Sole proprietor (füüsilisest isikust ettevõtja, FIE)
- must be registered
- has no minimum capital or articles of association
- is responsible for the business with his personal property
General partnership (täisühing, TÜ)
- two or more partners
- partners are solidarily liable for the obligations of the general partnership with all of their assets
Limited partnership (usaldusühing, UÜ)
- two or more partners
- at least one partner (general partner) is liable for the obligations of the limited partnership with all of the general partner’s assets
- at least one partner (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution
Commercial association (tulundusühistu)
- aimed at supporting and advancing the economic interests of its members through collective business activity
- members take part as consumers, users, suppliers, laborers or in other similar manners
- no personal liability of its members for the obligations of the association unless the articles of association provide for personal liability, which can be full personal liability or additional liability at least in the sum of 2,500 euros
- minimum share capital of 2,500 euros unless the articles of association provide for personal liability
Private limited company (osaühing, OÜ)
- at least one shareholder
- the minimum share capital is 1 cent per shareholder
- share capital must be paid but can also be in the form of a non-monetary contribution
- shareholders are not responsible with their personal property. If the share capital is under 2,500 euros and in bankruptcy proceedings the other assets of the debtor are not sufficient for satisfying the claim of the interim trustee, then reimbursement from a shareholder can be required to the extent of the difference between the share capital and 2,500 euros.
- transfers of share must be notarised. If the share capital is at least 10,000 euros and fully paid in, said format requirement can be changed in the articles of association to a format which can be reproduced in writing.
Public limited company (aktsiaselts, AS)
- at least one shareholder
- share capital must be at least 25,000 euros
- shares must be registered and entered in the Estonian Central Register of Securities
- no personal liability for the company’s obligations
Non-profit association (mittetulundusühing, MTÜ)
- a voluntary association of persons, whose objective or main activity is not earning income from economic activity
- may engage in economic activity and earn income, but this must be used to achieve the objectives specified in its articles of association
at least two members, the conditions of membership and members’ obligations are set out in the articles of association
Citizens of European Union member states, Iceland, Liechtenstein, Norway, and Switzerland have the right to live and work in Estonia for up to 3 months without registering for temporary residence. After this period, they must register their place of residence in Estonia.
Other foreigners can work in Estonia for a short term (up to 365 days) if they are in Estonia legally and their short-term employment is registered. The employer must have prior approval from the Estonian Unemployment Insurance Fund to hire a foreigner. In general, the salary should be at least the average annual gross monthly wage in Estonia.
For long-term residence and work in Estonia, longer than one year, one can apply for a temporary residence permit for employment. This permit is tied to a specific employer and can be granted for up to five years. If a person has lived in Estonia continuously for five years under a temporary residence permit and meets certain additional conditions, they can apply for a long-term permanent residence permit.
A residence permit can also be obtained for engaging in business activities if the person has invested a certain amount in the business's activities in Estonia (usually at least 65,000 euros). Additionally, a residence permit can be applied for conducting business as a startup. The startup must have been previously assessed by an expert commission.
Since there are many differences in various professions and employees, it is advisable to inquire with the Estonian Police and Border Guard Board regarding your specific position.
Direct obstacles from the state and local government are minimal and can mainly arise from the individual you are interacting with. Procedural deadlines, including for replying to requests for information, are usually set out in law, although they may prove impractical if an institution is overloaded with work.
A significant portion of bureaucratic processes can be conducted online through relevant e-registries and personal presence is rarely required anywhere. Most notarial acts can also be performed through remote authentication (video bridge), including the signing of contracts for the sale or purchase of real estate, company shares or other assets. However, for accessing e-registries and signing documents online, possession of an Estonian Digital ID is required.
Most individuals in government offices understand English and/or Russian, and with their consent, it is possible to use a foreign language in oral communication. Additionally, e-registries, government websites, and a large portion of legislation are available both in English and Russian. However, the language of public administration in Estonia is understandably Estonian, and official documents such as notarial acts must generally be submitted in Estonian or accompanied by a certified translation. In a local government unit where at least half of the residents belong to a minority ethnic group, there is a right to address authorities in that language (i.e., Russian).
Please also refer to the section on foreign investment review.
Some of the more common ways businesses can combine:
- Acquisition of shares;
- Acquisition of enterprise (a business unit as a collection of assets instead of a legal person);
- A merger, including:
- A combination merger where a new company is formed by the merging companies and the merging companies are considered dissolved;
- An absorption merger, where one company absorbs the other and the acquired company is considered dissolved);
- A division, including:
- A division by distribution, upon which a company transfers its assets to recipient companies and shall be deemed to be dissolved;
- A division by separation, upon which a company shall transfer part of its assets to one or several recipient companies;
- An EU cross-border merger or division;
- Takeover bids for listed companies.
