries, then.. take a look at the non-dom status in Great Britain.

Then again, people say that, since Brexit, Great Britain might be reverting back to a developing country. Anyway! Onwards to solution 3.

Solution 3: Permanent Establishment In Estonia

The last solution would be to actually set up a permanent establishment in Estonia. Depending on how you do it, the implementation of this ranges from “shady and risky” to “extremely easy”.

Let’s look at the extremely easy solution first:

Move to Estonia.

That’s it. Onwards to the shady and risky solution:

Set up what I call a “weird permanent establishment” in Estonia while you continue to live in your own country. Depending on what you read online, it boils down to 1) rending an office which consists of more than a letterbox, 2) actually hiring an Estonian person to sit in said office (hence the requirement for more than a letterbox, as you can’t sit in a letterbox) and 3) some proof that you also often sit in said office and make serious business decisions as its managing director.

This is also vague, because it leaves many questions unanswered: Hire an Estonian managing director or a normal employee? How big must the office be?

The three biggest problems Estonia e-Residency problems for me are:

What if your company grows, and it doesn’t grow in Estonia? Say, you hire five more people in Germany, while only one person continues to sit in your non-letterbox office in Estonia? Will this “tilt the scales” towards you suddenly having permanent establishment in Germany?
If you hire other people in other countries, you’ll likely have to hire them through a so-called “Employer of Record” (EoR) which easily charges 500€ / month / employee for that service (crazy). This adds up and cuts into your “tax savings” you were expecting due to Estonia’s better taxation system.
Or.. if you hire, say, >10 people in Germany, you might be better off founding an additional local German company for that, too, and now you’re stuck with a German company again!
There’s always the risk that your local financial authority will disagree with your Estonian non-letterbox company resembling a permanent establishment. You might win this argument, but you might also not. It’ll cost you time and legal fees for, yep, you guessed it, the international tax advisors.

The Real Solution To The Estonia e-Residency Permanent Establishment Situation

Here’s a very simple flowchart (in text) which boils it down for you:

You want to permanently live in one country and that country cares about permanent establishment / foreign income, e.g. Germany: Bite the bullet and found your company in your own country.
You live in a country which doesn’t care about permanent establishment / foreign income or are a digital nomad: Consider an Estonian company.

That’s it.

And maybe one more point: If you’re as deep into this sort of research as I am right now, both of us should probably actually get back to work and actually work on our companies and products and not research highly hypothetical scenarios of how to optimize this sort of stuff.

“Solutions” For The Estonia e-Residency Permanent Establishment Situation Which Actually Don’t Work

I originally published this article in 2024. Now it’s 2025, and in the meantime, I’ve come across many proposed “solution” to the permanent establishment situation which I haven’t covered so far. The problem with these solutions is that they are illegal – which doesn’t necessarily mean that they don’t work, depending on your risk tolerance for tax fraud (nervous chuckle).

Anyway, let’s get into those proposals and why they don’t work:

Broken Solution 1: Invoicing Your Estonian Company As a Freelancer

This one sounds interesting and even reasonably simple. Here’s the setup:

You’re living in a country which cares about foreign-controlled companies and taxes etc., e.g. Germany.
You set up an Estonian company which is your operational business, i.e. sends invoices to your clients, pays expenses, etc.
You set yourself up as a self-employed person / freelancer in your own country (e.g. Germany) and send invoices to your Estonian company, thereby moving money out of the company.

This solution might look elegant on the surface: You get all the digitalisation and simplicity benefits of having an Estonian company while, on the surface, not committing tax fraud because you’re properly invoicing your Estonian company as a freelancer and then paying German income tax on your freelance income.

So far, so good. But here are the problems with this setup:

You still have the permanent establishment problem, i.e. if the German tax authorities notice that your Estonian company essentially has no substance in Estonia and is mainly run by you, you’d be required to do the additional German bookkeeping and taxes for your Estonian company, too. This would suck tremendously.
As a freelancer, you run the risk of not being classified as a freelancer (“scheinselbstständig”) by the German tax authorities, because you’re only working for one company (your Estonian company). This would mean that you’d have to retroactively pay social security contributions on top of your freelance income.

Again, depending on your risk tolerance for tax fraud, an interesting question might be how high the probabilities for each of those are. I don’t have any data on tax authorities looking into the permanent establishment situation. That probability might below, as I haven’t found any Estonia e-Residency founders online which mentioned this. But the German authorities do check a lot on the “not being classified as a freelancer” thing, so that would be tricky.

