Estonia Company Registration- An Overview
Estonia is a country that is situated in northern Europe. It is one of the three Baltic countries with neighbours Russia and Latvia. Estonia is known as one of the friendliest and fastest-growing start-up business hubs across the world. Some even refer to Estonia's capital Tallinn as the silicon valley of Europe with the highest number of start-ups per capita and an economically active population inclined towards entrepreneurship. Estonia offers an ecosystem equipped with highly digitised processes, a globally connected e-resident community and an equally strong investment climate. Low bureaucratic controls make it attractive for entrepreneurs from across the world to choose Estonia as the place of business registration.
Benefits of Company Registration in Estonia
Following are the benefits of company registration in Estonia:
- Tax benefits-
Estonia offers a unique system of taxation for the companies registered in Estonia. One such feature of the Estonian tax system is that profits earned by the company are not subject to taxation immediately. The company becomes liable for taxation only when the profits derived are taken out of the business in the form of dividends. Profits retained in the company accounts or reinvested back into the company for business purposes are not subject to tax. This feature hands over the control of the payment of taxes to the hands of the management of the company. This means the taxes shall be paid by the company only when the company's management decides on the distribution of profits in the form of a dividend.
- Complete Online Registration process-
An entrepreneur's most significant advantage in setting up a company in Estonia is the 100% online registration and management process offered by the Estonian government. Once the entrepreneur receives their e-residency card, they can register and manage their company from anywhere in the world. The entrepreneur has been provided with the facility to digitally sign documents and contracts, use online banking services and declare taxes online. Entrepreneurs do not necessarily need to be present in Estonia to register and manage their companies.
- Perks of a unified EU market -
Estonia also enjoys being part of a unified European Union market which gives the Estonian registered business unhindered access to one of the biggest economic blocs in the world. The member states and their citizens avail the benefits of travelling across the bloc and enjoying the economic benefits without any barriers. A similar set of laws, common currency, and legal privileges enjoyed by the citizens and entities across the European economic area provides ease in commerce and empowers businesses to grow. Estonia is also a member of the Single Euro Payments Area (SEPA), which makes it easy to make electronic payments within the member countries, as it is in the case of making cash payments.
- Conducive business environment -
Estonia has consistently performed well on ease of doing business indices (such as the World Bank’s Ease of Doing Business Report) as being one of the best jurisdictions in the world, having a conducive environment for businesses to thrive and flourish. It has also been ranked as the top jurisdiction for having the best tax system in the OECD countries.
Regulatory Authority/ Body for Company Registration in Estonia
The primary regulatory authority for company registration in Estoniais Commercial Register.
Eligible Business Structures under Company Registration in Estonia
Once the applicant has applied for the e-residency permit and obtained his /her digital id, they are ready to start a business in Estonia. Before starting a business in Estonia, it is necessary to choose a legal structure for the business. The Commercial Code of Estonia provides 6 different types of companies to the E-residents, and they are as follows:
- Private Limited Company (OÜ)
- Public Limited Company (AS)
- Sole Proprietor (FIE)
- General Partnership (TÜ)
- Limited Partnership (UÜ)
- Commercial Association (ühistu)
- Private Limited Company (OÜ)-
The private limited company (OÜ) is the most common form of business entity adopted by e-residents to set up their company in Estonia. E-residents register around 21,000 businesses in Estonia, and more than 99% of these businesses have been opened in private limited companies.
Compared to other business forms, a private limited company is the most suitable business entity for e-residents in Estonia. The following are the primary reasons for adopting a private limited company by the e-residents as the business entity for their business.
- Simple registration procedure: the registration procedure is very simple and straightforward, and all the processes can be done online.
- Low share capital requirement: a private limited company in Estonia can be incorporated with a low share capital of €2 500. There is no cap on the maximum share capital. This share capital can be non-monetary.
- Number of founder directors: the minimum requirement of directors at the time of incorporation of a private limited company is 1 only. These companies can operate with a single management board member. A local or a foreign company can become a founder and shareholder of the company.
