Are the Baltics the ideal marketplace for developing FinTech companies?

Are The Baltics The Ideal Marketplace For Developing FinTech Companies?

I. Incorporating into Latvia
Apr 27, 2021

As a result of the United Kingdom (“UK”) exiting the European Union (“EU”) on 1 January 2021, a number of financial institutions in the UK lost their “exclusive” right of access to utilize the European Economic Area (“EEA”) passporting rules. These changes have also been felt by financial institutions based in Gibraltar.

Back in 2016, it was reported around 5,500 UK companies with licensed activities which have passported their authorization (i.e., a licensed activity) into the EEA are impacted as a result of the UK exiting the EEA bloc.

While the UK certainly has a more favorable corporate tax regime when compared to the other Member States, wider access to a larger marketplace seems to be the more favorable option in the long run for most companies. It is also without a word of doubt, the UK’s focus on retaining its presence as a financial services leader is ever strong, for example, the recent relaxation of some of the eligibility requirements for companies seeking to IPO.3

Following the recent memorandum of understanding agreed between the EU-UK, concerning financial services cooperation, no visible guarantee was given to hold UK rules as equivalent to EU rules.4 While this mist of uncertainty hovers above the UK financial services industry, institutions are gearing up for plans B and C.

Seeking the necessary permissions and compliance via each individual Member State’s national regimes adds complexity and substantial costs for FinTech companies based in the UK. This is something that all FinTech companies would ideally like to avoid or circumvent.

In the last couple of years, the Baltic states (i.e., Latvia, Lithuania, and Estonia) have geared up and responded by implementing favorable regulatory frameworks for all FinTech institutions. With this FinTech focus and benefits stemming from the passporting rules, the Baltic states are slowly driving the industry and attracting all the major market players, including Revolut.

In this series of articles, we outline the important practical considerations one needs to consider for each of the Baltic states; their regulatory advancements, licensing benefits, stock options, capital markets, and alternative financing mechanisms. These tools provide a beneficial and attractive environment for financial service institutions to either start out in life or continue growing their business.


  1. Latvia’s regulatory regime supporting FinTechs

In terms of numbers, one in five new Latvian startups belong to the Financial Technology sector.15

The Latvian Financial and Capital Market Commission (“FCMC”) has made available the Innovation Hub and Regulatory Sandbox to any market player for professional support and consultancy services in relation to existing and upcoming regulation.16

A good example of highlighting the FCMC’s readiness and competence to supervise the financial services industry is in relation to the upcoming EU crowdfunding rules. The European Parliament has recently adopted the Regulation on European Crowdfunding Service Providers (“ECSP”) for businesses.17 The ECSP is already in force and is applicable from 10 November 2021. The ECSP is binding in its entirety across the EU and will provide a new and comprehensive set-up for crowdfunding platforms to operate under. In Latvia, the FCMC has already begun working and consulting with companies establishing or established to correspond with the upcoming rules in the ECSP.

Several of the largest European peer-to-peer marketplace platforms have originated in Latvia, such as Mintos and Twino, which are currently adapting to the recently adopted regulatory

changes, by either acquiring an investment firm license and/or electronic money institutions license.18

  1. E-money and payment licenses

In order to obtain a license to operate an electronic money institution or for the operation of a payment institution, the company must submit a complete application to the FCMC.

Depending on the licensed activities, the minimum capital requirement for an EMI is EUR 350,000 and for PIs starting from around EUR 20,000 up to EUR 125,000.

The FCMC shall take a decision on the issuance of a license or refusal to issue a license and inform the applicant within three months after receipt of all the necessary documents, as well as detailing the reasons in the event of a refusal. If all relevant documents are not submitted or submitted incomplete, the FCMC can prolong the duration for an additional three months, and therefore the licensing process can take up to 6 months (and as we have seen in practice, sometimes even longer).

In the event, a FinTech company already holds the respective documentation for a UK-issued EMI or PI license, it could save time in adapting the documents and reduce the assessment period before the FCMC.

For FinTechs who intend to provide innovative payment services, FCF reduces state fees for the examination of documents submitted for the respectively chosen license of either electronic money institutions or payment institutions. Following the registration or authorization, the annual charge is also set lower than average for the first three years.19 In other words, these instruments assist with limiting the financial burden (i.e., licensing and maintenance costs) at the early stage.

  1. Attractive employee stock options

The main demand for employee stock options originates from FinTechs and other start-ups, which attract strong and high-level candidates for skyrocketing their ideas into a profitable company with promising equity.

Employee stock options, if developed thoughtfully, can attract employees for the long-term and set the ownerships’ mindset. Especially within the startup community, stock options are also used in cases when a company is not able to afford the increases in employees’ salaries at the time.

At the beginning of 2021, the Latvian Personal Income Tax Law and Commercial Law brought about favorable changes. These changes expanded the possibilities to grant stock options not only to joint-stock companies but also to limited liability companies’ employees, board and supervisory board members, and other related companies’ employees.

The minimum holding period has been reduced from 36 months to 12 months and in addition, it is possible to exercise the option within 6 months after employment is terminated without losing the tax exemption.

  1. Access to capital markets and alternative sources of financing

The FCMC has undertaken (until 31 December 2021) to create a development and support model enabling enterprises to prepare for their participation in the capital market in case of the issuance of shares and/or bonds.20

Similar to Lithuania, Latvian SMEs can apply to reimburse the costs incurred by acquiring third-party advisory services necessary exclusively for the listing of shares and/or bonds.

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