Estonian companies now have greater freedom in business banking
The Commercial Code has been amended to improve the ease of doing business for Estonia’s citizens, residents and e-residents.
Estonia’s Parliament, Riigikogu, today passed an amendment to the country’s Commercial Code to remove the requirement that limited companies must use an Estonian bank account when registering share capital. From January 2019, they can instead use a ‘credit or payment institution in the European Economic Area’ for this.
This change means that all limited Estonian companies can conduct all their business activity using any business account for their company from across the Europe Economic Area for the first time.
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We welcome this news at the e-Residency programme because it improves the ease of doing business for all Estonian companies and helps attract increased investment to Estonia, while preserving the trusted and transparent nature of our business environment.
Below is our FAQ to answer questions you may have about this news. If we’ve missed anything, you are also welcome to comment underneath with additional questions.
- What exactly is changing?
- Why was the law change necessary?
- Who does this law change benefit?
- How does this affect Estonian banks?
- What now are my options for business banking as an Estonian company owner?
- How likely are e-residents to obtain business banking for their Estonian company?
- How does this change affect risks to Estonia, such as money laundering?
- What happens next?
What exactly is changing?
Estonia’s Commercial Code includes a requirement for limited companies to register a minimum share capital of €2,500. This is not a fee to the state (or anyone else) though. It’s an investment that entrepreneurs are required to make into their own company’s financial account. By doing so, their company is more trusted and they are helping contribute to the trusted nature of Estonia’s entire business environment.
There’s an extra rule though that preserves this level of trust while still keeping the barriers to entrepreneurship as low as possible for everyone: The share capital payment can be deferred for up to ten years. Most entrepreneurs do this and it simply means that they are personally liable for the amount not yet paid in and their company is unable to pay them dividends until it is done. In the meantime, they can focus on growing their company until it reaches the point where it is ready for the investment.
During this time, their company could be using business banking from either a credit or payment institution, based either inside or outside Estonia — or a combination of them. When they are ready to register share capital though, the previous Commercial Code stated that only an Estonian credit institution could be used. This effectively compels Estonian companies to open an Estonian bank account at some point, regardless of whether they want it or ever use it for anything else.
The revised Commercial Code, which takes effect from January 2019, will instead state that share capital must be registered using ‘a credit or payment institution in the European Economic Area (EEA)’, which includes all EU countries plus Iceland, Liechtenstein and Norway.
This not only expands the countries where the banking providers can be based, but also the types of banking providers offering these business accounts. A ‘credit institution’ is a bank, but a ‘payment institution’ covers many financial technology (or ‘fintech’) companies too.
Why was the law change necessary?
The share capital rule in the Commercial Code was written in the early 1990s and so the previous wording was reasonable for the time because banks based in Estonia were then considered to be the only viable option for business banking.
A lot has changed since then. Business has been transformed by the advance of financial technology and the rise of location-independent entrepreneurship — and Estonia has been at the forefront of this change globally by offering e-Residency and being home to many companies that support location-independent entrepreneurs.
TransferWise, one of Estonia’s four ‘unicorn’ startups, is one of the most famous examples. This is a financial technology company that offers a ‘Borderless’ account that can be used by Estonian companies for all business activity — except registering share capital under the previous rule in the Commercial Code. That’s both because they are licensed as a payment institution and because the European IBANs (International Bank Account Numbers) they offer are not Estonian. So, using this example, an entrepreneur who wants to use TransferWise for all their business activity is still compelled to open an Estonian bank account to complete one process and then they can close it immediately afterwards if they choose.
As a result, this rule was no longer useful and was instead limiting choice and creating unnecessary hassle for owners of Estonian companies.
Who does this law change benefit?
The change to the Commercial Code will benefit all Estonian limited companies that want to take advantage of this greater freedom in business banking, whether they are run by citizens, residents or e-residents.
However, non-residents (which includes e-residents) have the most difficulty obtaining an Estonian bank account for a combination of reasons. For a start, Estonian banks still choose to verify their clients in person so a visit to Estonia is required, which can mean quite a large investment of time and money depending on where they are in the world. In addition, banks have more complex risk considerations due to the nature of their business models and so, for understandable reasons, are not able to serve the broad spectrum of non-residents whose companies would make a positive contribution to our country.
This requirement doesn’t just limit choice for entrepreneurs. It also raises the barrier to entrepreneurship too high for many people around the world who are then unable to benefit from e-Residency.
Despite this issue, Estonia’s business environment remains attractive globally and the e-Residency programme is growing at an ever increasing rate as more people use it to establish an EU company with low costs and hassle that they can run from anywhere in the world. Improving access to banking has therefore been a top priority.
This change will have a significant effect on improving the e-Residency programme and helping more people around the world benefit from it, while unlocking foreign investment into Estonia.
How does this affect Estonian banks?
