Where you are a citizen, tax resident, where you do business, where you hold your assets and where you live, work and play can easily be in different jurisdictions and consequent legal and tax can be vastly different depending on various factors.
Possessing relevant knowledge and taking action in this regard can result in gaining more freedom – Freedom of mobility, excess taxes, obligations, duties and services we might otherwise not enjoy.
Let’s look deeper into achieving more freedom and how Estonia could be leveraged in this context.
Travelling as a lifestyle e.g. perpetual traveller
First of all, there is a certain type of person who does not wish to be a tax resident anywhere, so they are constantly on the move to avoid staying in a particular jurisdiction for a sufficient period not to be caught in the tax net of that jurisdiction, with the consequence that they are not taxed anywhere. An international tax-free lifestyle without any ties may sound attractive. This type of person is referred to as a “perpetual traveller”. There is no international law against this. A British Tax advisor quoted a few years ago, “there are around 2m British people who have a National Insurance number and a passport, but nothing else “.
For citizens and residents of an EU member state, the “perpetual traveller “lifestyle in the EU may be easier to achieve than for those from third countries due, firstly, to the fact that citizens of an EU member state benefit from what is known as the free movement of people within the single market of the EU, allowing them the right to live, work, and study anywhere within the EU. Secondly, there are no formal border checks between the Schengen states, many of which are EU member states, which means that it is difficult to tie a citizen of an EU member state to a particular jurisdiction for any period of time.
Potential challenges of a perpetual traveller
However, the “perpetual traveller “lifestyle is becoming increasingly complex and might not be suitable or practical for everyone, especially from the standpoint of maintaining individual non-tax residency in all jurisdictions while being actively involved in doing business.
It is a well-known fact that obtaining an account for banking is becoming increasingly difficult without proof of address. Many services can only be paid for directly from a bank account (such as electricity and internet), and there is an increasing need for a payment card to make purchases ranging from travel to even paying to use a public WC. The use of cash is becoming increasingly difficult, as the places that accept cash are decreasing or not even available. In the event that a place exists where cash can be used (such as a ticket office with a human being), the price difference between cash and internet payment can be very significant. A short-term solution may be using the address of a relative or a friend, who may be able to supply a letter confirming that the “perpetual traveller “lives with them, but this is not an ideal long-term solution as the “perpetual traveller “is very dependant on that friend or relative. A digital postbox service offered by corporate service providers is often a must-have to have a stable address for receiving correspondence.
2. Health insurance and pension entitlement.
Every human being will eventually fall ill, with the likelihood of such increasing with age. Whilst it may be possible for the “perpetual traveller “to purchase private health insurance, it is a well-known fact that private health insurance companies will do their best to wriggle out of paying up when it is needed most, using a clause from the nearly impossible to understand the small print of the policy or digging up a pre-condition from somewhere. Government schemes do not tend to have these exclusions, and it is better to be part of this type of system than a private one so that there are no unpleasant surprises when one needs health care the most. Similarly, it may be possible to contribute to a private pension plan, but these can be loaded with many problems. The contributions to a private pension plan will invariably need to be made from a bank or payment service provider account. The returns on pension plans may not be sufficient to rely upon in the future, and if there is a need to withdraw funds in an emergency, this may be difficult (akin to putting money in a deposit account where one is unable to access the capital) due to various restrictions that may be in place. Government pension schemes may not be the most generous, but they leave a safety net that the “perpetual traveller “will might otherwise not have. By establishing an Estonian company or employment, you can get access to health insurance coverage according to European standards.
3. The ability to own and drive a vehicle.
Registering the ownership of a vehicle commonly requires a permanent address in the same jurisdiction. Likewise, a driving licence and insurance are needed, and obtaining or maintaining one may be challenging without a permanent address. Again, whilst it may be possible to use the address of a relative or friend, this is not an ideal long-term solution as the “perpetual traveller” as it leaves you dependent. Additionally, a motor insurer is likely to be a private sector insurance and is likely to try and wriggle out of any liabilities when they are needed most. E-residency enables access to Estonian mobility services helping to tackle this problem.
There may well be additional problems arising out of the inability to produce sufficient documentation to prove the place of residency. In addition, obtaining an identity document is likely to be increasingly difficult without a fixed address. Consequently, accessing certain public and other services (such as rental equipment like a van) might be impossible. Finally, the “perpetual traveller “lifestyle may lead to an unsettled feeling, with resulting mental health adverse consequences.
The “perpetual traveller” may suffer additional problems due to the inability to prove a permanent residency. In addition, obtaining an identity document such as a passport or ID card is likely problematic, thus denying the ability to travel. Also, certain services (such as rental equipment like a van) could be rejected.
Finally, the “perpetual traveller “lifestyle may lead to an unsettled feeling, with resulting mental health adverse consequences.
