How can e-Residency help UK entrepreneurs in a no-deal Brexit?

The Republic of Estonia’s e-Residency programme can help UK businesses remain in the EU digitally, even during a no-deal Brexit.

e-Residency
Oct 16, 2019 · 22 min read
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There is speculation that the UK could leave the European Union through a ‘no-deal Brexit’.

Here at the Republic of Estonia’s e-Residency programme, we’re helping UK-based entrepreneurs prepare for this risk by providing as much clarity as possible about what to expect and how e-Residency can (and can’t) help in this situation.

That advice is now outlined for everyone in this article.

E-Residency is a status provided by Estonia to citizens of other countries living around the world. Along with that status, e-residents receive a digital ID card that enables them to establish and manage their own EU company entirely online from anywhere — including in the UK and even after a no-deal Brexit. You can learn more and apply at e-resident.gov.ee.

The Managing Director of e-Residency Ott Vatter will be answering questions about e-Residency and Brexit during a Zoom webinar and live Q&A session on ‘e-Residency : A Brexit bolthole for your business’ on 24 October at 1pm UK time / 3pm Estonian time. You can sign up here.

Until then, we’ve put together an overview of key information that is relevant below.

We can’t predict everything, but we’ve examined the expected impact of a no-deal Brexit on UK-based entrepreneurs in the following areas:

  • Legal recognition
  • Taxation
  • Cross-border trade in goods and services
  • Data protection
  • Contracts
  • Intellectual property.

We’ve then broken down the differences between the following two options for UK-based entrepreneurs:

  • Managing a UK company in the UK after a no-deal Brexit
  • Managing an EU company in the UK through e-Residency after a no-deal Brexit

Managing a UK company as a UK-based entrepreneur is, of course, the normal way to conduct business and still likely the most convenient if you run a fixed-location business with the majority of your customers in the UK. However, e-Residency provides an additional option for UK-based entrepreneurs in which you can run an EU company (registered in Estonia) online in the UK (or anywhere else you happen to be). This option is particularly well suited to location-independent entrepreneurs, such as freelancers or those running online businesses, who can benefit not just from remaining in the EU business environment but doing so using a trusted company with low costs and minimal hassle. Even for UK-based entrepreneurs, we think the opportunities of e-Residency are bigger than Brexit.

And it’s not an either/or choice. Some e-residents have both a UK company and an EU company — sometimes in parallel under the same brand — in order to give themselves more opportunities.

For people like Vicky Brock, this is already the new normal. She’s one of our newest e-residents and runs her startup, VistalWorks, in Glasgow and Edinburgh. She first registered the business as a UK company but now also has an EU company that she runs in the UK through e-Residency in order to expand the business. You can read her full story here.

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British entrepreneur Vicky Brock became an e-resident as a result of Brexit

We’d obviously like to welcome more entrepreneurs to join our digital nation through e-Residency, but we’ve also tried to be objective and offer some straight-talking facts and advice. So we’ll also cover what e-Residency can’t help with. Our programme is not for everyone and can’t solve all the challenges of Brexit, but it can significantly help many entrepreneurs. We want to ensure that everyone has the right facts and those who benefit the most are able to take advantage of our programme.

If you have any further questions or feedback about our advice then leave them in the comments section at the end or ask them during the Zoom webinar and live Q&A session ‘e-Residency: A Brexit bolthole for your business’. Sign up here.

We can then update this article again in future with more information where requested.

What to expect in a no-deal Brexit:

The UK and the EU are currently negotiating a Withdrawal Agreement that would facilitate a smooth transition and pave the way for the next phase of discussions about the future relationship between them.

There is increased speculation however that this first stage will not be completed before Brexit takes place. This scenario, in which the UK abruptly ends its membership of the EU along with its benefits for UK companies, is what is known as a no-deal Brexit.