Estonian banks do serve a large proportion of e-residents who meet their criteria and will continue to do so. The e-Residency programme will also continue to work constructively with Estonian banks in support of e-residents in a wide range of areas. For example, the Estonian Banking Association has contributed positively to the development of e-Residency 2.0.
However, this law change is good for Estonian banks too — if only because it creates greater clarity for everyone.
If Estonian company owners believe that it is mandatory to obtain an Estonian bank account then that creates the impression that the growth of the e-Residency programme is in conflict with Estonian banks when they are not able to serve all e-residents.
This law change confirms that it is not the case and so e-residents should choose the banking solution that best suits them out of the wide range of options available to them. That might still be an Estonian bank account, but it doesn’t have to be.
What now are my options for business banking as an owner of an Estonian company?
There will never be any one banking provider that is best suited for every company or is available to every company so it’s important that you understand your range of choices.
There are three broad categories of banking providers for Estonian companies. As mentioned, the law change doesn’t affect which options are available to your company. It simply no longer states your company has to have an account from the first category (banks based in Estonia) when registering share capital.
It’s also important to note that you can choose a combination of these options or change accounts in future. For example, some e-residents choose a banking provider with an account that they can easily open online to get their business started and then switch to account with more functionality once their company is worth the investment and meets the criteria for that option. Many e-residents also use accounts from multiple providers in order to combine different features that they need.
Here’s an overview of the options:
1. Banks based in Estonia
For e-residents, there are two types of companies that are most likely to meet the criteria to open a bank account in Estonia.
The first is a company that has a “connection to Estonia”. This should be clearly explained in your company plans for the future or demonstrated based on your existing activity. It could include employees, as well as relationships with partners and suppliers, as well as actually serving the Estonian market. This is good for many people conducting business through e-Residency and may help many more to consider making an even larger contribution to the Estonian market — but e-Residency is not just for people who can meet this criteria.
The second is a company run by a single shareholder with easily trackable income. This covers many freelancers, contractors, solo entrepreneurs and others around the world who fit under a broad group of people sometimes called ‘digital nomads’. These people often feel that their lifestyle is the least understood by governments and companies, although this is a positive exception as it is relatively simple for banks to monitor risks associated with these companies — especially when they are so visible online — as well as understand why they have chosen an Estonian bank account in order to benefit from Estonia’s location-independent business environment.
Estonian banks are less likely to open business accounts for non-residents of Estonia (including e-residents) if their companies are large, involved in manufacturing or wholesaling, acting as an intermediary to sell the services of others, only doing business in their home country or outside of the EU — in addition to not being visible online or not being able to explain clear business goals. One reason for this is simple: These types of companies are less likely to benefit from e-Residency so it would not be clear to the bank why they desire an Estonian bank account.
These criteria are assessed by the banks on a case-by-case basis, but if you would like to open an Estonian bank account then we strongly recommend that you first speak to a business services provider who can advise you on this process. They should be able to give you a pre-decision before you book any travel to Estonia for the purposes of opening an account. A list of business services providers is available in the e-Residency marketplace here:
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We can not speak on behalf of the banks or provide the kind of business advice on this issue that you can obtain for your company from a business services provider. However, we can point out that LHV is the most commonly used Estonian bank by e-residents — primarily because they have been open to serving non-residents if they are single shareholders with easily trackable income that are working with a reputable provider of business services. Swedbank is also used by many e-residents, although they have focused more on ensuring their non-resident clients can demonstrate a strong connection to Estonia.
2. Banks based elsewhere in the EEA
A small proportion of e-residents have successfully opened a business bank account in their own country for their Estonian company. The change to Estonia’s Commercial Code may encourage many more e-residents who are residents of countries in the European Economic Area to consider this option now that share capital can be registered there.
These banks may not be familiar with e-Residency or location-independent entrepreneurship more generally. However, there may be other factors in your favour here.
For a start, you are not applying for business banking as a non-resident in this situation and so the bank is likely to have a better ability to conduct due diligence on you and ensure you are conducting business legitimacy. In addition, you may choose a bank in your own country that you already have a longstanding relationship with and therefore knows you much better than Estonian banks could.
There are a number of advantages to this option for e-residents based on convenience and the features of the accounts on offer. There is also anecdotal feedback though that there is sometimes difficulty using specific types of services if a company and its account are in different countries. At the e-Residency programme, we are seeking out examples of this in order to solve the issue by finding workarounds, mapping out alternative options or discussing the issue directly with the service provider.
3. Payment institutions based in the EEA
This category is where the widest variety of choice for business banking has emerged in recent years and where more choice is expected in future. These companies are often referred to as financial technology companies (or ‘fintech firms’), but legally they are classed as payment institutions.
Unlike banks, these companies are not allowed to lend out the money that you pay into your account so (among other reasons) the way in which they operate and manage risks is different. As a result, these accounts are attractive to e-residents because they can be opened entirely online and are often available to more people globally.