- Financial liability: the company's shareholders are not personally liable for the obligations and debts of the company.
Due to the abovementioned reasons, Private limited companies are suitable for freelancers and ‘solopreneurs’ because these companies can be registered with a single shareholder. It has been observed that most of these companies have only 1-2 employees.
The company is also required to open a bank account where money will be deposited for the share capital of the company after the registration of the company. The business bank account can be opened at any EEA zone bank account or any payment institution.
The Commercial Code provides an alternative. If the company is registered in the e-Business Register, the share capital can be deposited in the court's escrow account. In this case, the company must apply for reimbursement of the money to the corporation’s EEA bank account within one year or else the share capital will be contributed to the state.
The company has the option to voluntarily register for VAT or obtain the VAT registration if the annual taxable turnover exceeds the amount of €40,000.
All the founding members need to have an e-residency card at the time of incorporation of the company.
The company needs to apply for an activity license should the company engages in a government-regulated industry.
- Public Limited Company (AS)-
A public limited company (AS)is a type of business entity which can offer its securities to the general public and foreign investors. The shareholders of these companies have the liability limited to the amount of share contribution to the company. Due to the high entry barriers, such as high incorporation costs, these types of companies are not the most common business entity adopted to do business in Estonia.
A Public Limited Company in Estonia cannot be registered without an authorised signatory. An applicant cannot simply register a public limited company itself with just an e-ID card. A resident board member is required to register a public limited company. Registration of a public limited company in Estonia requires a physical visit to the notary.
The minimum share capital required to register a public limited company in Estonia is €25,000. A shareholders' general meeting governs it, and its management is taken care of by the supervisory board consisting of at least 3 members who the company's shareholders elect. A minimum of 1 founder is required for its incorporation. Further, an auditor is also required to be appointed at the time of incorporation of a Public Limited Company in Estonia.
Where the turnover of a public limited company exceeds €40,000 in Estonia or €10,000 in other EU states, then the company has to obtain VAT registration. The company also has to obtain an activity license or give notice that the company is working in a government-regulated industry. The company also has to acquire notice from a bank or a payment institution about the contribution of the share capital.
- Sole Proprietorship (FIE)-
The adoption of the vehicle of a sole proprietorship is not a very common form of business entity adopted by companies in Estonia and by e-residents. The reason is that a sole proprietorship is not considered a separate legal entity in the eyes of the law. The goods and services are sold in the name of the resident and not in the name of a separate legal person making the e-resident personally liable for the consequences arising from their activities. Moreover, the taxation system for a sole proprietorship is also relatively complex and expensive; therefore, it is not advisable to adopt the business vehicle of a sole proprietorship. It can be an excellent vehicle for individuals (freelancers) and family members (family-owned restaurants).
The minimum share capital required to set up a sole proprietorship in Estonia is €0. The minimum number of founders needed is 1. Further, another great disadvantage in adopting a sole proprietorship business vehicle is that the proprietor has unlimited liability arising from the debts and obligations of the business. It is very easy to incorporate a sole proprietorship as it requires very few documents. The founder can set up a proprietorship using their e-residency card at a notary or a service provider using a Power of Attorney. Similar to other businesses, if the annual turnover of the proprietorship crosses €40,000, it has to obtain VAT registration.
- General Partnerships (tü) and Limited Partnerships (uü)-
These types of businesses are not very common among the e-residents despite a quick and easy-to-establish procedure. Both these entities can be formed electronically using the e-residency card or through a service provider using a Power of Attorney. Where the partnerships are being formed using an e-residency card, both the founders need to have an e-residency card.The difference between these two lies in the extent of liability the partners have against the debts and liabilities of the partnership.
To form these partnerships, there is no requirement for minimum share capital. However, a minimum of two founders are required to form these partnerships. In the case of general partnerships, all the partners are general partners, and they share an equal amount of liability arising from the debts and obligations of the partnership. On the other hand, in the case of a limited partnership, at least one general partner has unlimited liability, and at least one limited partner has limited liability. Additionally, in the case of public associations, all the partners can manage the partnership's affairs. In contrast, in the case of a limited partnership, only the general partners are allowed to manage the affairs, and the limited partner is barred.