One interesting thought here would be whether you live in a country which is more open towards freelancers working only for one company (= your Estonian one) and also how likely that companies looks into the permanent establishment stuff. One data point below as provided by a commenter from Spain who noted that they’ve heard from an Estonian e-residency provider that the Spanish authorities tend to not check on these sort of things, so the setup of being a freelancer plus having an Estonian company might work in Spain. I reached out to that company and they unfortunately couldn’t provide any details.

Let’s move on and look into the next broken solution which aims to circumvent the drawback of the freelancer setup not paying social security:

Broken Solution 2: Your Estonian Company Pays a Proper Salary

Here’s the setup:

You’re living in a country which cares about foreign-controlled companies and taxes etc., e.g. Germany.
You set up an Estonian company which is your operational business, i.e. sends invoices to your clients, pays expenses, etc.
Your Estonian company pays you a proper salary in Germany. For that, it registers with the German authorities, pays income taxes and (potentially) social security, etc.

This is an interesting setup, because it looks very compliant on the surface. However, the problem here is also that of permanent establishment. Sure, your Estonian company is properly registered in German (“Betriebsstätte”) and pays the proper deductions of your salary. But, on top of that, having a permanent establishment in Germany, it would need to do the German bookkeeping and pay German corporate taxes, too! So this won’t work.

Again, the big question here would be “what’s the probability of the financial authorities checking this?”, and I don’t know. But it certainly would make it hard to sleep at night.

Broken Solution 3: Just Pay Out Dividends At 22% Tax Rate

One reddit user suggested the genius idea of simply paying our dividends from your Estonian company, taxed at 22%, instead of paying yourself a German salary (or via freelance invoicing) which would subject you to German income tax which tops out at 42-45%. Here’s the difference between those two scenarios:

Invoice your Estonian company as freelancer or pay out a salary in Germany: Progressive tax rate, tops out at 42% – 45%.
Pay out dividends from your Estonian company: Flat tax of 22%.

The reddit user was like “dude, I just pay myself out lots of dividends and safe taxes!”. However, this is clearly tax fraud. Why? Because the Estonian 22% “dividend tax” is actually a delayed corporate tax, and not a capital gains tax. So the proper taxation of dividends of the Estonian company would be 22% Estonian tax and then another 26% German capital gains tax on what remains afterwards.

Contrast this with owning a German company (UG / GmbH) whose yearly profits are taxed at 30% – the tax benefits suddenly aren’t very significant as you’d pay 30% + 26% to get money out of the German company vs. 22% + 26% in the Estonian one.

So yeah, this also doesn’t work.

Anyway, those were the most commonly proposed “solutions”. Now, back to topic: Does the Estonian e-Residency suck? Yes and no. Let’s look at it again.

Conclusion: Estonia’s e-Residency Is Awesome And Sucks

It’s awesome because its execution is near-perfect: Getting e-Residency is straightforward, and all the online services I’ve seen so far are amazing and simple. The actual process of founding a company in Estonia is digital and very impressive.

It sucks because Estonia can’t change the international tax system. Founding a company in Estonia is essentially non-viable for people who reside in countries which care about permanent establishment and/or foreign income.

This actually prohibits a huge number of e-Residents from founding an Estonian company. Further, I think that most e-Residents are not even aware of this.

It’s not Estonia’s fault though, because, well, they can’t change the way the international tax system works – like, they can’t change the way e.g. Germany taxes German tax residents running an Estonian company. Or, worse yet, US citizens anywhere in the world, because the US taxes people based on citizenship, not residency (so solutions 1-3 literally don’t work for US citizens.. yeah). Oh wait, there’s another country which does that.. Eritrea. Yes, seriously.

What would be a better solution? Maybe something like a “EU-wide system of choosing a company”: Nowadays, a German business (like ours) can choose a bank in Lithuania or Belgium for its corporate bank account, and thanks to SEPA and IBANs, none of this is a problem. This is really cool!

What if, in the future, a German business could choose any country for its corporate “founding”, like Estonia, regardless of where its employees live? That would really be awesome.

If you think this is outlandish, I disagree. Look at the US, where Delaware is now the de facto place to found a company.

