ESTONIA: A Global Expansion Hotspot for Developing Fintech Companies
III. Incorporating into Estonia
- Estonia’s e-government and embrace on digital platforms
In 2014, Estonia became the first country in the world to offer electronic residency to individuals from outside the country. The E-residency program equips e-residents with a digital identity and the status provides individuals access to Estonia’s transparent digital business environment.
With the e-residency kit, an e-resident can sign documents and can establish a company online from anywhere in the world, access banking, payment processing, as well as settle tax-related obligations.21
A great benefit that comes with e-residency is the network of already existing e-residency entrepreneurs ready to share their experiences with outside companies who are interested in joining the community.
- E-money and payment licenses
In order to obtain a license to operate an EMI or for the operation of a PI, the company must submit a relevant application to the Estonian Financial Supervision Authority (“EFSA”).
Depending on the licensed activities, the minimum capital requirement for an EMI is EUR 350,000 and for PIs starting from EUR 20,000 to EUR 125,000.
The EFSA 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, but not later than within six months after receipt of the application.
The seat and the principal place of business of a PI or EMI entered in the commercial register shall be located in Estonia.22
- Start-up status and visa
Once a startup has decided to relocate its founders and/or employees to Estonia, the first step would be to apply for the ‘Startup Status’.
Once the startup holds the Startup Status, the company can hire global talent with ease and the founder can apply for a visa or a temporary resident permit.23
Estonians are open to attract non-EU founders via the startup visa, which is also designed for start-ups to ease the process to hire non-EU talents.
To be eligible for the startup visa a founder must have a technology-based, innovative and scalable business in mind, at least EUR 160 per month available for day-to-day needs and to receive approval from the Startup Committee.
In light of recent amendments, if approved, as of 19 February 2021 the same visa will be granted to family members – spouses and children.24
- Stock options
Currently, Estonia does not hold any specific incentive scheme for start-ups, and issuance of employee share options is provided based on existing general regulations.
Rules regarding the offerings of transferrable securities are used to facilitate the need and together with the tax regime currently in force (applicable to all private companies), there are favourable options.
Tax exemptions for share options can be applied if an employee holds stock options for at least three years. Most of the terms and conditions attached to stock options are established within a stock option agreement between the company and the option holder.
- Access to capital markets and alternative sources of financing
While the issuance of bonds and/or shares is a regulated market in Estonia (similarly as in Latvia and Lithuania), Estonians have taken a big leap and in late 2017 passed legislation with the aim to regulate cryptocurrency trading. The latter gained popularity in the amounts of initial coin offerings (“ICOs”) and token generation events (“TGEs”).25
The structures of ICOs and TGEs vary and may be used to raise capital for different kinds of projects, for example, creating new coin, app or service launches. These structures provide for an alternative source of financing and are more frequently used for seed/early-stage financing, instead of the ‘traditional’ initial public offering (“IPO”) where the financing is company-based and usually is used as an exit after venture capital funding.
Any ICO or TGE should be assessed on its substance to define whether they should be treated as an issuance of a security instrument or not and which corresponding regulation should be applied.26
Where to go…?
Well, it depends. There is no right or wrong answer.
With certain limitations now visible for certain UK-based FinTech businesses trying to reach EU customers, detailed and clear thought needs to be given as to how to potentially widen the options in a fast-growing and developing industry.
In the event the EU holds UK rules as equivalent to EU rules, as a result of further discussions, passporting considerations may not be necessary.
Without access to the EU marketplace, it significantly reduces the actual or potential customer headcount and therefore limiting prospective growth opportunities.
The Baltic States are leaning towards providing somewhat of a City ‘complement’ for FinTech businesses who wish to serve customers throughout the EEA.
Regardless of the vision taken, it is important to carry out the necessary due diligence and preparations before engaging any of the regulators in either of the Baltic States.
Right from pre-launch planning to initial setup and registration; Centuro Global will work with you, offering end-to-end assistance in navigating complexities by activating the local business ecosystem and offering a coherent roadmap of actionable solutions. Start on your global expansion journey with us today! Enquire today or feel free to send us an email.