Establishing a company

 

 

The most popular type of legal entity being set up by foreigners in Estonia is the so called “Osaühing, OÜ”, or Private Limited Company. 

First the founder(s) of a Private Limited Company should consider whether to buy a pre-registered company, or registering a new one. Pre-registered companies are sold by numerous accounting- and law firms, and is often the fastest way to have one’s company registered. However, in addition to the stamp taxes, a fee will obviously be charged by the intermediary (generally EUR 500-1000).

If registering a new Private Limited company, first the share capital (minimum EEK 40 000) must be paid in to a designated bank account. If non-monetary contributions are made, special rules apply.

 

Then, the following documentation will have to be prepared in Estonian and notarised:

Memorandum of Association, setting out, among other things, business name, address, area of activity, names and residences of the founders, the amount of share capital, the nominal value of the shares and their division among the founders and the members of the management board.

Articles of Association, setting out, among other things, name, address, business activity, share capital, procedure for payment of shares, reserve capital, other terms and conditions for the company.

The founders sign the documentation. If a founder is a foreign company, the power of attorney given to its representative must also have been notarised.

The notarised documentation is then submitted to the Commercial Register.

 

Using the possibilities of the Estonian electronic identification system and digital signature, it is from 2007 possible to register a company electronically with expedited procedure (target within two hours). However, this procedure is limited to founders who are registered as Estonian residents.

(Source: Commercial Code, Articles 137-147)

 

In More Detail

The Estonian legal system is based on the continental European model.
The new Commercial Code was adopted on 15 February 1995 and has been effective since 1 September 1995. The law expresses the basic principles of Estonian entrepreneurship according to the best European traditions and standards and outlines the role of the Commercial Register. According to the Commercial Code there are five forms of business entities, which are created by entry into the Commercial Register:

 

Sole Proprietorship (füüsilisest isikust ettevõtja or FIE)

Any natural person may be a sole proprietor. A sole proprietor may be entered in the Commercial Register at his/her request. A sole proprietor will be entered into the Commercial Register if he or she is registered with the Tax Board as a taxpayer under the Value Added Tax Act. The law may provide other cases in which a sole proprietor will be entered in the Commercial Register.

 

General Partnership (täisühing or TÜ)

A general partnership is a commercial undertaking in which two or more partners operate under a common business name and are solitarily liable for the obligations of the partnership with all of their assets. A general partnership will operate on the basis of the partnership agreement concluded by the partners. There is no minimum capital requirement and partners shall make monetary or non-monetary contributions in the amount prescribed by the partnership agreement.

 

The partners shall agree on and enter to the Commercial Register: business name of the partnership, area of activity and the amount of the contributions of the partners.

Each partner will receive a portion of the distributed profit corresponding to the partner’s contribution (unless the partnership agreement prescribes otherwise).

Departing partner of the partnership shall also be solitarily liable with the other partners for an obligations of the partnership which arose before entry of the departure or exclusion of the partner in the commercial register if the due date for performance of the obligation has arrived or arises within five years after departure or exclusion.

The partnership shall be dissolved: by resolution of the partners, by court judgement, upon expiry of a term or achievement of an object.

 

Limited Partnership (usaldusühing or UÜ)

The provisions concerning general partnerships shall apply to limited partnerships unless otherwise provided in Commercial Code.

A limited partnership is a company in which two or more persons operate under a common business name, and at least one of the persons (general partner) is liable for the obligations of the limited partnership with all of the general partner’s assets, and at least one of the persons (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution.

A limited partner shall not have the right to manage or represent the limited partnership unless the partnership agreement prescribes otherwise. A limited partner who has paid a contribution in full shall not be liable for the obligations of the limited partnership and he/she is entitled to the corresponding part of its profits.

 

Private Limited Company (osaühing or OÜ)

A private limited company is a company that has share capital divided into private limited company shares. A shareholder will not be personally liable for the obligations of the company. A private limited company is liable for the performance of its obligations with all of its assets.

The share capital must be a minimum of EEK 40,000 (approx. EUR 2,556). The minimum nominal value of a share is EEK 100. A shareholder may freely transfer a share to another shareholder.