It would line up well with the whole idea of the EU which was.. hm, I don’t know, but enabling this sort of stuff. And there’d suddenly be competition among EU countries on who provides the best business services.

I’d look forward to that competition and Estonia becoming the Delaware of the EU. I’d move my business there in a heartbeat.

Anyway. Hope this was useful! If I missed anything, write a comment below.

And as always, the usual disclaimer applies: I’m a doctor, not a tax advisor. So.. unfortunately you’ll still have to do your own research and/or hire one of those rare and expensive international tax advisors if you’re considering moving forward with your Estonian company.

21 responses

P.L.

Jul 2, 2024

Thanks, this is helpful

Reply
Rodney

Aug 4, 2024

Spot on. Have used it to build an international company and operating for the last 5 year. But it has become a challenge and is far from sunshine and roses. Internarional laws continue to change. What might work now. Won’t necessarily work later. Another big problem , and probably the biggest problem is banking ,trading and currency, specially if you have shareholders, staff and clients all over the world. Currently the bank that not too long ago had a name change was a great solution. But the same bank put accounts on hold, lock them for no reason. Suddenly you are unable to trade, debit orders gets rejected. Salaries can’t be paid. Your whole business falls apart. Back to E-residency , getting help in English can be a pain in the backside. Finding a trustworthy company when there are problems to solve is another challenge. The amount of spam also increased. Getting someone reliable to manage or help you with the tax and booking is extremely frustrating.

In the end the best solution is to have a backup plan. Don’t put all your eggs in one basket. Have a local business bank account available if necessary. Have more than one source of income. But yes , not the solution for a company who is completely digital and “online”.

But as the world is waging a digital war, one country cancelling another, I don’t know how we will ever have the perfect solution.

/rant over

Reply
1. Oliver Eidel
  
  Aug 5, 2024
  
  Hey Rodney,
  
  awesome comment, and I 100% agree! I think we might be talking about the same bank, by the way – a while ago our Wise business account got more or less arbitrarily locked, and we were super lucky that this happened during two weeks in which we didn’t have to run payroll. Since then, we’ve moved to another business bank for our main account – I suppose this mirrors your recommendation of not putting all your eggs in one basket. People like to rant about old-school business banks in Germany and their crappy software, but the benefit of those is that they have customer service and don’t randomly lock you out.
  
  Your points about the drawbacks of e-Residency are also interesting.
  
  But.. yeah, the question remains: What would be a better solution? I don’t know.
  
  Reply
Urban Lens

Aug 12, 2024

This was a very balanced and informative read on Estonia’s e-Residency program. I appreciate how you highlighted both the benefits and the challenges. The ease of setting up a business and accessing EU markets is definitely a huge advantage, but it’s also important to be aware of the limitations, especially regarding banking and taxes. Your personal experiences add a lot of value and help set realistic expectations for those considering the program. Thanks for sharing such a candid review—I found it really helpful!

Reply
Hasan Saeed

Sep 8, 2024

Very good information and great participation from all of you.
I am about to form a company in Estonia but puzzled just because of these double taxation. Involving tax consultants for startup is always challenging but International tax rules are also very unpredictable

Reply
1. Oliver Eidel
  
  Sep 8, 2024
  
  For sure! Keep us posted (if you like) on your progress! 🙂
  
  Where are you located and how do you plan to solve the double taxation situation in your country?
  
  Reply
Nawaz

Sep 20, 2024

Hi Oliver thanks for information.
I am a filmmaker globetrotter that exited the german system recently. too much paperwork!

How do you feel about Paraguay residency / Wyoming LLC and Estonian E resident company . for someone who lives half in Mexico, half Greece with a romanian passport ? hahaha ))

What a world
Thanks

Reply
1. Oliver Eidel
  
  Sep 20, 2024
  
  Hey Nawaz! Interesting setup you have there 🙂
  The short answer is that I have no clue.
  
  Reply
Ben

Nov 11, 2024

What do you think of this potential 4th solution:

Found company in estonia, sign-up as freelancer in your country of residence such as Germany.
Invoice your estonian company as a freelancer.

Setting up as freelancer tends to be much easier, your individual work is taxed in your country of residence at the appropriate rate but you can still enjoy all the benefits for your actual startup.

Reply
1. Oliver Eidel
  
  Nov 12, 2024
  
  Hey Ben, thanks for your comment and ideas! 🙂
  While I think you have some great thoughts in there, I don’t think it would work – or, at least, it would be a huge legal grey area with all sorts of risks.
  