Legal recognition

Article 54 in the Treaty on the Functioning of the European Union sets out the basis for what is recognised as an EU company — and also states that they should be treated in the same way as natural persons who are nationals of EU Member States. Directive 2017/1132 outlines EU company law.

If the UK becomes a third country through a no-deal Brexit then this recognition will end abruptly and the lack of EU legal frameworks, such as those outlined in the Directive 2017/1132, will create considerable new complexities for UK companies doing business across the EU.

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How EU legal recognition of a UK-registered company will change after a no-deal Brexit:

Once automatic recognition under Article 54 ends, UK companies may be recognised instead in accordance with each EU Member State’s national law or international treaties. In addition, many EU countries have different rules for companies from third countries.

As it happens, this is not the case in Estonia. Our national law already recognises all foreign legal entities and our Commercial Codes have almost no distinction in the rules between EU companies and third country companies (except in the case of cross-border mergers and their obligation to appoint a contact person). Therefore, no recognition issues shall arise with UK companies trading with Estonia after a no-deal Brexit.

This is not the case for all EU countries, however.

Depending on the applicable national or international rules, UK companies might not have a legal standing in some EU countries and shareholders might be personally liable for the debts of the company as it is no longer recognised as a legal person in law.

EU law, such as freedom of establishment, and EU court judgements will no longer apply to UK companies.

This means that UK-based companies may lose many benefits arising from EU law, such as the possibility of cross border mergers, conversions and the establishment of an SE public company. In some EU-27 Member States, the law also states that only companies incorporated in an EEA Member State can establish branches. A branch is a company’s local presence operating under the same legal entity as elsewhere, as opposed to a subsidiary which is a separate company even though it may operate under the same brand.

Under existing rules, a UK company has the freedom to operate across the EU without the need for a local subsidiary, including using licenses issued by the UK for specific business activities that then apply across the whole of the EU. However, the end of EU freedom of establishment for UK companies means that UK companies would instead need to comply with the additional requirements imposed by the local legislature on foreign companies in different EU Member States. In many cases, this will mean that a UK company would be compelled to set up a local subsidiary for its activities (and apply for new licenses) as opposed to simply operating through a branch of the UK company as was previously possible.

These requirements depend on the local law of the EU Member State and may include different or additional obligations, such as providing certain information to the trade register if a new subsidiary isn’t required.

The sudden absence of EU legal frameworks is not just problematic for company owners, but also investors, customers, and employees who will lose many of their previous protections and may therefore be less willing to conduct business with a UK company.

Directive 2017/1132 applies to limited liability companies incorporated in EU. This directive stipulates the ground rules for corporate life and various corporate transactions, including formation of companies, minimum share capital requirements (including rules on the distribution of funds and amending share capital amount), compulsory disclosure of certain company information in the business registers, mergers and divisions. After no-deal Brexit, these rules no longer apply to UK companies. Consequently, stakeholders, including employees, creditors and investors dealing with the UK companies cannot rely on the rules from EU law. As a consequence, they are likely to have far less knowledge of the law and obligations applicable to the UK incorporated company and therefore less certainty that their rights are adequately protected if, for example, the company has to be wound up. In addition, judicial decisions issued by the UK may not be enforceable in EU-27 and vice versa.

As a result, after no-deal Brexit, investors may prefer to invest in companies registered in the EU-27 as they have more knowledge about the law and obligations, and may feel that their rights are better protected in the EU. For the same reasons, an EU-based company may prefer to cooperate with other EU-based companies.

Finally, UK companies are expected to lose ownership of any ‘.EU’ domains they have acquired as these can only be held by EU companies or EU residents.

How EU legal recognition of an e-Residency company in the UK will change after a no-deal Brexit:

Almost no change. Your e-Residency company managed in the UK will still be recognised in law as an EU company with an equal legal standing to EU companies that are physically located inside the EU, along with the benefits that this brings.

