Managing an Estonian Company from Abroad
William H. Cronenberg
Attorney at Law
A prime consideration when setting up any foreign business structure is management. It is a misconception to assume that titles like “Director”, “Manager”, “Managing Director”, “CEO” and “Board Member” have universal meaning. Legally they do not. In different legal systems, such terms may have specific legal definitions or none at all. In so called offshore jurisdictions, laws tend to be very permissive, and requirements regarding company management are relatively few. Managerial positions, responsibilities and liabilities are largely as defined by the owners and their legal advisors in the founding documents. And, the founding documents are relatively easy to create and amend, usually without any need to inform the jurisdiction of incorporation. While this may sound like a dream come true for a bureaucracy weary entrepreneur, it can have both advantages and disadvantages depending on the context.
Estonia is clearly an “onshore” rather than “offshore” jurisdiction. While the business, tax and banking environments are favorable, and bureaucracy relatively modest, the legal system imposes company management requirements comparable to other EU countries. Management board members (always natural persons) of Estonian companies must be identified in public records, and bear significant personal liability for the management of their companies. This serves to protect the State´s interest in being able to enforce tax liabilities, and to protect other creditors of Estonian companies. This does not mean that liabilities of an Estonian company are automatically shared by its management board members. But it means that to preserve limited liability, the relevant management and reporting requirements must be met. If management board members fail to keep a company in compliance, then creditors may acquire the right to pursue such individuals personally. And this is no mere theoretical possibility. It works in practice.
To discuss company management requirements imposed by Estonian law, we should distinguish the main company forms. The simpler and more common form of Estonian company is the “Osaühing”, or OÜ. This is equivalent to LLC in many other jurisdictions, a private limited company. The other main form is the public limited company, “Aktsiaselts” or AS. The AS carries more complex management obligations and is required for certain licensed activities, offering shares to the public and in other specific circumstances. An AS is required to have a much larger minimum share capital, and has additional reporting requirements. An AS is also required to have both a management board and a supervisory board, whereas an OÜ only has a management board, unless it elects to also have a supervisory board. Since the overwhelming majority of non-resident persons using an Estonian company as an international business entity would elect an OÜ with no supervisory board that is the scenario I will use for reference. However, most comments to follow about management board members of an OÜ apply equally in the context of an AS.
Residence requirements for management board members of an Estonian company have eased recently. Earlier it was required that no less than 50% of management board members of an Estonian company reside in Estonia. Today, the requirement is that 50% or more reside in the EU, Switzerland, Norway, Iceland or Liechtenstein.
However if an Estonian company has appointed a (Estonian resident private or legal) person competent to receive procedural documents and filed it in Commercial register, then no limitation applied to management board membership.
It means that a foreigner who is not resident in any of these places and wishes to have an Estonian company must engage at least one person to serve who fulfills the requirement serve as a management board member. A non-resident foreigner can serve together on the management board with a qualifying resident, or let such a person be the sole manager. If there are two or more management board members, it can be specified that representing the company requires two or more joint signatures from the members of the management board. In this way the management rules are relatively flexible and do not force the non-resident foreigner to be exposed to great risks from misconduct of the resident director if reasonable precautions are observed.
If one needs to engage a management board member mainly to fulfill the residence requirement, it is typical and advisable to find an Estonian resident well acquainted with the requirements for properly complying with Estonian law. In practice, reputable persons providing this service are usually established providers of legal, accounting or business consulting services. The pricing will vary depending on the intended activities of the companies, levels of turnover, anticipated responsibilities and etc.
So to conclude, if you are a foreigner who does not meet the residence requirements to serve alone on the management board of an Estonian company, this is not a great obstacle to owning and controlling an Estonian company. In many circumstances an Estonian company can provide a very favorable balance between the freedoms of a flexible business environment and the security provided by sensible regulation and oversight.