  Let’s see:
  
  1. If you start freelancing and only have one client, you run into the German problem of “Scheinselbstständigkeit”. In short, the risk is that your freelance work is classified as employment instead which means you’d have to pay the employer contributions retroactively, plus a huge bureaucratic hassle. You could, in theory, avoid this by having more than one client, i.e. you as a freelancer would need to invoice other companies, too. Still a huge grey area.
  
  2. This doesn’t solve the problem of permanent establishment, i.e. you Estonian company being at risk of being (additionally) taxed as a Germany. That’s because the financial authorities would see you working (for your Estonian company) primarily from Germany.
  
  3. My gut feeling is that there are additional risks here which I’m not aware of regarding the setup that you yourself are freelancing for a company which is owned 100% by you. This could be classified as a tax avoidance scheme – not only on the German side, but maybe even on the Estonian side. Not sure.
  
  All in all, the question here is also whether the setup as a whole still makes sense: You now have to deal with the Estonian bureaucracy with your company and additionally with the German bureaucracy as a freelancer. The sum of those parts might be more work than just founding a Germany company including the additional tax and overhead costs.
  
  Usual disclaimer: Not a lawyer and only my personal opinion 🙂
  
  Edit: Just noticed you’re not necessarily referring to Germany as your country to set up your freelancing in. Still, all of my points apply to other countries, too, with the “caveat” that other countries might be less strict about this or not follow up on these matters at all. I could e.g. imagine developing countries not really pursuing this. No clue.
  
  Reply
Sebastiaan Brouwer

Nov 14, 2024

Hi, Thanks for all the comments. I am about to start an OÜ and reside in Portugal as an NHR 2025. that might be an option (?)

Reply
1. Oliver Eidel
  
  Nov 15, 2024
  
  Hey Sebastiaan, that sounds super interesting! I know very little about the NHR scheme in Portugal – at the very least, this now seems to be the newer (second?) iteration of it, with some of the rules still to be defined (?). From what I could gather though, it seems they want to exempt foreign-sourced dividends from taxation, so in theory, it sounds viable.
  
  Essentially, this would sound like your Estonian company could pay out its profits as dividends to you, being a tax resident in Portugal. That being said, you would still pay the 22% (in 2025) corporate tax in Estonia upon paying out the dividends. So this somewhat opens up the question whether, if tax optimization is your goal, another country might be more beneficial; e.g. Singapore has a corporate tax rate of 17% (on profits though, not dividends), so you’d save 5 percentage points. That being said.. if optimizing for less headaches, more digitalization and having an EU entity, an Estonian company would sound like a better choice to me.
  
  Hah, I feel like I got a bit sidetracked into tax optimization here though! The actual topic you were likely referring to was about the whole permanent establishment stuff. I’m actually completely clueless about that. The questions to answer here would be:
  
  1) Does Portugal assume your Estonian company has a permanent establishment in Portugal if you’re living there and working for it?
  2) Would there be any tax / bureaucracy implications or is this exempt under the new NHR?
  3) If any of those are answered with “yes”, a side question might be whether it’s enforced in reality.
  
  As always.. not a tax advisor, I’m sharing my personal opinion while feeling like I’m banging rocks together here, haha..
  
  Reply
  1. John
    
    Dec 20, 2024
    
    well technically the NHR has it’s limitation which people are not aware of and the internet agencies overhyped nhr and hiding the truth, it’s anything but tax saving…I’ve yet to see anyone who had success with nhr…
    1- the tax benefit is up to a certain amount, i think for less than 100k then you get taxed normally(I only found it after i visited like 20 websites, most of them don’t want to mention this since they sell service).
    2- you still have to prove you are not doing the work in portugal which is very hard, read about permanent establishment and CFC rules
    3- it’s not possible to get NHR anymore, they are discontinuing it.
    4- like any tax law, if they find out what you are doing(trying to be smart a**), you will be charged with tax evasion. taxman wants his money…
    
    so it doesn’t work like that, and there a couple of reddits who had the same idea, you can also read about it there….
    
