know your legal duties as an e-⁠resident company owner (pt. 1)

Mariann Kirsipuu • Dec 03, 2020 • 8 min de lectura

Essential legal and risk-related obligations to be aware of when setting up your company in Estonia – part one

Congratulations! You’ve set up your company in Estonia. You’re mastering the use of your digital ID card, which allows you to sign documents, make decisions, and use Estonia’s e-services. You’re eager to start doing business, grow your client base and revenues, and build up your brand and reputation. Maybe you’re also thinking about hiring employees or contracting freelancers to work on your projects.

If you’re at this early stage of growing your business, you need to know about several important obligations you have under Estonian law.

They include the simple but mandatory steps of making sure you have listed an ultimate beneficial owner for your company and defined a contact person. We’ll also cover more complex legal or risk-related recommendations to build into your business setup to ensure you are putting your best foot forward in running a legally-compliant business in Estonia.

It’s important to note that we clearly cannot cover ALL legal obligations that could be relevant for you and your company in Estonia or elsewhere. So, think of the ones we cover as the most essential to be aware of at the beginning of your e-⁠Residency journey as a company founder.

In part one of this two-article series, we will cover the key obligations you have right at the beginning of your journey as an e-resident company founder. We wrote about further obligations in a second post on the blog. In that article, we cover the first year of operating your business and introduce some of the main duties you should know about as a company founder regarding dividends, net assets, taxes, annual reporting, employing staff, and intellectual property

This article was written in consultation with PwC Estonia, who provided valuable inputs and feedback during the drafting process.

1. Make sure your ability to run your company is not compromised

Becoming an e-⁠resident means that we are opening our digital country to you. We do ask you to help us keep the digital environment as trusted and transparent as it has been.

This means providing all information requested by Estonian State agencies so that you can be contacted and be timely when conducting any activities required under law, such as reporting or disclosing required information.

In short, get familiar with the local legislation, regulate your activities, and obey the law.

An essential obligation you have is to keep your digital ID card safe and up-to-date and your PIN codes secure, i.e. do not disclose them to another person. Bear in mind that PIN 1 is your identity and PIN 2 is your digital signature. It is your obligation and in your best interest (as it costs money to replace them!) to keep them confidential and secure and also to not forget them.

If you don’t keep your PIN codes safe, you are putting yourself and your company at risk of harm from third parties with bad intentions, for example, by using them to sign legally binding contracts or other documents in your name, which might have enormous (monetary, legal, ethical) consequences.

We also recommend noting down the expiry date of your digital ID card so that you have plenty of time to renew it.

Please see the e-Residency Knowledge Base for more information about your responsibilities as an e-resident.

2. Appoint a contact person and provide a foreign address for the management board

If the management board of a company (or a body substituting therefor) is located abroad, the company must designate a contact person with a residence and address in Estonia.

The decision whether the management board is located abroad is made by a registrar representing the Estonian state on a case-by-case basis. A clear sign of it being located abroad is when decisions regarding the management of the company are made abroad.

When choosing whom to appoint as a contact person for your company, please know that you are permitted to appoint only a notary, a notary’s office, an attorney, a law firm, a sworn auditor, an audit firm, a non-resident tax representative or a provider of trust and company services.

We encourage you to visit the e-Residency Marketplace to find a suitable contact person for your company.

When you register a company in Estonia as a non-resident, similarly to the requirement to appoint a contact person for your company, you are also obliged to fill in the address of the location of the management board (outside of Estonia) in the Commercial Register. The foreign address of the location of the management board is the location where most of the everyday decisions on business are made.

3. Disclose your company’s beneficial owners

Once you have established your Estonian company, you must register your company’s ultimate beneficial owners (UBOs) in the commercial register, which are essentially any individuals who have ownership claims or can exercise control over your company.

The UBO is defined in the Money Laundering and Terrorist Financing Prevention Act as a:

“natural person who ultimately owns or controls a legal person through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that person, including through bearer shareholdings, or through control via other means.”

If UBOs cannot be identified in such a manner, a natural person whose direct or indirect shareholding or the total shareholding of all the direct and indirect shareholdings in the company exceeds 25 per cent, is considered to be a UBO of a company.

The UBOs must be disclosed in the commercial register information system and kept up-to-date in case of any changes. Disclosures can be made either via the Company Registration Portal using your e-⁠Residency digital identity or via a notary.

The following data of the UBOs must be disclosed:

The person’s name;
The personal identification code of the person and the country in which the code was issued, or if there is no such code, the date and place of birth and the country of residence of the person; and
The manner of exercising control over the company (e.g. if you are the sole shareholder of your Estonian company, you will fall in the category of the UBO who controls the legal person through direct ownership).

The data of the UBOs are made public in the commercial register information system.

It’s important to note that failure to submit information on the beneficial owner, to notify changes in data, or intentionally submit false data is punishable by a fine of up to EUR 1,200 for natural persons and up to EUR 32,000 for legal entities.

Furthermore, not registering a UBO to your company could be grounds for refusing to renew your e-⁠Residency card upon its expiry. Therefore, it’s key to register your company’s UBO as soon as possible once it’s established.

More information is available at the State Company Registration Portal.

4. Share capital contribution

You may have founded your company without initially paying for the shares. The good news is that you are free to choose the time at which you would like to make the payment. There is no statutory time-limit to do so.

But as your business grows, you need to know that you will not be able to pay out dividends until all shareholders have fully paid for their shares.

The minimum share capital contribution is 2500 euros for private limited companies. Until that minimum benchmark is reached, the company is not permitted to increase or decrease the share capital or make any payments to its shareholders. The prohibition to make payments does not apply, however, to salaries or other remuneration payable to shareholders.

You can pay in the share capital in a few simple steps, after which you will be able to remove the notice “established with no share capital contribution” from the registry. The easiest way to pay in the share capital is to make a monetary contribution in the following manner:

Firstly, adopt a shareholder’s resolution to make the payment of the share capital;
Then, transfer the necessary amount from your bank account to your company’s business banking account. NB! Please state “share capital contribution” as an explanation in your payment order.
Thirdly, get a certificate from your bank or financial services provider, attesting that you have paid the share capital. It can be sent to you in a digitally signed format by email or be downloaded online.
Finally, submit an application for the change to be registered via the Company Registration Portal.

You can use your digital ID card for signing documents, communicating with the bank, and asking the commercial register to make the necessary changes.

The business banking account into which you pay the share capital contribution must be with a bank or fintech located anywhere within the European Economic Area.

Read more about share capital contribution in our Knowledge Base.

5. Do you need a license to run your business in Estonia?

Some areas of activity are subject to special requirements for which you will need to submit a notice of economic activity or apply for a business licence. For example:

Tourism undertakings, including tourism operators or retailers of travel packages
Financial services, including virtual currency services like cryptocurrencies
Educational activities, such as private schools for continuing education or hobbies
Construction-related areas of activity, including building, design, owner supervision, site investigations, and expert assessments
And many more…

If this applies to the business activities you intend to operate through your Estonian company, you will need to obtain the necessary licence or provide the requisite notice before you commence such activities.

A complete overview of licences and economic activities can be found in the Estonian State Portal on business licensing. You can also check which area of activity requires a licence or a notice of economic activity using the EMTAK Search. After you find your business activity, scroll down to expand the Details section and check for special requirements.

For more information, with particular emphasis on the business activities most relevant for e-residents, please read our Knowledge Base article on Business Licences.

Check out part two of this article for more important information about your legal duties as an e-⁠resident company owner.