Brexit Brain Drain Delivers Financial Boon to Estonia
At first Vicky Brock struggled to place Estonia on the map. And when she flew to the Baltic nation last December, she took just hand luggage, assuming it would be a short trip.
Eleven months later Ms. Brock, a British technology entrepreneur, is still there, living and working in the former Soviet satellite state as what she calls a “Brexit refugee.”
Ms. Brock split her Scotland-based start-up and set up half of it to operate in Estonia, a country of 1.3 million people that is welcoming companies looking to escape the tangle of regulations and financial obstacles that Brexit imposes on British firms doing business in Europe.
Several thousand other company leaders have done the same, some physically moving like Ms. Brock but most staying in Britain while shifting their business registration to Estonia. By doing so, they can take advantage of the country’s membership in the European Union and therefore gain something Britain has lost: free access to the bloc’s giant single market of more than 400 million people.
Their departure is a stark example of one of the negative impacts of Brexit, which critics say ties up exporters with mountains of new paperwork, imposes new restrictions on trade and limits their ability to recruit workers from abroad.
For Estonia, the influx of British businesses, especially technology firms, has contributed to a big jump in tax revenues and reinforced the country’s reputation as a hub of innovation.
The situation is a striking turnaround for a country that, like other Baltic States, suffered an exodus of some of its brightest young workers after 2004, when joining the European Union gave its citizens the right to live and work in Britain, then a member country.
Now the brain drain is in the other direction.
Ms. Brock’s technology company, Vistalworks, which combats online illegal trade, was founded in 2019, three years after Britain’s Brexit referendum. She knew that new Brexit-imposed trade and non-tariff barriers could impede her ability to do business in continental Europe, particularly if the rules on data transfers — vital to her company — were altered.
Then British firms started being frozen out of European research projects and public procurement contracts. So Ms. Brock went “shopping for countries” in which to base her company, prioritizing rule of law, anti-corruption efforts, financial transparency and low taxes
“I didn’t really know where Estonia was but it shone out on all of those lists,” said Ms Brock, speaking on a video call from a shared work space in her adopted home, Tallinn, the Estonian capital.
She said she plans to hire up to 30 staff members in the next nine months. Eventually, around two-thirds of Vistalworks will be based in Estonia, and those workers will pay income and payroll taxes there, not in Britain. Corporate tax on the European company will be levied in Estonia too.
At the end of 2020 Ms. Brock and her business partner and husband, Stephen Budd, headed to Estonia before a Brexit-related deadline to request residency rights in the Baltic country. They took only hand luggage, expecting a speedy return to Scotland and then a period of reflection on where to live and how to proceed with their business. That plan was upended by coronavirus travel restrictions, forcing them into a choice.
“We are learning Estonian and managing both the U.K. team and the growing E.U. team from here,” she said.
Estonia is only one of a number of countries that offer such opportunities for so-called “digital nomads” who do not need to live in the country. But more than 4,000 British firms have seen the benefit, helping to swell Estonian tax revenues by 60 percent compared to 2020, according to comments by the country’s prime minister, Kaja Kallas, in an interview with the British business newspaper City AM. She estimated the tax gain at 51 million euros.
Estonia has received applications for e-Residency, as it is known, from 176 countries, with Britain ranking fourth in the list of non-European Union nations after Russia, Ukraine and China. Being given e-Residency does not grant you citizenship, tax residency or entry into Estonia or the rest of the European Union.
However it does come with the advantage of a 20 percent tax rate for both income tax and corporate tax. The latter is levied only when profits are distributed (rather than when they are earned), allowing firms to grow with a low tax burden. In Britain the income tax rate for top earners is 40 percent on much of their earnings and, for the very highest paid, it rises above that.
E-residency “clearly increased after Brexit, even before actually, even when the vote happened, we saw a spike,” Ms. Kallas told City AM.
Hannes Lentsius, a director and tax specialist at PwC accountants in Estonia, described the government’s estimates of increased tax revenue as credible and said that the e-Residency scheme had worked well for the country. “Brexit has been part of it,” he said adding and e-Residency “has been a great success, it has marketed Estonia.”
Another British business owner who saw the potential in Estonia is David Fortune, who co-founded his company, Saher, in 2014. Saher does much of its work with European police departments and border guards, matching innovative technologies, like counter drone systems, to their needs.
Mr. Fortune served for 30 years with the police in North Yorkshire, in the north of England, where he still lives, and is surprised to find himself an Estonian e-Resident.
“As a nearly 60-year-old ex-cop I don’t think I’ve ever thought of myself as a digital nomad,” he said. However, becoming one was pretty easy. The Estonians provided a first-rate service to help him, including advice sessions with tax and customs authorities, he said.
“They answer questions in English within 48 hours,” he said, “I have nothing but praise for the people we have dealt with.”
There are benefits for Estonia too: the growth of the European side of Saher has overtaken the British one, and generates tens of thousands of euros in tax revenue each quarter.
“This was not because we had a downer on the U.K., it’s just about survival and was necessary to grow our business brand as we wanted it to grow,” said Mr. Fortune. But he said he had no plans to physically relocate.
Ruth Paterson spent more than a decade building up her company, Woolly Wormhead, in Britain before Brexit forced her into a business and personal choice. Her online publishing firm sells designs for knitted hats and there was uncertainty over whether Brexit would change digital trading rules, for example on sales taxes. Ms. Paterson was also spending time in Italy — where she is now resident — as well as Britain, so it made sense to base the company in the European Union. She became an e-Resident of Estonia in 2017.
“It was one of the best things I’ve ever done, my turnover doubled in two years,” she said referring to the amount of money flowing into the business during the pre-pandemic period. . That, she said, is because the Estonian system is digitalized, integrated and requires less of her time, and she can devote more energy to creative work.
She has been to Estonia only once so far.
By contrast Brexit refugees living there, like Ms. Brock, tend to meet up at language lessons and at courses to help them integrate and become residents. Ms. Brock said that, in terms of her business, Brexit may have done her a favor, forcing her into an adventure she would not otherwise have undertaken, but she nonetheless regrets Britain’s decision to leave the European Union.
“If I could wave the Brexit wand so that this didn’t need to have happened, I would take my personal happiness on the chin and wave that wand.”