    Reply
Bob

Dec 17, 2024

I think you are overthinking the whole thing. First of all, tax authorities are busy enough prosecuting actors in their jurisdiction because they have all information available of them, like local businesses or employees that reside there. Prosecuting foreign companies requires more efforts, which for small economic actors (making less than 1M/y) is not enough incentive. I didn’t find anyone who makes less than a million per year who had issues with CFC laws and PE owning a company in Estonia. An I have read dozens of articles and experiences over the years and talked to lawyers.
Plus I talk from my own experience with a company in Estonia for 5+ years. The real chance that Tax authorities will knock at your door are very low unless you do unusual things that will trigger an investigation. As long as you paid your income/social taxes in your country relative to the income your have distributed from the company, it would be fine. There are no tax laws (yet) about undistributed profits, so keeping them in the company is okay and paying no taxes is completely legal according Estonia tax law. And your company is subject to Estonian tax laws always, unless a CFC procedure is triggered.
All the CFC and PE bullshit was designed to catch big companies, although they usually never catch them because the same legal experts that help them avoid it, are the ones who design the laws for the bureaucrats who eventually implement them (basically the big 4).
Yet you believe the government is competent and evil enough to prosecute tiny entrepreneurs trying to escape from the tax and bureaucracy burden imposed by the gov? Stay in your country and enjoy the experience every single day.

Reply
1. Oliver Eidel
  
  Dec 17, 2024
  
  Hey Bob,
  
  Appreciate your perspective! Sure, your point is a good one – there’s a possibility I’m overthinking this an over-estimating the real-world risk of the authorities pursuing a small business in this context.
  
  We don’t have a whole lot of real-world data here as 1) not many people found a company in Estonia while having their PE somewhere else, 2) a small fraction of those get prosecuted (how many?) and 3) an even smaller fraction of those will post about their experience publicly.
  
  But maybe the fact that we don’t hear about those cases might be evidence in itself that it is indeed not being checked a lot? That’s an interesting thought.
  
  So yeah. Your point may be a good one.
  
  I think it will vary wildly by country though. Curious: Where are you located?
  
  Reply
Leon

Jan 11, 2025

Hey Oliver, thanks for outlining your research and experiences into this topic, very helpful!

Reply
1. Oliver Eidel
  
  Jan 11, 2025
  
  Sure! Great to hear it was helpful for you! 🙂
  
  Reply
Egon

Jan 20, 2025

Hey Oliver,
How do you value us llc (delaver, wyoming, florida) as for german permanent resident founding a company? Specially in terms of taxes and banking (to accept online payments and use credit cards?

Reply
1. Oliver Eidel
  
  Jan 20, 2025
  
  Hey Egon, great question!
  
  Short answer: I don’t know, because I haven’t tried this myself and I haven’t researched it much (yet). Could be super interesting though.
  
  Long answer: I think you’d have to differentiate two aspects which you mentioned: 1) Access to banking and payment providers and 2) German taxes.
  
  Regarding access to banking and payment providers, I think a US LLC is probably really good – you get access to Stripe and all the others, and from what I’ve heard you can use Wise as your business account, so that’s cool. That being said, this is not a unique benefit of US LLCs – you get similar access to providers with an Estonian OÜ and even a German GmbH. So I don’t really see a benefit here actually. On Twitter I sometimes see people in India complaining about not having access to a payment provider like Stripe. If you’d be in that sort of situation, founding an LLC might be a game changer as you get access to literally all payment providers which is awesome. But, again, compared to an Estonian OÜ or German GmbH.. not so much.
  
  Regarding taxes, I think this becomes a much bigger point. US LLCs are, as far as I understand, taxed as “pass-through” entities. This means that your earnings are essentially taxed as German income at your personal German tax rate. Or, in other words, your taxation here would be very similar to simply operating as a sole proprietor (freelancer, more or less) registered in Germany. So no real tax benefit there. On the contrary: You probably have to figure out how to do the taxes or search for a tax advisor who has this specific expertise, i.e. being a German tax resident with a US LLC which is taxed in Germany.
  
  However that’s only one of two possible outcomes – the other possibility is that your LLC is considered a corporation in Germany (like a GmbH). So instead of doing the simple “freelancer-like” bookkeeping, you now have to do corporation (double-entry) bookkeeping like a GmbH. That would suck tremendously.
  
  So – I don’t know. A lot of uncertainty there. If I were a solo founder in Germany, I’d probably go for the sole proprietorship (Einzelunternehmen) instead. Some bureaucracy and bookkeeping, but less than a German GmbH, same taxes as US LCC (at least while living in Germany), and less risks (permanent establishment etc.) than an Estonian OÜ. As a side note, a sole proprietorship is probably also more favorable regarding exit tax if you’d ever consider leaving Germany in the future (vs. a GmbH).
  