As an EU member state, Estonia’s laws are harmonized with the relevant EU legislation. The Competition Act is the most important law, regulating among other things merger control, abuse of dominant position and state aid. Another relevant law is the Restriction of Unfair Competition and Protection of Business Secrets Act. State supervision is exercised by the Competition Authority.
Undertakings operating in markets regulated by specific Acts (such as the Electricity Market Act, District Heating Act, the Aviation Act, the Natural Gas Act, the Postal Act, the Ports Act, and the Public Water Supply and Sewerage Act) shall pay a supervision fee to the Competition Authority.
Unlike other EU states, competition infringements are currently prosecuted and sanctioned in criminal or misdemeanor proceedings instead of administrative proceedings, though as of 2023 there are plans in progress to change this legislation.
The Penal Code states that agreements, decisions, or concerted practices between undertakings with the objective or effect of restricting competition are punishable by a pecuniary penalty or up to one year's imprisonment. Agreements, decisions, or concerted practices among competitors, including participation in public procurements, which directly or indirectly fix prices or other trading terms with respect to third parties, limit production, service, goods markets, technical development, or investment, or share markets or sources of supply, restrict access to goods markets for third parties, or attempt to exclude third parties from these markets, are punishable by a pecuniary penalty or by one to three years' imprisonment. The pecuniary penalties for these acts, if committed by a legal person, are, respectively, up to 5 percent of the legal person's turnover or 5 to 10 percent.
There are no stamp taxes or transfer taxes.
In most cases, making or amending entries in any register, such as the Commercial Register or the Land Register, require the payment of state fees, the rates of which are determined by the State Fees Act. Typically, these amounts are quite negligible.
Certain contracts require notarial certification, including merger and division agreements and transfer of real estate. In such cases, one must consider the notary fee established by the Notary Fees Act. The fee is typically calculated as a percentage of the transaction value. An important difference regarding business combinations is that in the case of mergers and divisions, the transaction value is calculated based on the share capital, while in asset purchase agreements the transaction value is usually the value of the asset itself. Since the value of the enterprise is often significantly higher than the company’s share capital, the notary fees for asset purchase agreements are also higher.
In any case, the most significant costs in any business combination are likely to be costs related to due diligence, legal assistance, and auditing.
A takeover bid may not include resolutive conditions (where the end of legal consequences is contingent upon an uncertain event). A mandatory takeover bid may also not contain suspensive conditions (where realization of legal consequences is contingent upon an uncertain event). The offeror may not set conditions that can be influenced by the offeror or persons acting in coordination with them.
The offeror may link the termination of rights and obligations to the disclosure of a competing takeover bid. This cannot be done in the case of a mandatory takeover bid. A mandatory takeover bid may, however, be set contingent on obtaining the approval of the Competition Authority or another governmental institution if such approval is mandatory.
Once a takeover bid has been publicly disclosed, the offeror is prohibited from making changes, except to make the price more favorable to the target and to waive suspensive conditions. The obligation to pay the purchase price in cash cannot be replaced by an obligation to pay in securities, and vice versa.
In the case of other business combinations besides takeover bids, any conditionality depends on the agreement of the parties. Sale agreements for shares or stocks may be conditional. Merger and division agreements may also be conditional. If a condition specified in a merger or division agreement has not occurred within five years of the contract being signed, the entity may terminate it.
The purchase price may be paid in cash or in liquid shares traded on a regulated securities market. Payment of the purchase price in shares is only permissible if it does not violate the requirements of the Securities Market Act. If shares are transferred as part of a conditional increase in share capital, payment for the shares can only be made in cash.
There are no specific rules regarding the seller’s obligation to assist the buyer’s financing. However, the Commercial Code prohibits a company from granting a loan for the acquisition of its own shares or providing collateral for the same purpose. Such a loan agreement is void. A transaction securing such a loan is not void, but the person whose loan was secured must compensate the damages incurred by the company due to such security.
Due to this prohibition, a leveraged buyout in Estonia is usually done through a special purpose vehicle created specifically for that purpose.
Key Features:
- Liability: Shareholders’ liability is limited to their investment in the company. Personal assets are protected from business liabilities.
- Capital Requirements: The minimum share capital is just 1 euro cent per shareholder, but practical operating capital is usually higher.
- Management: Offers flexible management and organizational structure. The transfer of shares typically requires notarization unless the share capital exceeds 10,000 euros.
- Suitability: Ideal for a wide range of business activities and scalable as the business grows.
Pros: Limited liability protects personal assets. Low initial capital requirement. Flexible and suitable for various business sizes and types.
Cons: More regulatory compliance compared to simpler structures. Share transfers might involve legal formalities like notarization.
- Unique System: Estonia employs a deferred corporate tax system where profits are only taxed when they are distributed to shareholders, not when they are earned. This system encourages reinvestment into the company.