The EU’s rules permit EU companies to operate from anywhere in the world if they comply with the EU’s legal frameworks and standards. This won’t change in the UK after a no-deal Brexit (or any form of Brexit) so e-Residency will remain a convenient and secure way to run an EU company in the UK while retaining the benefits outlined in EU law.

The only consideration is that some industries require licenses that depend on having a physical presence in the EU country that grants that EU-wide licence, as set out in national law. The financial services industry is a key example as a bank cannot be run as a location-independent business due to the higher risks involved for the country granting that license. That’s why e-Residency is already not recommended for location-dependent businesses.

Taxation

Even without any form of Brexit, taxation can be a confusing subject for anyone doing business internationally — regardless of whether or not you are using e-Residency. The general principle among OECD countries (like the UK and Estonia) is that each country has the right to tax both inbound and outbound investment, but should also try to alleviate any double taxation occurring between them in cross-border trade.

Fortunately, the UK and Estonia already have a treaty for the avoidance of double taxation and — this bit is crucial to know — the treaty for the avoidance of double taxation between the UK and Estonia will remain in force after a no-deal Brexit. Estonia has 56 other treaties like this, including with all other EU member states.

This means that your company’s money can only be taxed once by one country, even if both countries consider they have a basis to do so.

If there is any doubt about your obligations then you should consult a qualified tax advisor.

It’s also worth noting that in principle your personal taxes on your wages will be paid in the country in which you work as an employee, regardless of where your company is registered or where it pays its company taxes.

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How taxation of a UK-registered company will change after a no-deal Brexit:

By default, your company will be tax resident in the UK and if you are generating your company’s value in the UK then it will remain that way because that’s your place of business and where income is generated.

However, there may be additional complexities between UK companies with tax obligations in other countries, arising from the risk of non-recognition as outlined in the previous section.

How taxation of an e-Residency company in the UK will change after a no-deal Brexit:

By default, your EU company registered through e-Residency will be tax resident in Estonia. However, if you are generating your company’s value primarily in the UK then that may create a permanent establishment in the UK for your company, regardless of the fact that it was registered in Estonia.

Estonia does not seek taxation from Estonian companies when their taxation is fairly owed (and paid) to other countries instead, as is the case for many e-Residency companies, so double taxation is generally avoided. This is Estonian law, as well as a basic principle of fairness. Estonia already benefits from e-Residency due to the increased connections and expanded business opportunities that it creates for Estonians globally. As mentioned, the treaty between the UK and Estonia for the avoidance of double taxation will remain in force, which will help ensure that your e-Residency company is only taxed once and only taxed in the UK if that is where your permanent establishment is.

The main expected effect of the UK becoming a third country to the EU after a no-deal Brexit is that there will be an additional burden of proof required for demonstrating that the Estonian company’s taxes were paid in the UK, but this is a very minor administrative task.

Cross-border trade in goods and services

After a no-deal Brexit, there is likely to be significant disruption to cross-border trade between the UK and the EU due to both the rule changes that result from the UK becoming a third country to the EU, as well as the knock-on effect of the transition to those rule changes, such as delays at the border.

This does not just affect the UK’s trade with the EU either. As a member of the EU, the UK has about 40 free trade deals with more than 70 countries, which would abruptly end during a no-deal Brexit unless they have been replaced in time.

Goods and services are affected in different ways.

For the EU market, the UK will be a third country and therefore all goods moving between the UK and the EU will have to be cleared through customs, subject to the rules that apply in these circumstances. The EU will start to apply its third country regulation and tariffs on these goods, which includes additional checks and controls. The UK has also published its own tariff schedules for a no-deal Brexit, which is available online here.

Importers and exporters will need to take responsibility for these customs procedures on their own goods, either internally or using a specialist customs agency.

Providing services from the UK to the EU can involve a different set of challenges. If you are providing them online, for example, then you will obviously not be held up at any borders. However, there are other considerations here that affect UK and EU companies differently.