Upon transfer of a share to a third person, the other shareholders have the right of pre-emption.

A share of a private limited company can be pledged or encumbered or divided or transferred to successor if not fixed otherwise in the Articles of Association. The shareholder is required to make a contribution corresponding to the nominal value of the shareholders share. The Management Board organises the accounting of the private limited company. A private limited company must have an auditor if the share capital of the private limited company is greater than EEK 400,000 (approx. EUR 25,560) or if so stated in the Articles of Association. An auditor is also mandatory when the company surpasses certain threshold values in terms of turnover, number of employees and asset value.

 

Public Limited Company (aktsiaselts or AS)

A public limited company is a company that has a share capital divided into public limited company shares. A shareholder is not personally liable for the obligations of the public limited company. A public limited company is liable for the performance of its obligations with all of its assets. One or more natural or legal persons without or with share subscription may found a public limited company.

Share capital must be a minimum of EEK 400,000 (approx. EUR 25,560) and the minimum nominal value of a share should be EEK 10. Shares shall be registered. Shares shall be entered in the Estonian Central Register of Securities. The rights attached to registered shares belong to the person who is entered as the shareholder in the share register maintained by the company. The management board shall ensure the timely submission of correct information. The number of shares a shareholder can own in a company is unlimited and shares can be freely transferred to third parties. A share cannot be divided.

The remuneration of auditors is obligatory and the general meeting, who specifies the procedure for the remuneration of auditors, will also specify the number of auditors.

 

Corporate Governance

The management of a public limited company operates through general meetings of shareholders, the Management Board and the Supervisory Board. A private limited company operates through the Management Board.

The general meeting of the shareholders has the highest authority in the corporation and is to be convened at least once a year. It approves the annual report, distributes profits, elects the Supervisory Board and the auditors of the corporation, amends the Article of Association, increases and decreases the share capital, decides on dissolution the public limited company and etc. according to law. Resolutions are usually passed by a simple majority vote. However, for a change in the Articles of Association or termination of its operations and for a resolution to decrease or increase share capital, a majority of 2/3 is required.

The Management Board is the executive body of the corporation, which represents and manages the corporation. The Management Board must report the corporation`s activities and economic situation to the Supervisory Board at least once every four months. The residence of at least one-half of the members of the management board must be in European Union, in ECC or Switzerland.

The Supervisory Board plans the strategic activities of the corporation, arranges its management, and controls the Management Board. A member of the Management Board cannot be a member of the Supervisory Board.

 

Formation Procedures

For entering a company in the Commercial Register, the founders must draft a Memorandum of Association, the founders shall also apply an Articles of Association as an annex to Memorandum of Association. The Memorandum of Association must be signed by all founding members and notarised in Estonia or at the Estonian diplomatic representation in a foreign country. Upon foundation, the founders shall open a bank account in the name of the newly founded company into which monetary contributions will be paid in. The required minimum share capital requirement must be paid in before the registration of the company. Contributions may be monetary or non-monetary, but not in the means of service or work provided for the company or any activities of the founders at the foundation of the company. If the non-monetary contribution exceeds EEK 40,000 (approx. EUR 2,556) or if non-monetary contributions in total exceed one half of the share capital, an evaluation is required by an auditor. An auditor must audit the valuation of a non-monetary contribution paid in to a public limited company.

The Memorandum of Association must include the following information:

the business name, location, address and area of activity of the company;

the names and residences or seats of the founders;

the proposed amount of share capital;

the nominal value and number of shares and, upon of issue of more than one class of shares, their denotation and the rights attaching to the shares and their division among the founders;

the amount to be paid for the shares, and the time, place and procedure of payment;

if a share is paid for by a non-monetary contribution, the item of the non-monetary contribution, its valuation method and value;

the names, personal identification codes and places of residence of members of the management board, supervisory board, procurator (if appointed) and auditors;

the assumed amount of foundation expenses and the procedure for payment thereof.