- Commercial Association (ühistu)-
Where the purpose of the company is to support the economic interests of its members through a joint economic activity, the business vehicle of a commercial association, there is no minimum share capital requirement for setting up a commercial association in Estonia. There should be a minimum of 2 founders to register a commercial association. Here, the partners do not have personal financial liability unless agreed otherwise.
There are other alternatives available to foreign companies wanting to establish a business in Estonia in the form of (a) branch office and (b) a non-profit organisation (MTÜ).
- Branch Office -
Suppose an existing foreign company wants to permanently sell goods and services to the Estonian market under the company’s name. In that case, there is an option to register the company as a branch. It must be noted that a branch is not a separate business entity distinct from its parent company. Instead, the foreign enterprise is liable in Estonia for all the obligations arising from the activities of a branch office.
A branch office is supposed to be registered with the Estonian Business Register. A foreign company is allowed to set up only one branch office in Estonia. The application is made to a notary, and all the documents must be translated into Estonian by a sworn translator. In some cases, the compositions may also be required to be apostilled or legalised, depending on the origin of the documents. The accounting of the branch office shall be done separately from the head office and according to Estonian standards. Additionally, all the requirements of the VAT registration will be applicable to the branch office as they are applicable to other entities.
Non-Profit Organisation (MTÜ): A non-profit organisation is an association of two or more persons carrying their activities towards a non-profit objective.
Preliminary Steps for Company Registration in Estonia
For registration of a company in Estonia, all the founders have to be holders of E-residency digital ID cards of Estonia or Latvian, Belgian or Estonian ID cards, and Lithuanian or Estonian mobile ID, and they should be private persons. If the founder does not have any of these documents, he needs to visit a notary in Estonia to verify these documents.
Following is the procedure for becoming an e-resident in Estonia:
- Making an online application-
The applicant is required to make an online application and submit the fee, which may vary between €100-120. The applicant is required to choose the pickup location to receive their e-residency kit. The applicant must personally collect their digital ID because their fingerprints are required to obtain digital signatures.
- Selecting the service provider-
If the management board of the Estonian company is not located in Estonia. In that case, the applicant is required to provide a legal address and a service provider (contact person) who shall be responsible for correspondence with the concerned authorities on behalf of the Estonian company in Estonia. The service provider's address shall serve as the company's legal address. Both these services can be availed from the virtual office service provider. The cost of these ranges from €30-150 monthly. It includes the services such as bookkeeping etc.
- Online Registration of company at the e-Business Registry -
The applicant has to make an application for the company's online registration at the e-Business Registry. The applicant should decide the company's structure and deposit the state fee for company registration, €265.
- Application to business banking-
The applicant has to apply for business banking with a fintech partner who shall take care of all the banking needs of the company.
- Network globally-
By becoming a member of the e-resident community, the applicant gains access to the global network of the e-resident community to grow their business further.
Procedure for Company Registration in Estonia
An applicant going through the company registration process in Estonia must follow the method prescribed below.
- Choosing an appropriate name for the company
- Deciding the main area of activity
- Obtaining the Legal address and Appointment of Contact Person in Estonia
- Making an Application for Registration of the Company
- Making the share capital contribution
- Completing the Registration formalities of company registration
- Fulfilling the additional formalities for company registration
- Choosing an appropriate name for the company -
The first step in registering a company in Estonia begins with choosing an appropriate name for the company. It must be remembered that the company's name has to be in Latin letters only without using any special characters. Additionally, the name should be unique and distinguishable from existing companies' names and trademarks. The company's name doesn't need to match the brand name.
Where the applicant wants to build a website and social media accounts using the company's name, it is advised that the domain name for the company must be purchased before beginning the process of company registration. The availability of the desired name can be checked at the Business Register name query service. In case of rejection of the chosen name, the applicant can apply again with a different name without payment of any additional fee.