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How cross-border trade in goods and services for a UK-registered company will change after a no-deal Brexit:

After a no-deal Brexit, UK companies will lose many of their previous benefits to access the EU market as EU companies and revert to the additional requirements of third country companies. This could lead to loss of business and considerable disruption, as well as a higher administrative burden.

The UK government has published its own guide to help companies prepare for this at www.gov.uk/brexit.

One key point to note is that any certificates, licences or authorisations for UK companies may no longer be valid across the EU after a no-deal Brexit if they were issued by the UK.

How cross-border trade in goods and services for an e-Residency company in the UK will change after a no-deal Brexit:

Your EU company would retain its right to offer goods and services across the EU and beyond in accordance with the EU’s legal frameworks, even if you are based in the UK after a no-deal Brexit.

Providing cross border services with greater ease is one of the main benefits of e-Residency and this will be even more the case for UK-based entrepreneurs after a no-deal Brexit.

As an e-resident, you can easily apply for licences and notices of economic activities for your EU company from Estonian authorities without leaving the UK and these will be valid across the EU (except in some cases in which the validity is confined to a specific territory or place of business). Many e-residents don’t actually require licenses or notices of economic activity when they are selling services online, but you can check this list from Estonia’s Ministry of Economic Affairs and Communications about which industries are affected. You can then read through the corresponding legislation in the link above to understand any additional responsibilities you may have.

Moving goods out or into the UK after a no-deal Brexit will be more complex for everyone, however because the same import and export rules will apply regardless of where your company is registered. So e-Residency is not going to help UK-based entrepreneurs avoid any regulations, tariffs or disruption imposed on the movement of goods between the UK and the EU after a no-deal Brexit.

However, there is one way it may help UK-based entrepreneurs moving goods in this situation and that’s by helping them avoid the UK-EU border entirely — if that’s the path that the business chooses. As outlined in earlier sections, it would be easier to work with EU companies if you also had an EU company (even if it was run from the UK after a no-deal Brexit) so e-Residency may make it easier for UK-based entrepreneurs who want to reconfigure their supply chain and start making their goods in the EU or buying them from EU-based suppliers. If most of your customers are in the UK then this obviously won’t solve any problems, but if you are already exporting a significant proportion of your goods to the EU then it might be the best solution.

Data protection

After a no-deal Brexit, the UK will become a third country in relation to EU data protection rules known as the General Data Protection Regulation (or more commonly “GDPR”). Not only that, but the UK will also be a third country that will have an inadequate level of data protection by EU standards. This means that the transfer of personal data from the EU to the UK will require the introduction of additional safeguards.

However, the UK Government has indicated it is committed to maintaining these high standards of data protection in future. The expectation is that any such legislation will largely follow GDPR, given the support previously provided by the UK to develop GDPR as an effective privacy standard, together with the fact that the GDPR provides a clear baseline against which UK business can seek continued access to the EU digital market.

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How data protection for a UK-registered company will change after a no-deal Brexit:

Irrespective of whether or not the UK chooses to retain GDPR rules, a UK-based company that processes data about individuals in the context of selling goods or services to citizens in EU countries will need to comply with GDPR anyway.

In most cases they will also need to appoint a suitable representative within the EEA who will need to be set up in an EU or EEA state where some of the individuals whose personal data they are processing in this way are located.

How data protection for an e-Residency company in the UK will change after a no-deal Brexit:

An EU company operated in the UK through e-Residency will also have to comply with GDPR and may use the Standard Contractual Clauses approved by the European Commission, which offers the additional adequate safeguards required in order to transfer personal data to the UK or any other third country under the allowed circumstances.

Another advantage to e-Residency is that EU companies created in Estonia through the programme will already require a local licensed contact person, which is easily available through a range of business services providers in the e-Residency marketplace. This person could also serve as the local representative for the purposes of GDPR if agreed with the provider.

Additional considerations for UK-registered companies after a no-deal Brexit.

The following issues have no effect on UK-based entrepreneurs running EU companies through e-Residency, but may pose additional challenges for UK companies.