 

Registration Requirements

The Management Board must submit a petition application for the registration in the Commercial Register within six months of concluding the Foundation Agreement. The application must be signed by all members of the board and include the following information to be entered to the Commercial Register:

the business name of the public limited company;

the area of activity, location and address of the public limited company;

the amount of share capital;

the date of approval of the Articles of Association;

the names, personal identification codes and residences of the management board;

the members of the management board entitled to represent the public limited company differently than provided for in subsection 307(1) of the Commercial Code;

the beginning and end of the financial year;

other information provided by law.

The following documents should be enclosed with the application:

the Memorandum of Association;

the Articles of Association;

a bank notice concerning the payment of share capital;

upon payment by a non-monetary contribution, the agreement concerning the transfer of the contribution to the public limited company, documents certifying the value of the contribution and an opinion on the valuation of the non-monetary contribution signed by the auditor;

the names, personal identification codes and residences of the members of the management board, the supervisory board, and the auditors;

specimen signatures of the members of the management board;

telecommunication numbers (telephone, fax, etc.);

a notice from the registrar of the Estonian Central register of Securities concerning registration of the shares;

other documents provided by law.

In case the founder is a foreign company, an official certificate proving the existence of the company in the country of incorporation is required. This certificate as well as a foundation resolution must be notarised in the foreign country by a public notary, which is legalised by the Ministry of Foreign Affairs of the foreign country and the Estonian Embassy or its diplomatic representative. If there is a translator available in the Estonian Embassy, these documents may be translated in a foreign country and legalised at the Estonian Embassy. In that case, no further legalisation is required in Estonia. However, if there is no acceptable translator available in a foreign country, the documents must be legalised at the Estonian Embassy and sent to Estonia for translation and notarisation.

All documents must be submitted to the Commercial Register in Estonian or with an appended notarised translation. The Foundation Agreement must be signed by all founders or by their notarised proxy. As a rule, the registration process takes up to 2 or 3 weeks.

 

The following stamp taxes are applicable on registration of the company:

Sole Proprietorship EEK 500 (approx. EUR 31.9)

General / Limited Partnership EEK 500

Branch of a foreign enterprise EEK 3,000 (approx. EUR 191.6)

Private / Public Limited Company 0,2% of (nominal) share capital (min. EEK 3,000 max. EEK 20,000 (approx. EUR 1,278) for private limited company; and min. EEK 4,000 (EUR 255.6) max EEK 40,000 (approx. EUR 2,556) for public limited company)

1EUR=15.65 EEK

 

Foreign Enterprise Entities

If a foreign commercial undertaking wants to permanently offer goods or services in its own name in Estonia, it should enter its branch in the Commercial Register. In the cases provided by law, a commercial undertaking must obtain a license in order to open a branch (filiaal) in Estonia. All entities not registered in the Commercial Register (e.g. permanent establishments) must be separately registered with the Tax Authorities.

As a branch is not a legal person, the foreign company is liable for the obligations of the branch. The branch of a foreign company is established after its registration in the Commercial Register. To register a branch, the application must contain the same data about the branch and the parent company as for a share company. The application also has to state the country under whose legislation the corporation operates. A foreign company shall appoint a director or directors for the branch. A director must be a natural person with active legal capacity. The residence of at least one director must be in Estonia. A bankrupt or a person who`s right to engage in economic activity has been taken away pursuant to law shall not be a director. If the branch or company conducts banking activities in Estonia it will need a foreign investment license from the Council of the Bank of Estonia.

There must exist separate records for the transactions of the branch, which provide a true and fair basis for determination of the income and expenses attributable to the branch. The branch must generally follow the Estonian Accounting Law, with only minor exceptions stipulated in that law especially for branches (e.g. the branch is not required by law to have a statutory audit performed).

 

Source: Estonian Investment and Trade Agency www.investinestonia.com

 http://investinestonia.com/index.php/investment-guide

 

 

Sea also Company Registration Portal: http://www.rik.ee/33168
Read also “Estonian Enterpreneurs` Portal helps cut red tape” : http://brilliantfixer.wordpress.com/2008/02/01/estonian-enterpreneurs-portal-helps-cut-red-tape/
Central Commercial Register: http://www.eer.ee/index_eng.phtml

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