- Tax Rate: The standard corporate income tax rate is 20%, but it is calculated as 20/80 of the net distribution. From 2025, the rate is set to increase to 22%.
- Reinvested Profits: Profits retained within the company are not subject to corporate income tax, providing significant benefits for businesses focusing on growth and reinvestment.
In September 2023, the Foreign Investment Reliability Assessment Act came into effect, requiring certain foreign investments to obtain government approval.
A foreign investor is considered to be:
- a person who holds the citizenship of a country outside the European Union or who is stateless;
- an entrepreneur established under the laws of such a country; or
- an entrepreneur controlled by the aforementioned individuals,
and who:
- acquires a direct or indirect significant stake in the target company;
- gains direct or indirect control over the target company;
- acquires a portion of the target company.
The target company is a certain business that is crucial to the state, such as providers of essential services, businesses with significant state ownership, producers or suppliers of military goods, nationwide television or radio service providers, specific media service providers, railway infrastructure companies, international airport or certain seaport operators, and more. The precise list is provided in section four of the Foreign Investment Reliability Assessment Act.
Authorization must be obtained before concluding the foreign investment transaction. This authorization is granted by the Foreign Investment Committee operating under the Consumer Protection and Technical Regulatory Authority. The notification can be submitted electronically, and there is no state fee. The decision should be made within 30 days (up to 120 days in special cases or during negotiations). Authorization may be granted with additional conditions.
If a foreign investment is made without permission, the Consumer Protection and Technical Regulatory Authority may issue an injunction, requiring a party to divest their ownership, undo the transaction, or take other actions to restore the pre-foreign investment situation. In case of non-compliance with the injunction, the Consumer Protection and Technical Regulatory Authority can impose a non-compliance levy of up to 100,000 euros. The levy can be imposed repeatedly until the injunction is complied with.
The main sources for the relevant legislation are the Anti-Corruption Act and the Penal Code.
Estonia's penal law also applies to the granting, acceptance, or arrangement of the receipt of bribes or influence peddling committed outside the territory of Estonia or to crimes that damage the financial interests of the European Union if such acts are committed by an Estonian citizen, company or official.
The following acts are considered crimes under the Penal Code:
- Acceptance of a bribe;
- Arrangement of a bribe;
- Giving or promising a bribe;
- Acceptance of a bribe in the private sector, i.e., by a person competent to engage in economic activities in the interests of a private law entity and in exchange for the abuse of their competence;
- Giving a bribe in the private sector.
All these acts are punishable either by a pecuniary fine or by up to five years' imprisonment. Giving a bribe, if committed at least twice, by a group, or on a large-scale basis, is punishable by one to ten years' imprisonment. A knowing violation of a procedural restriction established by the Estonian Anti-Corruption Act to a significant extent is punishable by a pecuniary fine or up to one year's imprisonment, or up to three years if committed on a particularly large-scale basis.
Failure to comply with obligations provided by legislation implementing international sanctions or establishing sanctions of the Government of the Republic or violation of the prohibition is punishable by a pecuniary punishment or up to five years’ imprisonment. Misdemeanors related to sanctions can be found in the International Sanctions Act.
All aforementioned crimes, if committed by a legal person, are punishable by a pecuniary fine. In the case of a legal person, the court may impose a pecuniary fine ranging from 4,000 to 40,000,000 euros.
Corruption in Estonia can happen but is not a significant problem. Transparency International’s Corruption Perception Index ranks Estonia at number 14 on their best-to-worst list among the countries of the world.
The main law regulating employment relations is the Employment Contracts Act. This law regulates the rights and obligations of employees and employers, including concluding and transfer of employment contracts, working and rest time, holidays (including parental leave), wages, termination of employment contracts, and possible claims and liability.
There is a minimum wage in Estonia, which is 820 euros (gross) in 2024 and which usually rises at the start of every new calendar year. A full-time employee works 40 hours a week, has the right to 28 calendar days of annual holiday and the right to receive holiday pay. An employer can only cancel the contract extraordinarily and must always justify the cancellation, giving no less than 15-90 days of notice, depending on the employee’s duration of employment.
The provisions of the Employment Contracts Act are of a mandatory nature. This means that an agreement between the employee and employer that deviates from the provisions of that act or the Law of Obligations Act regarding the rights, obligations, and liability of the parties, and does so to the detriment of the employee, is invalid, unless such an agreement is specifically permitted by the act itself.
The Labor Dispute Resolution Act governs the establishment and the rules of procedure of labor dispute committees and the procedure for the resolution of a labor dispute. This is a voluntary specialized committee without any state fees and a simplified procedure compared to courts. The committee's decision, however, has the same power as a court decision.
Break-up fees are not provided for by law, and their negotiation is a matter of the parties' contractual freedom.