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Contracts

There are two main risks here for UK companies. The first is that partners may seek to amend or cancel contracts following a no-deal Brexit. The second is that partners may simply be less willing to enter into contracts with UK companies without EU legal frameworks.

UK companies will no longer be subject to EU law and court judgement in the UK after a no-deal Brexit, which poses additional complications for the enforcement of contracts. However, all contracts have the potential to contain clauses — relating to people, delivery of goods and services, business infrastructure, pricing, supply chain and data — that rely on the established legal framework provided by the EU.

Possibly more significant though is the possibility that a no-deal Brexit may create such a considerable change in circumstances that they affect the terms of contracts and the viability of business relationships. For example, contracts may include references to a particular currency or detailed pricing mechanisms. The impact of a no-deal Brexit on external factors such as currency could result in significant increases in cost and render contracts uneconomical. The possibility to terminate a contractual relationship due to no-deal Brexit depends on the terms of the relevant contract and applicable mandatory laws (including, e.g. applicability of the doctrine of frustration or its alternatives).

Such uncertainty is much less likely in contractual relationships where the parties are entities registered in the EU-27 state, including through e-Residency while still operating in the UK.

Intellectual property

Intellectual property is protected through patents, copyrights, and trademarks. On this subject, there are no significant problems to expect, even under a no-deal Brexit. The UK government has also published its own advice on this subject here.

Patents are governed by the European Patent Convention, which is separate to the EU, and this arrangement is entirely unaffected by the UK’s relationship (or lack of relationship) with the EU.

Copyrights are a bit more complicated. They are governed nationally and there is no worldwide or even EU-wide standard. However, copyright is largely harmonized internationally by a number of treaties, including through EU copyright legislation that builds on the international treaties. Although the UK is leaving the EU, UK and EU copyright works (like books, films and music) will continue to be protected in the EU and UK respectively because of the international treaties, which require all treaty countries to protect works originating in any other treaty country to a minimum standard.

Trademarks are slightly more problematic, but not significantly. After a no-deal Brexit, EU trade marks will no longer be protected in the UK as a matter of EU law. However, these rights will be immediately and automatically replaced by UK rights. In addition, UK businesses will still be able to obtain trade mark protection in the remaining 27 Member States of the EU through an application to the European Union Intellectual Property Office, and businesses from the EU and worldwide will still be able to apply for a UK domestic trade mark through the UK Intellectual Property Office.

What does e-Residency not help with?

E-Residency is a status that provides digital capabilities, although with significant offline advantages — such as the ability to establish and manage an EU company from anywhere. As examined above, this is entirely consistent with the EU’s own rules, which welcomes legitimate entrepreneurs from around the world who wish to operate within the EU’s legal frameworks so they can grow their businesses globally.

However, e-Residency is not related to physical residency rights or citizenship. It will not give you the right to enter or reside in Estonia or elsewhere in the EU. The UK government has Brexit advice for UK nationals living and travelling across Europe here.

That’s not to say you wouldn’t be welcome here though.

E-residents often choose to visit Estonia. For example, we recently invited e-residents from around the world to take part in our hackathon on the Estonian island of Vormsi to come up with new ideas to benefit the e-resident community. You can read more about that here.

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If you are planning a trip to Estonia yourself (and we definitely recommend it) then check out Visit Estonia. There are also separate government programmes who can help you relocate here if that’s what you’re looking for. Startup Estonia offers a ‘startup visa’ for people who want to move here with their companies while Work in Estonia helps job seekers find employment here.

So who benefits most …and least from e-Residency?

E-Residency offers location-independent entrepreneurship through a trusted EU company with convenient and low cost business services.

By its nature, this is most popular with entrepreneurs who are selling services online and have no requirement for a fixed location, especially those who are highly mobile such as “digital nomads” or anyway planning to travel or relocate in future. A significant proportion of entrepreneurs using e-Residency are also ‘solopreneurs’, such as freelancers, because they don’t employ anyone else.

