Spanish Tax Residency & Estonian e-Residency: How does that work?

As an e-resident and Envoy to the Estonian e-Residency program operating an Estonian company, while being a Spanish resident (and tax resident), I get asked a lot of questions. Questions like:

● How do you do that?

● Is it even legal?

● Are you considered a digital nomad?

● What about the autónomo payment?

A lot of these questions stem from some fundamental misunderstandings and confusion over terms like residency and tax residency, tax and social security, self-employment, and trading (operating) as a company. So, I am very happy to set the record straight and bust a few myths along the way.

First of all, Estonian e-Residency. This is a pioneering program that enables me to operate my business from Estonia. Thanks to their use of digital ID, I was able to set this business up long before I first set foot in this tiny Baltic country, nearly 4,000 km away from home.

I did this in 2018, because I needed a limited company, fast!

At the time, I was trading as a freelancer (autónoma) in Spain, having gladly shuttered my weighty and expensive Spanish limited company a year before. Then suddenly I was confronted with a lucrative short-term contract for an overseas client, who could only subcontract to another business, not a freelancer.

Record-breaking business formation time

They had no idea what that meant in Spain! The administration, the notary fees, the share capital, submitting business names for approval, and above all - the time it would all take, most likely many months. Not to mention the costs, which would sink most of my profit from the job. I could feel this project slipping away from me before it had started.

I thought about forming a UK limited company for a while, being a UK citizen. But back then the UK’s relationship with the EU had just been voted into chaos due to Brexit, with its future status very much unknown. It did not seem like a great solution.

Then I remembered hearing about the Estonian e-Residency program, and long story short - I applied online, received my ID within 4 weeks, and set up my Estonian business the day after. Invoice raised, job done! The longest part of the process was applying for and obtaining the digital ID, which also involved a trip to the Estonian Embassy in Madrid (there is a pop-up option in Barcelona too, and you can see a full list of pickup points here. The record for business formation speed in Estonia is now measured in minutes.

Why operate an Estonian e-Resident business?

That was 5 years ago, and I am no longer working with my client who needed that business invoice. But I still have my Estonian company. Nowadays, I also have clients in Estonia and more interest there, but at the time I did not. I simply found I preferred operating through a limited company, rather than as a sole trader, for lots of reasons.

The advantages for me included the ease of collaboration, scaling up and down, and working with different people. It helped with income smoothing, through the freelance ‘feast and famine.’ As I worked with a number of very early startups in emergent fields, the limited liability structure made me more secure about the relationship with them, at a distance from any regulatory challenges they faced. I dare say that on more than one occasion, the heft of a legal enterprise may have helped me actually get paid at all.

Furthermore, the Estonian fiscal and cultural approach to business supported me to innovate, experiment, and take some calculated risks while I figured out what my business consulting model would look like. Instead of forcing me into industry codes, questioning every expense, and coming after the first cent I made, Estonia’s unique policy of zero corporation tax on reinvested profits gave me room to breathe.

But why not a Spanish-limited company? And wouldn’t Spain insist on that anyway?

Overseas Companies: Compliance and risk in Spain

My situation was a little unusual, as a journalist and content creator, I had no clients in Spain. I live here and pay my taxes here (and yes, my autónomo fee as well!), but my business has little footprint in Spain itself. It’s all online, and I travel to where my clients are located, for events and consultations.

I simply use the Estonian company to smooth my administration and ensure all my income is invoiced out and fully taxed in Spain.

As my accountant (and fellow Estonian e-Resident) Louis Williams from Entre Trámites explained, it’s all about substance.

If my business built up profit in Estonia, then the Spanish tax authorities could legitimately make a case that Spanish corporation tax was owed - because I live here. I am not a digital nomad, I am a tax resident here, where I own a home and have put my girls through school, and so on. It could therefore be argued that my business has a permanent establishment in Spain.

If I wanted to strengthen the case against this, I could hire staff in Estonia, or invest in property or business there. I could bring in non-Spain resident investors or shareholders, or simply spend more time overseas.

For now, I avoid making a profit in Estonia. I simply enjoy the frictionless admin of business administration through the Estonian digital system, which has many advantages:

The combined monthly administration costs of operating as an autónoma here in Spain AND operating my Estonian limited company, are less than the costs of operating a Spanish Sociedad Limitada (S.L.)

That’s even before you count the time I have spent in the past, trying to get a viable factura (invoice) out of a travel company, or arguing with a gestor about amortizing the cost of a gadget I will replace in less than 2 years, or whether my journalism really demands this or that periodical subscription… Never mind the business-related costs I ended up absorbing in the past out of after-tax income, having learned that trying to claim for it would be more hassle than it could possibly be worth.

Because Estonia is only interested in my profits and dividends rather than my income, I simply never have to get into the quibbling over every expense receipt I want to file. Their tax office accepts that a flight ticket in my name, whose dates tie up with a conference where I am speaking, is a legitimate business expense.

Is an Estonian e-Resident business for Spanish tax residents?

So for me, this approach makes sense. What about you?

If you operate a business in Spain with local clients, it probably won’t. Nor will it offer you any advantages if you are happy and successfully operating as a freelancer (autónomo) here in Spain. To be absolutely clear: I declare my income in Spain every year and every quarter just like everyone else, and pay my Seguridad Social as well - which, for a family of 4, represents very good value to me.

Estonian e-Residency is in no way a vehicle for tax evasion, and it does not impact on your personal tax residency. Only your BUSINESS becomes a tax resident in Estonia, not you.

An Estonian e-resident company is a possibility to consider if you want to create a BUSINESS, while living in Spain, or anywhere else, but operating flexibly and internationally, with minimal hassle and admin overhead. If you want the upsides of limited liability and a separate legal entity, without the expense and grief of forming, operating, (and one day liquidating), a Sociedad Limitada.

Or, if you want to form a partnership or grow your enterprise outside of Spain, with non-Spanish collaborators - operating everything online, with the ease and immediacy of secure digital signatures. (While the Spanish FNMT does indeed issue digital signatures now, the Estonian system is simply light years ahead, in terms of functionality and efficiency.)

The possibilities are exciting because we live in a world where we can enjoy the Mediterranean climate and lifestyle, contract with clients anywhere in the world, and operate it all through the transparent and accessible Estonian digital system. And it’s not surprising that Spain continues to be the fastest growing segment of new e-Residents of Estonia, keen to take advantage of all the flexibility this offers.

If you’d like to join them and take your enterprise from Spain to the world via Estonia, then book a call with GroüHub today. We partner with Entre Trámites and other professional experts, to help you launch your enterprise in a compliant, efficient, and growth-oriented way. We’re a Spanish-speaking partnership that will help you achieve your business goals and scale from Spain to the whole world.

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We offer you to book a personalized advisory call with our expert, who will listen, understand, explain and clarify your questions about e-Residency and doing business in Estonia.

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