Estonian E-Residency Makes No Sense

The tiny country of Estonia is selling a new kind of residency… one it calls e-residency or e-citizenship. Here’s the bottom line on why e-residency in Estonia is a waste of time for Americans… and might get you into trouble with the IRS.

The Estonian e-residency program has been written up by the Wall Street Journal and The Guardian, and recommended by Simon Black and International Man. Simon went so far as to suggests it will change the “nation state” as we know it.

What a bunch of BS… here’s the real story.

Let’s start with the pitch: Sign-up for e-residency, turn over your information and biometrics, pay small fee (about $62), appear at one of their embassies and you get a biometric ID card.

What can you do with your Estonian e-residency card? Not a lot.

That card “allows” you to form a company in Estonia online. WIth corporation in hand they  might, just might, allow you to open a bank account in the country. Note that you’ll need a legitimate business purpose and travel to the bank in Estonia to open the account.

The ID card doesn’t make the process of opening an offshore bank account easier or provide any additional privacy. The bank will want all of the usual supporting documents, such as your US passport and reference letters. No, you can’t use the card as your ID to open the bank account and they’ll report your account under FATCA just like any offshore bank.

Sure, e-residency in Estonia sounds hip and cool, but it offers zero value. In fact, it might get you into trouble.

Now, you might be wondering what I’m on about. So what if people want to spend $62 for an online ID card? Most of the headlines cited above are from 2014. Why am I harping on it now?

Because the Estonian e-residency program might cause all kinds of confusion and IRS trouble for Americans.

First, e-residency isn’t a path to citizenship, a second passport, or even traditional residency. It’s only an online identification card… which doesn’t include your photo, so it can’t even be used as an ID or travel document in the normal world.

And here’s my real concern with this program:

I new client came into my office last week looking to prepare his U.S. taxes. Let’s call him Bob.

Bob spent about 240 days out of the U.S. in 2014, operated an online business through an offshore corporation and netted about $100,000.

Bob thought he qualified for the Foreign Earned Income Exclusion because 1) he was out of the US for most of the year and 2) he was an e-resident of Estonia.

Bob was wrong. In order to qualify as a resident of a foreign country under the FEIE you must be living in the country, have legal resident status, and generally “make that country your home.” You should be filing taxes there and it should be your base of operation… the place you return to after traveling.

Estonia’s e-residency program provides none of those things. Sure, you can call yourself a resident, but all you really have is a fancy online ID card.

Had he not been confused, Bob could’ve qualified for the FEIE without putting down roots or paying for a real residency permit. But he should have been out of the U.S. for 330 out of 365 days, not 240.

Had he not been confused by internet sites hyping Estonia’s e-residency program, and had he planned his offshore business structure properly, he could have saved big money in 2014 and again this year.

This confusion cost Bob about $36,000 in US taxes in 2014. He’ll probably pay through the nose again this year. He relied on the e-residency program, and his own research rather than a hiring a professional, and got burned.

Those of us who write about the offshore industry are always looking for the next big thing. What can we do to increase privacy and protect our assets? In the case of Estonian e-residency, I must call BS.

The bottom line is that Estonia e-residency offers little value to the American and is likely to do more harm than good.

You will find many articles on this site on how to legally minimize taxes and protect your assets abroad. If you’re new to this offshore thing, take a read through my Getting Started section.

Don’t be like Bob. Hire a firm experienced in U.S. tax planning to form your offshore structure and plan your offshore adventure.