How to make things work better as a perpetual traveller
Often the solution to the above problems is for the “perpetual traveller “to make a controlled landing somewhere by establishing legal residency but not necessarily tax residency at the same time. This applies especially when an individual decides to remain in a place under circumstances from which it can be assumed that his stay at this place is not only temporary – also known as a habitual abode. Estonia is an ideal jurisdiction for this. It is part of the EU, and the Schengen zone is situated on the Baltic Coast. Estonia is also a leading start-up hub and is regarded as one of the most tax-competitive jurisdictions and an administrative haven.
Legal residency and tax residency
Every country has a different way of defining who is a legal resident and a tax resident. Depending on the case, tax domicile can be distinct from tax residency and legal residency, so careful analysis and planning are recommended, especially for someone with a more nomadic lifestyle.
How e-Residency can help perpetual travellers
- E-residency is neither a legal nor tax residency but an opportunity for anyone to access Estonia’s government services without needing to obtain a residency permit or turning into an Estonian tax resident.
- E-resident entrepreneurs worldwide can start an EU-based company and manage their business from anywhere, entirely online.
- Establishing a company in Estonia can be a future gateway to facilitating obtaining a residency permit or visa.
Estonia as a place for residency
Residence and employment rights vary according to whether the applicant is an EU citizen. Whilst an EU citizen has the automatic right to live and work in Estonia (and obtain a residency permit), most third-country nationals fall under a quota, meaning only a limited number of residency permits are issued yearly. Visas, however, are not limited, so obtaining one might be a better choice for starters, for example, a long-term visa for employment in an Estonian company or a digital nomad visa for those who like to continue working for an employer registered abroad, or as a freelancer. Employment-based visas may also pave the way to the exemption of the quota for obtaining a residency permit in the future.
The timescale for the application for D-visa is 30 days from the commencement of proceedings, while for TRP, the procedures take two months.
Estonia has various residence programs suitable for investors in this economy which has become one of the most advanced and innovative countries in the world, making it a very competitive jurisdiction for residency by investment. Estonia has a population of around 1.3 million. In addition to Estonian, the national language, English and Russian, are widely spoken. It is a small and open economy that has adopted the Euro as its currency and enjoys highly developed transit services. Further benefits of the program include the right to live, work and study in Estonia, visa-free access to Schengen countries, and no minimum presence required for residence permit renewal in certain cases, topped off with an attractive tax system. The residency by investment can be obtained in one of four ways, with the decision-making process varying between two to six months, an outlay of between EUR 16,000 and EUR 1M being required, and the decision resting with the Estonian Police and Border Guard.
There are three possibilities for investors wishing to immigrate to Estonia by direct application for a Temporary Residence Permit (TRP), whereby the decision-making process generally takes two months:
1. By investing €65 000+ of capital in your Estonian company (the company’s equity capital, subordinated liability and registered fixed assets can be considered an investment). A business plan in Estonian or English is required to support the application. More than one applicant may invest in the same Estonian company (€65 000 each). In the case of a sole proprietor, the minimum investment is €16 000
2. As a major investor, by investing €1m+ in an Estonian company or investment fund that invests mostly in the Estonian economy. A business plan is not required.
3. As a start-up, this option requires a previous evaluation from the expert committee. A business plan is not required, but the business model should be technology-based, innovative and scalable.
Estonian tax residency as an individual
Establishing tax residency somewhere could be a wise choice.
Estonia has an attractive tax system to high net worth individuals, with a proportional (i.e. flat) tax rate of 20%, which applies to all items of income derived by a resident taxpayer. Dividends that have been subject to the reduced rate of 14% at the level of the distributing Estonian company will have a WHT of 7% levied. On top of that, there are various benefits available to tax residents, which together make Estonia a leading country in tax competitiveness.
- Individuals are commonly considered tax residents of Estonia if they have a permanent residence in Estonia and their stay in Estonia during any 12-month period exceeds 183 days.
- An individual who is a resident of Estonia is liable to tax on worldwide income. Non-residents are taxed on their Estonian-source income.
- Suppose the tie-breaker article in an applicable double tax treaty (DTT) allocates the residence of a dual-resident individual to a foreign country (most often if the home and family of the individual remain abroad during an assignment to Estonia). In that case, the individual will be taxed as a non-resident in Estonia regardless of the above-mentioned Estonian domestic rule.
- Estonia has 62 double tax treaties, and for Estonian tax residents, foreign personal income will generally not be double taxed unless the rate is lower than 20% in case the difference by which foreign income tax is lower than the income tax in Estonia must be paid. A double tax agreement effectively overrides the domestic law in both countries, the fact that could turn out to be beneficial in various cases. Having a registered residence in Estonia or staying more than 183 days in Estonia is generally enough for this purpose.
IBCCS TAX helps entrepreneurs achieve their desired lifestyle, manage and secure their assets and businesses across borders, expand into new markets, improve productivity and implement leading-edge tax mitigation strategies. Our team includes international tax experts based in Estonia, Georgia, Cyprus, and Armenia and our network of associates covers 75+ jurisdictions.
The author of this article is a British Citizen who spent around 15 years as a “perpetual traveller. Today he is based in Estonia, having obtained his TRP in 2017, which was converted to Permanent residency in 2022, without the need for the language exam and following the withdrawal agreement between the UK and the EU.