According to the Law of Obligations Act, persons engaging in any pre-contractual negotiations must consider each other's interests and rights. If such negotiations do not result in an agreement, no legal consequences arise from them. However, a person must not engage in negotiations in bad faith, especially if they have no genuine intention of entering into a contract, nor terminate negotiations in bad faith. In that case, the aggrieved party has the right to claim compensation for damages. Generally, these damages should include directly related costs and expenses rendered useless (such as travel and time costs associated with negotiations, drafting of contract projects, etc.). If it would be extremely unfair to limit compensation solely to direct costs, the party to the contract must reimburse all the expenses incurred in relying reasonably on the promise of the contracting party to conclude a contract.
Typically, such situations are resolved through a separate agreement (such as a letter of intent), which may stipulate penalty clauses in case either party refuses to conclude the contract. This also applies to preventing competing offers. The parties may agree, for example, on a reservation period.
A certificate for a cross-border merger or division shall not be issued if it is planned for fraudulent purposes or with the intent to evade legal requirements, or if it is planned for criminal purposes or may pose a threat to the security of Estonia. This also applies if the registrar has a justified suspicion that the cross-border merger or division is planned for the purposes specified above. The registrar may make inquiries to state or local government authorities or other public-law legal persons, who will inform the registrar about unfulfilled obligations and provide an assessment of whether, in their opinion, there are circumstances excluding participation in the cross-border merger.
In the case of real estate acquisition, the Restriction on Acquisition of Immovables Act sets certain limits for foreigners when acquiring agricultural or forest land. This does not apply in the context of a company's merger and division but is applicable in other ways of land acquisition.
In other cases, without regards to competition regulations or specific industries, government agencies do not have a general right to hinder business combinations, given that the legal procedure has not been violated and the persons involved comply with the requirements of the law.
Cross-border merger, division or transformation is possible for an Estonian limited liability company (AS and OÜ) with another limited liability company which is registered in an EU/EEA country, and which complies with the requirements of Directive 2017/1132/EC.
The procedure is similar to a domestic one with some differences. The preparation of a merger report is mandatory. The agreement must specify among other things the compensation offered to shareholders, the principles of creditors' protection and benefits provided to the members of the governing bodies. The transaction report must also explain the transaction’s impact on the company's shareholders and employees, including measures taken to protect employment relationships and significant changes in working conditions or the place of business. The transaction agreement must be attested by an Estonian notary. The agreement must be reviewed by an auditor who also prepares a written report.
A creditor whose claims arose before the disclosure of the cross-border agreement, has a right to receive security, with respect to claims that have not become due by the date of disclosure if the transaction may jeopardize the fulfillment of his claims.
Participation in a cross-border merger, division or transformation is not permitted if the company is in liquidation and the distribution of its assets to partners or shareholders has started, or if reorganization, bankruptcy, or criminal proceedings have been commenced against the company.
The Community-scale Involvement of Employees Act is also a relevant law in case of cross-border transformations, divisions, or mergers, outlining regulations for informing and consulting employees and their participation in the management of the enterprise.
Finally, the rules and regulations of the other jurisdiction must naturally be taken into consideration too.
Key Features:
- Liability: Shareholders’ liability is limited to their shareholdings, protecting personal assets from company debts.
- Capital Requirements: Requires a minimum share capital of 25,000 euros.
- Management: Shares must be registered with the Estonian Central Register of Securities, ensuring transparency and regulatory compliance.
- Suitability: Ideal for businesses that plan to expand significantly and seek to attract substantial investment through public stock offerings.
Pros: Enables raising capital from public investors. Limited liability for shareholders. High credibility and visibility in the market.
Cons: High initial capital requirement. Extensive regulatory and reporting obligations.
Estonia has a three-tiered court system. All civil and criminal proceedings start at the county court level, with the appellate level being the circuit courts located in Tallinn and Tartu, and the cassation level being the Supreme Court located in Tartu. For administrative proceedings, the first instance is typically handled by administrative courts located in Tallinn and Tartu. In specific administrative matters, it may be mandatory to go through a pre-trial procedure before turning to the courts.
There are no specialized courts. Claims for the payment of a monetary amount arising from a private law contractual obligation of up to 8,000 euros, can be resolved through a simplified procedure in the expedited order-for-payment process. Parties in labor disputes can turn to the Labor Dispute Commissions located in Tallinn, Tartu, Jõhvi, and Pärnu. In disputes related to the rent of residential premises in Tallinn, parties can also seek resolution from the Tallinn Rental Dispute Committee. Decisions made by either of them have the same legal consequences as court judgments. In Tallinn, there is also the Arbitration Court of the Estonian Chamber of Commerce and Industry, whose decisions are enforceable in all countries that have ratified the 1958 New York Convention. Estonia does not have a jury system.
Individuals can represent themselves in court or be represented by a legal representative. A representative must have the necessary legal education. An employee of a company can serve as a representative in court if they have sufficient knowledge and experience, as determined by the court. In the Supreme Court, a lawsuit can only be filed through an attorney. In criminal proceedings, anyone other than an attorney can act as a defense counsel only with the consent of the proceedings authority.