Payment institution can offer accounts with many of the same features of traditional banking, including the IBAN (the International Bank Account Number that you will provide to your clients when they have to pay you). However, as there is a large number of these companies operating globally and disrupting the banking industry, they often focus on more niche features that benefit specific types of companies. For example, most banking providers haven’t focused on supporting companies that deal with crypto tokens as it involves complex considerations, yet there are payment institutions who do.
Holvi, a payment institution based in Finland, was the first company back in May 2017 to recognise the growing importance of the e-resident community and invest in offering e-Residency business banking entirely online. Their investment was such a success that they were able to significantly lower their monthly fee for e-residents one year later and are continuing to grow their company by supporting the community. Since then, even more payment institutions around the world have begun engaging the e-resident community and offering their banking services and this is likely to continue.
The variety of choice available is so wide, complex and ever changing that the e-Residency programme is working on mapping this out for Estonian companies. We are also continuously engaging new payment institutions to encourage them to serve the e-resident market and provide them with the guidance that they need to do so — from ensuring they are compliant with Estonian business rules to helping them integrate the Estonian digital ID card. For both these tasks, we appreciate the support of the e-resident community who are continuously providing feedback on different options that they find. One way to help with this is to provide your feedback (and help advise other members of the community in the Estonian e-residents Facebook group.
In addition to the issue of some service providers questioning a company and its account being in different countries, we sometimes hear e-residents asking why payment institutions are not covered by the same guarantees for when a bank faces difficulty and is unable to return money to account holders. This is based on how payment institutions operate differently and are regulated differently, such as by segregating their client’s deposits and not lending it out. We advise payment institutions to communicate themselves about how they safeguard deposits in these unlikely circumstances.
How likely are e-residents to obtain business banking for their Estonian company?
Thanks to credit and payment institutions across Europe, almost all e-residents can obtain business banking for their Estonian company. The range of available options for each company depends on a wide variety of factors, but this is often the nature of the company itself — such as how it conducts itself and whether the banking provider chooses to specialise in serving that type of company.
As a result, the most effective way to improve access to banking for Estonian companies is to both widen the choice available and ensure e-residents receive the advice they need to conduct business well and demonstrate that to the banking providers.
There are many more issues affecting access to banking globally, but these will not be solved by Estonia alone. Public and private sector organisations around the world have to work together to work together to combat threats and solve key issues of trust.
Most notably, the only significant exception is for people who live within a jurisdiction categorised as ‘high risk and non-cooperative’ by the Financial Action Task Force (FATF) and so are restricted from obtaining international financial services. At present, these countries are North Korea, Syria, Iran, Iraq, Pakistan, Serbia, Ethiopia, Trinidad and Tobago, Vanuatu, and Yemen. Note that this is based on residency, not nationality, so people from these countries living abroad have still successfully benefited from e-Residency.
How does this change affect risks to Estonia, such as money laundering?
Estonia’s message to money launderers, tax evaders, and others who would seek to harm our trust is stronger than ever: Don’t even think about getting away with it.
The robust way in which Estonian authorities combat risks to our trusted business environment is reflected in the latest Basel Anti-Money Laundering (AML) Index, which currently ranks Estonia as the second lowest in the world after Finland for the risk of money laundering.
E-Residency is a status that is only granted after background checks from the Estonian Police and Border Guard Board who will first confirm the applicant’s identity and investigate whether they could post a threat to Estonia before deciding whether to approve the application. E-residents then provide their bio-metric data when they collect their digital ID card in person. This digital identity then enables e-residents to access e-services, such as to establish and manage an Estonian company, while providing Estonian agencies with increased oversight to ensure they are operating a legitimate business that is fully compliant with Estonia’s rules.
E-residents’ companies, like all Estonian companies, are then operating in a transparent business environment in which key company data is publicly available, including ownership and taxation paid. This is why tax evaders and others with bad intentions are always disappointed with e-Residency, as explained below by Dmitri Jegorov, the Undersecretary for Tax and Customs Policy at the Estonian Ministry of Finance and a member of the High-Level Working Party on Taxes at the EU Council.
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As the e-resident population has grown so too has the way in which Estonian agencies work together to monitor their activities and ensure their compliance. This has already resulted in a very small number of e-residents having their digital ID card certificates closed for failing to meet correct standards of compliance.
Enabling these companies to register share capital at credit or payment institutions across the EEA improves their ease of business, but does not alter their responsibilities or Estonia’s ability to ensure they meet those responsibilities.
What happens next?
An Act passed by Estonia’s Parliament, Riigikogu, is signed by its President. The Act will be then sent to the President for proclamation. After its proclamation, the Act is published in Riigi Teataja and generally enters into force on the tenth day after its proclamation.
The benefits of this change have already begun though. Entrepreneurs now have the assurance that it will soon be possible to register share capital using any credit or payment institution in the EEA and can plan accordingly now. We look forward to hearing how you use that freedom to grow your companies. Good luck.