- Deciding the main area of activity-
After choosing the company's desired name, the applicant must decide the main area of activity the company will carry out. In furtherance of the same, the applicant has to choose the EMTAK code (The Estonian Classification of Economic Activities) to determine the main area of activity to be carried out by the company. The company, however, can undertake other commercial activities for revenue generation. The applicant must carefully select this code because this code shall determine the specific requirements and the number of licenses the company requires to obtain further.
- Obtaining the Legal address and Appointment of Contact Person in Estonia -
The company also needs a legal address that can be availed on an annual subscription. The law does not make it mandatory to have a resident director. However, the company must have a local contact person who shall handle the correspondence with the concerned authorities on behalf of the company. This does not mean that the contact person can take decisions on behalf of the company. The founders remain the owners, and the management board has full control and legal responsibility over the company.
- Making an Application for Registration of the Company -
The next step involves making an online application for the registration of a company on the e-business portal or through an API service provider. The process begins with preparation, signing the relevant documents, paying the state fee, and submitting the application. The state fee for company registration is paid to the Ministry of Finance, Estonia. The prescribed fee for an expedited company registration process is €265. The application for the company registration must be signed by all the shareholders and board members along with the contact person appointed in Estonia. The signatures can be made remotely with the help of secure digital IDs assigned to all the company members.
- Making the share capital contribution -
The contribution to the share capital can be made either by transferring the funds to the start-up's bank account or the designated depository bank account of the company's registrar. Though share capital contribution is required; however, the founders can register the company without contributing the share capital and postpone the event of share capital contribution to a future date. Where the founders want to postpone the capital contribution, they have to mention the time in the application.
- Completing the Registration formalities for company registration -
Once the application has been duly submitted, the entrepreneur has to wait for the court's decision on the application process. The court usually takes one day to give its decision, and the decision on the application is usually communicated through email. A bank account must be opened for the company's banking needs on successful company registration in the business register. The entrepreneur must get an EU IBAN account if the company does not have a business bank account in European Economic Area (EEA). The EU IBAN account must be opened in an Estonian bank or through an EU licensed fintech company, or by applying for a business bank account in EEA.
- Fulfilling the additional formalities for company registration -
There are additional formalities that need to be undertaken by a company. These are as follows:
Legal Documentation: The Company must prepare the necessary legal documentation for carrying forward the company's affairs. These include the founders' agreement, employment agreements, non-disclosure agreements etc.
Taxation and Accounting: The founders should know Estonia's tax and accounting framework and regulations.
Licensing: Depending on the type of commercial activities to be undertaken by the company, special permits and licenses must be obtained.
VAT registration: Where the company's annual turnover crosses the threshold of €40,000 from the commercial activities undertaken in Estonia, the company has to register itself for Value Added Tax (VAT).
Corporate Tax in Estonia
All companies that are registered in Estonia are required to pay corporate tax. The following taxes would be applicable:
- Corporate Tax payable in Estonia is 20% of the profit distribution. However, a reduced net effective rate of 14% is applicable in the case of regular dividend distribution.
- The Branch Tax rate is also 20% in Estonia.
- The capital gains taxrate is payable at the rate of 20%.
- The standard rate of VAT is 20%. A reduced rate of 9% is applicable on certain items. There are zero-rated items, and there are certain items on which Exemptions have been provided.
Documents for Company Registration in Estonia
The registration of a company can be done electronically through the e-Business portal. In case the founders of the company do not wish to get their company registered electronically, they can avail the option of physical registration of the company with the assistance of a notary. The notary shall help in the preparation of the following documents required for the registration of a company:
- Information about the Company's Founders- This will include their address, visa, passports and other relevant information.
- Memorandum of Association
- Articles of Association which must be notarised
- Board Resolution( If required)
- Certificate regarding payment of a fee
- Bank certificate regarding the deposition of share capital for the company