The speed of court proceedings depends on various factors, but according to 2022 statistics, in cases involving substantive disputes, the time for resolving civil matters is approximately 340 days at the county court and 197 days at the circuit court. In administrative matters, this is 288 and 257 days, respectively.
In the case of division and merger, shareholders must be provided with the contract, the report, and the auditor's report at least two weeks before deciding on the merger or division. If a public limited liability company (AS) is involved, the documents must be made available at least one month before the decisive general meeting. No earlier than one month after the decision, an application must be submitted for the registration of the merger or division in the Commercial Register. The application will be reviewed within five business days. All in all, the relevant waiting periods provided by law add up to about three months.
In cross-border mergers and divisions, the auditor’s report and the draft agreement must be made accessible at least six weeks before the general meeting and the agreement must be submitted to the Commercial Register for disclosure no later than one month before. Naturally, the requirements of the other participant's jurisdiction must also be considered.
For other business combinations, the time spent is primarily related to gaining access to a notary, which is usually relatively quick. For larger combinations, the most significant time expenditure is associated with conducting due diligence and auditing.
When an enterprise (a business unit) is transferred under whichever legal basis (merger, division, purchase agreement etc.), employment contracts are transferred unchanged to the acquiring company and in accordance with the Law of Obligations Act’s rules on transfer of enterprise. It is prohibited for the transferor and the acquirer to terminate the employment contract due to the transfer of the enterprise. This is only true if the company continues the same or similar economic activities. The employee can still be laid off in a situation where, as a result of restructuring, it is no longer possible to offer work to the employee. The lay-off must be carried out in accordance with the requirements of the Employment Contracts Act. The above does not apply in the case of transfer due to bankruptcy.
Before the transfer of the enterprise, the transferor and the acquirer must submit a notice to the employees’ representative or, in their absence, to the employees. The notice must contain information about the transfer, including the transfer date, reasons for the transfer, consequences for employees, and planned measures. If the transferor or acquirer plans to make changes affecting the employees’ situations (e.g., changing the location or working hours), they must consult with the representative or employees in advance. If there is a need to change any conditions agreed upon in the employment contract, consultation alone is not sufficient, and the employee's consent is also required. Failure to perform the obligation to inform and consult upon the transfer of the enterprise is punishable by a fine of up to 32,000 euros.
Cross-border transformations, divisions, or mergers are governed by the Community-scale Involvement of Employees Act, which outlines regulations for informing and consulting employees and their participation in the management of the enterprise.
Please see the section on foreign corrupt practices.
As for business combinations, according to the Code of Criminal Procedure, criminal proceedings are not initiated, and ongoing criminal proceedings are terminated when the legal entity suspected or accused has ended. Estonian laws do not allow for the transfer of personal criminal liability for a crime committed by a legal entity to a successor. This has been confirmed in the practice of the Supreme Court. Liability can only be attributed to the specific legal entity whose representative committed the act in the interest of that particular legal entity. In the case of merger or division, it might not be possible to speak of the same legal entity.
Therefore, the law allows legal entities to avoid criminal proceedings through merger, except for the merging entity that continues to operate with the existing registration code. In the case of companies merging by forming a new legal entity, criminal proceedings can be avoided for all merging entities because the new business entity is assigned a new registration code. The same applies to divisions by forming new entities.
Key Features:
- Liability: The owner has unlimited personal liability for all business debts and obligations.
- Capital Requirements: No initial capital requirement.
- Management: The owner has full control over the business operations and decisions.
- Suitability: Best for individuals seeking to start a small-scale business or operate as freelancers.
Pros: Simple and inexpensive to set up and manage. Full control over business decisions and operations.
Cons: Unlimited personal liability poses significant financial risk. Unique taxation issues as business income is treated as personal income.
The main laws relevant to business combinations are:
- The Commercial Code (conditions for mergers and divisions, selling and purchasing shares);
- The Non-profit Associations Act (the same for non-profit associations);
- The Securities Market Act (conditions for trading on regulated securities markets);
- Law of Obligations Act (general terms of a sales contract, regulations on the transfer of enterprise);
- Law of Property Act (conditions for the transfer of immovables and other real rights such as servitudes).
Key Features:
- Liability: Partners are jointly and severally liable for the partnership’s debts.
- Capital Requirements: No minimum capital requirement.
- Management: Partners share management duties and profits equally.
- Suitability: Suitable for small businesses where partners wish to have equal control and share profits and responsibilities.
Pros: Easy to form with shared management responsibilities. No initial capital requirement.
Cons: Joint and several liability can pose significant personal financial risk. Potential for disputes among partners.
- Standard Rate: The standard VAT rate in Estonia is 22%, applicable to most goods and services.
