A look at the legal framework for crypto businesses in Estonia
When an onset entrepreneur needs only three hours to start a company in Estonia from anywhere in the world, the message is loud and clear: it is a business-friendly and bureaucracy-free environment. But does easy establishment of a location-independent company mean susceptibility to potential frauds and money laundering, especially for crypto-related businesses?
Jaanus Prost, our Head of Legal, joins us today in the exploration of the crypto regulations in Estonia and share his insights on why this Baltic nation is the place to be for any crypto enthusiast.
The Baltic tiger on the rise
Estonia has been in the limelight for cryptocurrency investors and businesses around the world and the hype that comes with it did not appear out of thin air. The nation has been working tirelessly to become the part of the ‘Baltic miracle’ since its independence from the Soviet Union in 1991.
To power through what was the leftover of the Soviet legacy as well as the financial crisis in 2008, Estonia has performed deep structural reform, implemented austerity measurements and is among one of the countries which has the lowest debt-to-GDP ratios at 9.0 percent as of 2017.
Today the country strives to offer a favourable business environment by reducing and simplifying its taxing system; and this applies to any trade, including crypto-related one.
A taxing system that works for crypto assets
According to Jaanus, Estonia does not have classical corporate income tax but only distributed profits get taxed. This ultimately means that if a company’s crypto assets increase in value but its profit is not distributed, the company does not have to pay corporate income tax on the generated profit.
Comparing to the majority of jurisdictions around the world where any standard company is obliged to pay their share of this levy, Estonia transcends to be the pioneer in nurturing and encouraging early entrepreneurship.
Under the Estonian taxation scheme, a company can benefit by being able to reinvest with its own profit and not having to purchase or exchange for local currency to pay taxes. For micro businesses and startups whose funds are more scarce than readily available, this opportunity provides them a solid strategy to help sustaining their businesses in the early days.
But as for managing highly volatile investments such as crypto assets, does Estonia still appear promising? Jaanus offers a rather persuasive example:
“Let’s say a crypto trader bought 10 BTC on November 8, 2017 at the price of US$7,484.72. By December 31, 2017, the price was set at US$13,383.9, which meant by that time the trader had earned US$58,991.9 worth of profit. By June 16, 2018, the price of 1 BTC reduced to US$6,372.6, i.e. the trader lost all the profit as well as some of his original capital.
Under jurisdictions which apply the classical corporate income tax system, this trader could be taxed up to 35%. This means that approximately US$20K would be levied from the ‘profit’ calculated until December 31, 2017; even though the price had reduced significantly after this date. In other words, this crypto trader has not only lost capital due to a bad investment but also had to pay corporate income tax on the profit that had been lost thus making the situation even worse.
If this trader establishes a company in Estonia and uses it for trading, (s)he could have avoided the tax risks related to the volatility in prices as tax does not incur until (s)he decides to cash out.”
Needless to say, Estonia is surely emerging as a prime destination for highly volatile investments such as crypto-related assets.
Crypto regulations → An additional trust layer in place
Even though the country is all for business and growth, its government does not take anti-money laundering and combating the Financing of Terrorism (AML/CTF) matters lightly.
Estonia understands that when the implementations of AML/CFT controls are effectively in place, these would mitigate the detrimental effects of criminal economic activity. To further and promote the national integrity and stability in the international financial market, criminal acts such as corruption, tax evasion and market manipulation are not tolerated.
Jaanus points out that Estonia was one of the first nations to regulate the AML/CTF in fields that are related to cryptocurrencies. In fact, some of the foundation regulations were in place before cryptocurrencies even emerged. Prior to the time of Bitcoin and Alt-coins, Estonia had already implemented its own AML/CTF regulations in dealing with alternative means of payment, WebMoney or internet money such as e-gold and e-silver in early 2006.
As young as a country might be (FYI — 100 years in 2018), this veteran in legal regulations for online capital has been bold in its approach to the crypto market: it is amongst a few pioneering European countries to authorise the legal operations of cryptocurrency exchanges.
Toward this particular financial sector, the country keeps a relatively lenient attitude in general as there have been no known raids into crypto-operated businesses, given that the company has all the required legal licenses. In contrast to others countries where crypto enterprises are sometimes treated with suspicions, Estonian authorities endeavours to work with these businesses in a more cooperative manner.
With the implemented AML/CTF regulations, Estonia has managed to create additional trust for its fiscal regulatory environment and thus also cryptocurrency businesses. In 2017, Estonia went even further and forestalled AML 5th directive to regulate the activities of custodian wallet service providers and crypto-to-fiat exchange platforms. This alertness from Estonia has added legal certainty for its market participants even in the face of changing EU legislation.
Mothership x Estonia
Estonia has certainly succeeded in transpiring its image as a supportive government with a thorough regulation framework. It enables any business to thrive, as long as it is compliant to the nations rules. Mothership as a crypto-focused financial company has opted to base in Tallinn for these exact reasons and plans to remain so for a foreseeable future.
Not only the favourable business-friendly environment has kept Mothership a legal tax payer of Estonia, but also the country’s exceptional technology infrastructure and lack of bureaucracy.
From paying tax to securing your parking space, everything can be done online within a few mouse clicks (even voting!). Any business would appreciate the hassle-free process of dealing with paperworks in Estonia, where the documents are not really papers but often in electrical forms for the sake of easy and smooth communication between the authority and its citizens.
Another distinctive feature that allows the country to step up in the tech field, and attract as well as maintain its loyalty from location-independent companies from around the globe, is the infamous eResidency programme. We believe that this programme is so unique that it deserves its own elaborated post and will dedicate one for it in the coming weeks. For now we can say that the integration with eResidency will positively enhance our KYC process on the coming exchange, reducing the time to verify user’s identity to mere seconds.
Take-away
The bottom line is that Estonia is open and innovative in its approach to crypto-related businesses and investments, but it is by no means a newbie in regulating alternative means of payment.
The nation has a long history in dealing with internet money and is working hard to ensure that Estonian service providers can efficiently control money laundering and terrorist financing risks. By working towards this goal, it creates and maintains the country’s reputation in dealing with crypto-related enterprises.
It makes sense to be a crypto-business in this Baltic country to reap the benefits of the easy communication with authority, as well as the lack of hierarchy and bureaucracy. Basing here is certainly a no-brainer for any resourceful company, especially when remote work is the new norm today and talents from anywhere in the world can still be a part of the team.
So yes, welcome to the (virtual) land where any digital nomad’s dreams are made possible — ours will sure be reality soon!
Mothership is a cryptocurrency exchange built to support location-independent individuals and businesses with direct eResidency integration.
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