Tips and tricks on how to set up a nearshoring EU company only a few hours flight from London
Nearshoring can be a great tool for companies wanting to reduce their overheads and gain access to talent and workers that are difficult to find or too expensive to hire in the UK. Especially for smaller companies, who do not have the capital required to invest in traditional offshoring locations, nearshoring offers a cost-effective solution to lower your overheads and diversify your business.
The Estonian business environment and e-Residency offer an attractive option for UK residents looking to nearshore and at the same time establish a base in Europe following Brexit. The capability to run your business remotely along with being only a few hours direct flight from London makes Estonia an ideal place to set up a nearshoring venture.
What is ‘Nearshoring’?
Nearshoring is a type of offshoring, which is a common practice for many large companies outsourcing IT and business processing functions. Certain company operations can be relocated to a country where the costs to run such operations are much lower. An example of this is relocating call centers to India or South East Asia from the UK. Not only can you hire a skilled workforce at a lower base salary, commercial letting and real estate can also be cheaper, meaning fewer overheads and greater profits. As well as lower costs, having a presence in other countries can provide you with access to opportunities that are exclusive to resident companies, such as R&D funding, and streamlined VAT reporting.
Nearshoring has become more and more popular as companies look to set up these offshoring locations closer to their home country, reducing logistical requirements and lessening a company’s carbon footprint. Nearshoring can also be used to secure supply chains against global disruptions, such as geopolitical competition or infrastructure failures like the blockage of the Suez Canal. Nearshoring can make business much easier to manage and for British enterprises is an easy way to secure access to the European single market post-Brexit.
Traditional offshoring models normally involve large setup costs and onerous statutory requirements, which make them not viable for companies with a small turnover. For example, setting up a foreign-owned company in India requires: a resident Indian national director, an appointed qualified auditor, and capital confirmations filed annually with the Reserve Bank of India. For a company with greater than 25 staff members, the cost to meet these demands is manageable, but for smaller enterprises, the cost and time required to comply are not.
As well as being more affordable, nearshoring is simply more practical with the distance being within two time zones rather than six or more. You may also be able to hire foreign talent more easily than in your home country. With nearshoring locations such as Estonia, not only are there lower staffing costs but the requirements to get a skilled workers visa are much more attainable compared to the UK’s points-based immigration system. EU citizens also automatically have the right to work in Estonia, which post-Brexit can be a major hurdle in recruiting to the UK.
Things to consider when Nearshoring
When setting up a nearshoring company there are a few things to consider:
1. Do you want your nearshoring company to be a Profit Hub or a Cost Hub?
Do you want to draw profit directly from your nearshoring company or use it to lower operating costs for your corporate group? If you are selling directly from your Estonian company to the rest of Europe you will most likely wish to use the company as a Profit Hub. This means you may not want to incorporate such a company as a subsidiary but consider having it as a stand-alone company to avoid profits being subject to two levels of corporation tax. This also means you can set up your nearshoring venture completely online in Estonia, via the e-Residency program (i.e. no need for a notary).
2. What are the Transfer Pricing models used by the host country?
Transfer pricing refers to the rules and methods for pricing cross-border transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries regulate and adjust intra-corporate group transfer prices that differ from arm’s length transactions. It’s more than likely that your nearshoring venture will require you to consider the rules and models of the host country. This is a complicated topic, which we will cover more in a future blog post. But put simply, while there are various legally accepted methods to comply, the ‘Costs Plus’ model is arguably the easiest to operate. Estonia offers such a model with a markup ranging between 5 -10%, depending on the nature of the goods or services you are providing. Though it is advisable to seek professional advice, Estonian regulations have a simple structure for these calculations.
3. If you are creating a Profit Hub are there any withholding taxes to consider?
In many non-European countries, a withholding tax is in place on any income being distributed to a foreign entity. For example, when invoicing a client in India 10% – 25% of the total bill will be withheld as tax liability. This tax was introduced principally after the 2008 recession when certain countries saw a rapid divestment of capital overnight, which paralyzed their economies. This is something to look out for when setting up a Profit Hub as it can significantly affect the profit you receive.
Nearshoring in Estonia
Considering nearshoring or offshoring? Why not look to Estonia and set up a company remotely via the e-Residency program?
Estonia ticks a number of the boxes for nearshoring for British entrepreneurs:
- It is 2.5 hours direct flight from London;
- Has a similar business culture and English is widely spoken and used in business and on digital platforms;
- Has lower base salaries than the UK;
- Has one of the easiest to use VAT (OSS) reporting environments;
- Estonian businesses can be managed completely remotely using digital solutions;
- Does not require a resident national director;
- Does not have any special auditing rules for foreign-owned companies;
- Has Double Taxation Treaties and Bilateral Investment Treaties with the UK;
- Does not have any withholding tax;
- Has established Double Taxation Treaties to offset any withholding tax against corporation tax liability;
- Has access to the EU single market and development grants;
- Has robust and easy to use Transfer Pricing regulations;
- If you can make a Permanent Establishment in Estonia, you can take advantage of Estonia’s tax system – no corporate tax on undistributed profits
As well as all of those benefits it is arguably much easier to recruit foreign talent, as they will already have rights to work in Estonia if they are EU citizens and the visa requirements for 3rd party nationals are much easier to meet than those of the UK. There are a number of providers on our e-Residency Marketplace who can help you hire staff locally or from abroad, making access to skills and talent easy and cost-effective. Many existing companies have done this already in Estonia setting up IT, Customer, and HR support centers, to support their main profit-driving operations in the UK. A good example of this is Wise, which has over 2,000 staff members in Estonia.
Read about UK entrepreneur David’s experience with e-Residency and setting up the EU arm of his security consultancy in Estonia:
Nearshoring with e-Residency
So is nearshoring in Estonia something you want to explore further? The first step is to apply for e-Residency and pick up your digital identity card from one of our pick-up locations.
Read more about the benefits of e-Residency and how to apply:
Once you have picked up your digital identity card, you can easily register a company in Estonia with the help of expert service providers from the e-Residency Marketplace and start planning with them the most cost-effective way to Nearshore any part of your company. Recruit staff members, set up an office or warehouse, and do business online, at a lower cost, and with much more flexibility.
Alan Page-Duffy is a freelance writer for e-Residency. He specializes in UK / Estonian Business Operations and runs his own consultancy Cognito Support which supports businesses that operate in both Estonia and the UK.