- Reduced Rates: Certain goods and services, such as books, periodicals, and accommodation services, may be subject to reduced VAT rates.
- Registration Threshold: Businesses must register for VAT if their taxable turnover exceeds 40,000 euros in a calendar year.
- VAT Compliance: Registered businesses must file periodic VAT returns and comply with VAT regulations, including charging VAT on taxable supplies and reclaiming VAT on business expenses.
Agreements are typically governed by Estonian laws. There is freedom to choose the applicable law regarding general or specific contractual terms. This freedom is larger in the case of share, asset, or enterprise purchase agreements and less so in mergers and divisions.
Some operations, such as registry entries, are done according to Estonian laws. Share purchase agreements usually need to be executed in a notarial form. Notarial form can also be a requirement when purchasing an enterprise or certain assets, such as real estate.
Dispute resolution is usually carried out through a local court or an arbitration institution. The parties generally have the right to also decide on the jurisdiction.
Key Features:
- Liability: General partners have unlimited liability, while limited partners’ liability is restricted to their investment.
- Capital Requirements: No specific minimum capital requirement.
- Management: General partners manage the business, while limited partners typically invest without involving in day-to-day management.
- Suitability: Ideal for businesses where some partners want to limit their liability while others manage the business.
Pros: Flexibility with different levels of liability and involvement for partners. No minimum capital requirement.
Cons: Management complexity due to different liability levels. Unlimited liability for general partners.
- Tax-Free Allowance: Residents are entitled to a tax-free allowance, which varies based on income levels, providing relief for lower-income individuals.
- Non-Resident Taxation: Non-residents are taxed at 20% on income earned from Estonian sources, including employment, business, and property income.
Obligation of disclosure depends on the business combination.
The purchase of shares generally does not require an obligation to disclose information beforehand. The list of shareholders of a private limited company is public anyways, along with information about the ultimate beneficial owners. The shareholder of a public limited company acquires their rights when entered into the share register, which is maintained by the Estonian register of securities or another depository if so allowed by law.
The public offering of shares and trading on the securities market has more specific rules (e.g. information disclosed in takeover bids) which can be found in the Securities Market Act.
The acquisition of an enterprise as an asset does not usually require any disclosures. However, the acquirer must promptly notify the creditors of the assumption of obligations, while the transferor must inform the debtors about the assignment of claims to the acquirer. For registered assets, entries regarding changes in ownership must be made in the relevant registries.
In the case of mergers and divisions, the disclosure obligation is greater. A merger or division agreement must be drawn up (including information about the distribution of shares, replacement ratio, additional payments, arising rights of shareholders, list of assets and liabilities, etc.). Additionally, a report explaining and justifying the legal and economic aspects of the merger or division must be submitted too.
At least two weeks before deciding on the approval of the merger or division agreement, shareholders must be given access to the agreement, the report, and the auditor's report. Immediately after the registration of the merger or division, a notice must be published in the Official Announcements (Ametlikud Teadaanded) publication for the creditors of the companies involved.
In the case of a public limited company (AS), one month before the decisive general meeting on the merger or division, the agreement must be submitted to the Commercial Register or published on the company's website, accessible to the public free of charge until the end of the general meeting. Additionally, a notice in the Official Announcements publication is published regarding the conclusion of the agreement, indicating where the agreement, report and auditor's report can be reviewed.
Additional disclosure obligations may arise under the Money Laundering and Terrorist Financing Prevention Act or, in the case of concentration, under the Competition Act.
Key Features:
- Liability: Members are generally not personally liable unless specified in the association’s articles.
- Capital Requirements: Typically requires a minimum share capital of 2,500 euros, but this can be waived if members assume personal liability.
- Management: Managed collectively by its members, focusing on mutual benefits.
- Suitability: Best for cooperative ventures where members share common economic interests.
Pros: Designed to support members' economic interests. Flexible capital requirements.
Cons: Activities are limited to member-driven purposes, restricting purely profit-driven operations. Requires adherence to cooperative regulations.
The disclosure thresholds are 5, 10, 15, 20, 25, or 50 percent or 1/3 or 2/3 of all votes represented by the shares issued by the issuer. If the number of votes owned by a person corresponds to or exceeds any disclosure threshold, whether increasing or decreasing, the person must inform the issuer and the Estonian Financial Supervision and Resolution Authority about the number of votes they own. The disclosure obligation applies to every shareholder but in certain cases may also apply to other individuals, such as those authorized to exercise voting rights, those who may exercise those rights as part of a collateral etc. There are several exceptions regarding the disclosure requirements and special rules for how voting power is counted and what information must be shared. It is therefore advisable to familiarize oneself with the Securities Market Act. The disclosure obligation must be fulfilled promptly, but no later than within four trading days.