  Anyway, this is just my research, not a tax advisor, and I myself have still much to learn about US LLCs. The concept in general does look cool as it’s easy to found them and the bookkeeping overhead on the US side is very low. But yeah.. the problems are on the German side, a lot of unknowns there.
  
  Hope it helps!
  
  Reply
Turo

Feb 16, 2025

Thanks for the writeup! What are your thoughts on the following: as a freelancer you have a German UG/GmbH. You cater to multiple clients mainly in Germany. You setup a Oü in Estonia and invoice you UG to drain the UG of money. You avoid the capital tax of 30%. You pay 22% tax in Estonia for dividends. Big corps do similar things all time time. They invoice satellite companies with licencing fees to drain them and avoid tax.

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1. Oliver Eidel
  
  Feb 16, 2025
  Hehe, interesting idea – I’ve been thinking about similar setups lately but haven’t arrived at any smart conclusion yet, haha..
  
  Regarding your idea: The main problem here would be that the 22% “dividend tax” of the Estonian OÜ is, in legal terms, actually a delayed corporate tax. This becomes relevant because then, when paying out your dividends from your Estonian OÜ as a German tax payer, you’d have to pay the 22% Estonian dividend tax (which is actually a corporate tax) and the ~26% German capital gains tax on top of that. So that would suck tremendously.
  
  Contrast this to the (unfortunately only virtual) scenario that the 22% Estonian dividend tax would actually be considered a capital gains tax – in that case, this would work out great because, I think, you wouldn’t have to pay the ~26% German capital gains tax on top, or only the difference – in any case, this would be much better. But this is not the case, sadly.
  
  So yeah – your scenario would work out to be 22% tax and then 26% tax which is 1 – (0.78 * 0.74) = ~42.3% tax in total, not super great.
  
  Contrast this with only running a German UG / GmbH which would be 30% corporate tax and then 26% tax, i.e. 1 – (0.70 * 0.74) = ~48.2% tax in total.
  
  So your scenario only results in a small tax optimization. A few additional drawbacks would be:
  
  You’ll be paying the running costs of two companies
  
  You still have to deal with running a German UG / GmbH, which generally is not a great experience
  
  There’s the (probably low) risk of the whole “permanent establishment” situation of the Estonian company in German – but if that blows up, it might be the disaster from hell as you’d now have to do German bookkeeping for 1) your German company and 2) your Estonian company (ugh)
  
  For your German UG / GmbH, in your annual accounting statement (Jahresabschluss), you’d likely have to mention the transactions with your Estonian company specifically as there’s a reporting requirement of “transactions by shareholders” (or so) – so this will likely draw increased scrutiny by the German financial authorities. Possible problems might be that 1) they see you’re obviously siphoning off profits and 2) this re-raises the permanent establishment question for the Estonian company
  
  All in all.. I feel like the drawbacks outweigh the potential benefits here. So what would be better? I don’t know, man, haha.. again, I don’t have a perfect solution to this (yet?), but just throwing a few more ideas out there:
  
  If you’re optimizing for taxes, you could look into founding a company in Ireland or Cyprus, both of which have low corporate tax rates. Founding companies there is probably harder than in Estonia, but the benefit here is that this might be a much better tax optimization as their corporate tax rate would be (much) lower than the 22% in Estonia. So you’d be left with e.g. 12.5% in Ireland and then 26% in Germany (capital gains). But you’d have the permanent establishment situation here, too, so you’d need to establish substance in those countries, ugh.
  
  If you’re optimizing for simplicity, you could consider founding an Estonian company, running your business through that, then registering as a freelancer in Germany and invoicing your Estonian company to “get the money out”. Not a tax optimization as you pay your personal income tax rate on this revenue, but you might reduce your bureaucracy burden a bit. That being said, you’d also have the permanent establishment risk here, and additionally the risk of “Scheinselbstständigkeit” because you, as a freelancer, are only “working for one company”. One variation of this could be to hire yourself via deel.com or a similar employer of record, but those are expensive (500€+ / month) and you’d have to pay into unemployment insurance and the German public pension system, both things you can avoid if you’re a freelancer or truly employed by your own company (e.g. a German UG). It’s complicated.
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