If your business requires a complex structure and fixed locations then e-Residency may be useful for some aspects like digital signing, but not necessarily running the entire company. That’s because you will already have considerable burdens on your business from the jurisdiction in which you are physically based so there is less incentive to use the advantages of Estonia’s business environment instead.

In addition to these factors, businesses that are growing globally, especially in the EU market, have more reasons to use e-Residency than businesses that rely on UK customers.

It’s worth noting though that e-Residency is popular not just with entrepreneurs outside the EU who want to improve their access to the Single Market, but also with many entrepreneurs inside the EU. That’s because our business environment is not just digitised, but has among the world’s highest levels of trust and transparency, as well as many strengths even compared to other EU jurisdictions. For example, the state fee for starting a company is just €190 (after paying €100 for the e-Residency application), the minimum share capital is €2,500 (but doesn’t need to be paid in until the company is ready to pay out dividends), our tax system (if applicable to your company) was just rated as the best in the OECD for the sixth consecutive year, local business services providers offer great value-for-money on things like accountancy and virtual offices (which you can explore in the e-Residency marketplace here), and — most proudly — you can run your entire business online.

Conclusion

A no-deal Brexit would significantly harm trade for UK-based entrepreneurs in complex and far-reaching ways. At a time when global trade has become more open, this situation is almost unprecedented. However, e-Residency of Estonia already offers benefits to UK-based entrepreneurs who can use the programme to run a trusted EU company entirely online from the UK and this will also mitigate many of the harmful effects of a no-deal Brexit. The value of e-Residency is very much dependent on circumstances, but entrepreneurs selling services online can benefit the most.

These benefits, which we expect for UK-based entrepreneurs after a no-deal Brexit, are not entirely theoretical.

The Republic of Estonia began offering e-Residency in 2014 and there are already about 60,000 e-residents from more than 150 countries. When the UK voted to leave the European Union in 2016, there was a surge of interest in our programme from UK-based entrepreneurs who wanted their business to remain — digitally, at least — within the EU. As a result, more than 400 EU companies have already been started online by UK-based e-residents. But many e-residents entrepreneurs from elsewhere are already in situations that are comparable to Brits in a no-deal Brexit and are demonstrating how these benefits would work. For example, the e-resident community is growing fastest in Ukraine and also gaining popularity in Turkey. That’s because these countries are already in the position of being third countries to the EU on the edge of the EU market so e-residents there already use the programme for reasons outlined in the no-deal Brexit advice above.

We mentioned that a no-deal exit from a trading block is almost unprecedented. One of the few examples is Estonia’s experience in the early 1990s in which the re-establishment of Estonia’s independence following Soviet occupation resulted in Estonians losing access to their neighbouring market on which 90% of trade previously depended. Ironically, our own e-Residency programme is now based in a factory that was forced to close during that period and has now been rejuvenated — like many others here in Estonia. While the political context that led to this particular exit is entirely incomparable, we can at least sympathise with the challenge that entrepreneurs face when their country is exiting their largest market.

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Estonian President Kersti Kaljulaid and Managing Director of e-Residency Ott Vatter, pictured in the e-Residency programme office — which was once an abandoned paper mill (see image above).

No matter what happens with Brexit, our digital doors will always be open here in Estonia to legitimate entrepreneurs in the UK and around the world.

Learn more about e-Residency and join our Brexit AMA

You can ask more questions about e-Residency and Brexit directly to the Managing Director of e-Residency Ott Vatter during our Zoom webinar and live Q&A session ‘ e-Residency: A Brexit bolthole for your business’ on 24 October at 1pm UK time / 3pm Estonian time. Sign up here.

You can also visit e-resident.gov.ee to learn more about the programme and submit your application to become an e-resident.

E-Residency Blog, E-residentsuse blogi

This is the official blog of the Republic of Estonia’s…

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