Regarding business combinations, the disclosure requirements are influenced by the specific circumstances of the combination. For example, if it results in a change of control or ownership structure, or if the business combination involves material transactions that affect the ownership structure of the companies involved, the disclosure requirement is present. See also the previous section.
Key Features:
- Liability: Members are not personally liable for the association’s obligations.
- Capital Requirements: No initial capital requirement.
- Management: Focuses on non-profit activities with simple governance.
- Suitability: Perfect for non-commercial endeavors aimed at achieving social, cultural, or community objectives.
Pros: Ideal for entities focusing on non-profit activities. Simple to establish and manage without the need for capital.
Cons: Limited to non-profit activities, restricting commercial operations. Funding can be less predictable, relying on donations and grants.
- R&D Incentives: Estonia offers tax incentives to companies engaged in research and development (R&D) activities. Expenses related to R&D can be deducted from taxable income, and additional support may be available through grants and subsidies.
- Investment Incentives: Various tax incentives are available for investments in certain sectors, such as technology and green energy, aimed at fostering economic growth and innovation.
- Non-Profit Organizations: Non-profit associations benefit from special tax exemptions and incentives, encouraging social, cultural, and charitable activities.
When carrying out any activity, a member of the managing body (board or supervisory board) of a company must perform their obligations with due diligence. A board member who, through a breach of their duties, causes damage to the company is liable for compensating the incurred harm. The general duty of care for a board member means that the board member must act in good faith and in the best interests of the company, be adequately informed for decision-making, and refrain from taking unreasonable risks for the company. Board members are also subject to a duty of loyalty, which includes avoiding conflicts of interest; for example, they must not prioritize their own interests or those of related parties over the interests of the company. Additional obligations may arise from the articles of association, decisions of a general meeting, or agreements concluded with the board member.
According to Estonian law, the liability of any member of the managing body is primarily directed towards the company itself. Creditors may demand compensation for damages from the member only when they cannot satisfy their claims from the assets of the company.
In case of merger or division, members of the managing body or shareholders authorized to manage the company are jointly liable for damage negligently caused to the company, its shareholders or creditors through the merger or division. Shareholders have, according to case law, the right to demand compensation from board members only in exceptional cases, for instance, when a board member has violated a provision protecting a shareholder or has committed an intentionally wrongful act. An example of such a situation could be when a refund cannot be enforced against the merging company, partially or entirely, due to insolvency or removal from the Commercial Register.
Controlling shareholders do not have specific obligations. All shareholders are liable as shareholders only for damage caused negligently. A shareholder is not liable for the damage caused if they did not participate in the decision underlying the harm or if they voted against said decision. The same applies in business combinations.
- Overview: Estonia has signed double taxation treaties with over 60 countries, helping to avoid double taxation on income and capital.
- Benefits: These treaties reduce or eliminate taxes on certain types of income (e.g., dividends, interest, royalties) and provide clear rules on tax residency and relief methods.
- Application: Businesses and individuals can benefit from these treaties by claiming tax relief or exemptions on income earned in multiple jurisdictions.
Usually, decisions are made by the shareholders' general meeting with a simple majority vote (more than 50% must be in favor).
In the case of approving a merger or a division, a two-thirds majority is required unless the articles of association prescribe a greater majority requirement. If a public limited company (AS) has multiple classes of shares, the merger decision is considered adopted if at least two-thirds of the owners of each type of share vote in favor, and the articles of association do not prescribe a higher voting majority. In the case of a general or limited partnership, a decision regarding a merger or division is considered adopted if all partners vote in favor. The partnership agreement may specify that the decision is adopted if supported by over two-thirds of the partners. If a partner of a general partnership or a general partner of a limited partnership being acquired opposes the merger resolution, the partner or general partner shall become a limited partner of the acquiring company. Similarly, if a partner of the general partnership or a general partner of a limited partnership being divided opposes the division resolution, the partner or general partner shall become a limited partner of a recipient limited partnership.
Shareholders do not have specific appraisal rights. The decision on the merger or division cannot be invalidated on the grounds that the exchange ratio of shares or stocks was set too low. If the exchange ratio is determined to be too low, a shareholder may demand a refund.
A cross-border merger decision cannot be invalidated on the grounds that the financial compensation is unfair or that the information provided did not meet legal requirements. In the case of a cross-border merger, a shareholder who does not agree with the merger decision, has the right to sell or demand that the entity acquires their replaced share or stock for monetary compensation. The same right applies in case of division.
The law also provides for the protection of preferred shares and convertible bondholders, stating that their rights must be preserved in the case of a merger or division.
- Digital Filing: Estonia's e-Tax system allows businesses and individuals to file tax returns, make payments, and manage their tax affairs online, providing a streamlined and efficient process.
- User-Friendly: The system is user-friendly and supports various tax-related functions, including VAT returns, income tax filings, and employee tax reports.
- Security and Accessibility: Secure authentication methods ensure safe access to the system, and the e-Tax platform is available 24/7, offering flexibility and convenience.
