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Estonians created the first state-initiated virtual entrepreneurship program, E-residency. Finnish researcher Matti Ylönen reveals the lessons from it.
As it gets easier to move around, country borders matter less. We can work in one country but live in another. We can run entire businesses from our laptops. This suits Estonians, whose government offers most of its services online.
Around a decade ago, many of these services were made available to virtually anyone, anywhere in the world. This governmental start-up-like initiative was dubbed e-residency, which was soon launched as part of a country-branding initiative.
Anyone could apply for an Estonian identification card and, once they had passed all the checks, use it to start companies, submit financial reports and taxes, and use digital signatures – all remotely. The idea was to do something new, make a name for Estonia, and boost its economy.
Governmental officials tasked to handle Estonia’s small population were requested to monitor a rapidly growing global pool of entrepreneurs. Every company and person had to be checked and evaluated, even if they came from very different systems and cultures with various languages.
The e-residency program is managed by the government agency Enterprise Estonia; however, background checks are conducted by the Police and Border Guard in cooperation with the tax authority.
Recently, more countries and regions are opening their public services to foreign residents; for example, the US states of Wyoming and Delaware are following in Estonia’s footsteps. Lithuania, Portugal, and Azerbaijan have also established online incorporation systems with varying features.
The genie is out of the bottle
Over 100,000 people have signed up and become Estonia’s e-residents within a decade. Around every fourth person has started a company in Estonia. On those terms, one could call it a successful project. At the same time, many problems have surfaced.
“There are, for example, small hustlers who want to exploit the system,” said Matti Ylönen, who works as a Lecturer in World Politics at the University of Helsinki. Between 2020 and 2022, he spent two years researching e-residency as a Marie Curie postdoctoral fellow at the Ragnar Nurkse Department of Innovation and Governance at Tallinn University of Technology. In addition to other research, he conducted 30 semi-structured interviews with civil servants, entrepreneurs, and service providers familiar with the Estonian e-residency program. He recently published a peer-reviewed article in Transnational Corporations Journal based on that research with his colleagues Wolfgang Drechsler and Veiko Lember.
“Bigger players constantly scope and monitor weak points in the global system to launder money,” Ylönen added. “Many actors seek entry points to the global financial system through which they can escape the attention of the national tax authorities.”
The e-residency system makes it difficult to weed out malicious actors because of limitations in the availability of data and the resources needed for efficient supervision. In early 2021, only 4 per cent of the companies created by e-residents declared they had employees. Only about 15 per cent had paid taxes to Estonia. It can be difficult for the tax authority to verify if they paid taxes in another jurisdiction or anywhere. The officials dealing with e-residency permits also don’t have any access to international criminal records.
Another grey area relates to cryptocurrencies. According to Estonia’s Financial Intelligence Unit, more than half of global cryptocurrency service providers were registered in Estonia at the highest peak of the cryptocurrency boom. The Estonian Financial Intelligence Unit has reported that between 2017–2019, some 1300 permits were issued for cryptocurrency companies in Estonia. Since then, stricter rules have been imposed for cryptocurrency licenses, and most of these firms have left the country.
“Keeping these companies in check can be very difficult,” Ylönen said.
Even though not all the risks could have been foreseen ten years ago, like the emergence of the cryptocurrency sector, Ylönen believes that the risk assessments could have been more thorough. He also believes that international organisations should step up and actively keep new emerging digital solutions in check. “We have been experiencing three decades of global governance, and I think very little attention has been paid to the administrative capacities,” Ylönen pointed out.
Ylönen’s other research has shown a strong focus on tax havens. “Even though Estonia is not one of them, the country does have one thing in common with tax havens – a sudden influx of companies from all over the world,” he told Research in Estonia.
Estonia has signed several international treaties and takes its obligation to follow its rules seriously. All the e-residents must pass a thorough check to ensure their intentions are not malicious. Naturally, with such a sudden influx, there are “administrative cracks,” as Ylönen calls them. Many rules and practices have already been tightened, but there is room for improvement. International organisations like OECD should also pay more attention to administrative challenges created by non-resident entrepreneurs in their various national assessments, Ylönen argues.
E-residency is the best-known virtual program for entrepreneurs in the world. Just as it was intended, it has put Estonia on the map. Now it’s time to ensure it doesn’t become a black spot on that map.
Written by: Marian Männi. This article was funded by the European Regional Development Fund through Estonian Research Council.