Hostile takeovers in Estonia are relatively uncommon. As an EU member state, Estonia has adopted the European Takeover Directive. This directive includes the board neutrality rule, which means that the board cannot take any actions that could frustrate a takeover bid. Such forbidden actions include significant disposal or acquisition of assets, disposing or encumbering assets which are materially important to the bidder, payment of unreasonable compensation to the board or executive management, etc.
However, the target company still retains the right to solicit competing takeover offers. Similarly, the supervisory board must disclose a reasoned opinion on the takeover bid, explaining and revealing issues of conflicts of interest and measures taken to mitigate them, providing an assessment of the impact of the takeover, etc.
Minority squeeze-out can occur on three bases, being either corporate law-based, securities market law-based, or merger law-based.
- Firstly, a squeeze-out can be carried out in accordance with the Commercial Code. A shareholder whose shares represent at least 9/10 of the share capital, can ask the general meeting to decide to acquire the shares owned by minority shareholders. The majority shareholder must pay fair compensation, which is determined by the majority shareholder based on the value that the shares had ten days before the notice of the general meeting. The majority shareholder must submit a takeover report, explaining the conditions of the takeover and the determination of the compensation amount. The report must be audited, and the costs of the audit are borne by the majority shareholder. The report and documents must be presented to the shareholders for inspection at least one month before the decisive general meeting. The general meeting's decision is adopted if at least 95/100 of the votes represented by shares are in favor. One month after the adoption of the decision, the board submits an application to the securities register holder for the transfer of shares to the majority shareholder.
- Secondly, if the shares are traded on the securities market, a squeeze-out is possible after making a takeover bid. If the offeror has acquired at least 9/10 of the share capital of the target issuer representing the voting rights as the result of a takeover bid, the target issuer may decide, at the request of the offeror, on the takeover of the remaining shares belonging to target persons for a fair compensation. A resolution on such a takeover is adopted if at least 9/10 of the votes represented by shares are in favor. Fair compensation may be paid in money or in liquid shares traded on the market and cannot be lower than the purchase price of the takeover bid. The decision must be made within three months after the expiry of the takeover term.
- Finally, if a merging company owns at least 9/10 of the share capital of a merged company, the general meeting of the merged company may, upon the request of the majority shareholder, decide within three months from the conclusion of the merger agreement on the takeover of the shares belonging to minority shareholders by the majority shareholder. The general meeting's decision on the acquisition of shares belonging to minority shareholders is adopted if at least 9/10 of the votes represented by shares are in favor.
An activity license is required for operating in certain business sectors, especially in areas related to providing essential services, national defense, finance, healthcare, or fields that require specific qualifications or heightened security requirements for the protection of the public or the environment, etc.
A company subject to licensing requirements must obtain a license before commencing economic activities in the respective sector. The application for an activity license is typically reviewed within 30 days. In areas where there is no licensing obligation, there may still be a requirement to submit a notice of commencing economic activities in the relevant sector. The general principles of the licensing process are established in the General Part of the Economic Activities Code Act, but specific prerequisites for obtaining a license are outlined in various specific laws.
Sectors and activities subject to licensing requirements, their specific requirements, and the relevant laws applicable to them can be checked using the Estonian Classification of Economic Activities (EMTAK) search system (available at emtak.rik.ee).
Certain sectors, such as water usage, mining, waste management and so on, require an environmental permit. The relevant legal act in this regard is the General Part of the Environmental Code Act.
Concentrations (such as mergers or acquisitions of control) in certain sectors are subject to restrictions under competition law. Please refer to the section on competition law for more information.
Bankruptcy or reorganization proceedings do not forbid a merger or division. As an exception to this, a cross-border merger, division or transformation is not permitted, if the company is in liquidation or if reorganization or bankruptcy proceedings have commenced.
Even if the termination of the company is provided for in the articles of association or decided by the shareholders, the shareholders can still decide on the merger, division, or transformation of the company until the commencement of the distribution of assets.
In bankruptcy proceedings the company is managed by the bankruptcy trustee instead of the former management board. For example, if the merger is not completed by the time of declaring bankruptcy, necessary actions to finish the merger can only be taken by the trustee. The general provisions of the Law of Obligations Act regarding the transfer of the enterprise do not apply in bankruptcy proceedings. The trustee may sell the enterprise or its organizationally independent part only with the consent of the bankruptcy committee. Other individual assets of the company are usually sold by the trustee through public auctions. When a share is sold in an enforcement or bankruptcy proceeding, the enforcement agent, trustee and the debtor are not liable for defects in the share, except for possible unlawful damage caused.
While employment contracts usually transfer unchanged in the case of a merger, division, or transfer of an enterprise, this is not the case in the event of the employer's bankruptcy, and the transferor or acquirer may terminate employment contracts due to redundancy.
