Here’s why Estonian companies have high levels of transparency
In Estonia, transparency is not just a buzzword.
Estonia has a transparent and trusted online business environment, which can be accessed by entrepreneurs living and working globally through e-Residency.
You might notice that word ‘transparency’ appears a lot when we talk about e-Residency. This is not a meaningless buzzword that we just use for marketing purposes though.
In fact, Estonia’s business environment has one of the highest levels of transparency in the world because information about Estonian companies that is useful for conducting due diligence is both verified and publicly available.
This covers a significant proportion of the information that companies are required to provide to the state. A company’s Registry Card, which contains basic information, such as ownership, the area of business, and share capital, is freely available. Then, for a small administrative fee (usually between €1 and €2), you can look up different company documents, such as the Articles of Association, the annual reports, assets like property and vehicles, trading licences (which are required in some specific areas but not for many e-residents), and key financial reports, such as the annual balance sheet, income statement and cash flow statement. In some circumstances, unresolved reporting breaches are also listed publicly.
More recently, Estonian companies are now also obligated to state their ‘beneficial owners’ publicly, while the concept of using ‘shadow owners or directors’ to conceal ownership is already forbidden.
The legal basis for this transparency is set out in Chapter 4, paragraph 28 of Estonia’s Commercial Code, while the basic information available from a company’s registry card is explained in chapter 8, starting at paragraph 64. The collection of this data by a state is not unusual, but the differences in Estonia is that our digital infrastructure both improves the reliability of this data and ensures it can be accessed by anyone for the benefit of everyone.
For companies registered in many other countries, it can be a challenge merely finding out who owns a particular company. And even if you have the name that was submitted to the state then how could you verify that data was submitted accurately? The use of convenient and secure digital identities (which makes e-Residency possible) already solves that issue for Estonian companies.
In Estonia’s business environment, this transparency is combined with a wide range of other measures that also improve trust. For a start, all e-residents undergo background checks with the Estonian Police and Border Guard just to be able to operate within this transparent environment and then there are ongoing checks between state agencies to ensure continued compliance.
Also, all Estonian companies are required to have a registered address in Estonia (which is also public information) and an official contact person there. That contact person won’t own any part of your company or have any powers to make decisions for your company and it’s a service that can be easily obtained as a ‘virtual office’ from licensed providers listed in the e-Residency marketplace. However, this is yet another way that all Estonian companies are kept accountable in our transparent business environment because every company is answerable when needed too and that contact person is going to pay a penalty if they represent clients that breach Estonia’s trust. So even though Estonian companies can be run entirely online from anywhere, the concept of a ‘shell company’ isn’t possible considering the design of our business environment.
Rather than ‘transparency’ being useful for marketing e-Residency though, we actually know that this isn’t popular with everyone. Some people would rather keep their business activities private, which can be due to perfectly legitimate concerns (although not always, of course). In fact, we’ve just received a complaint from an e-resident who didn’t realise that their full name and date of birth would be publicly available after starting an Estonian company. We’ve sent that person a reply privately, but in the interests of continued transparency we thought it would also be a good idea to explain publicly here why Estonia favours transparency in business.
Note though that this transparency applies to Estonia’s business environment so we are still only talking about company data being publicly available. Everyone in our digital nation — citizens, residents and e-residents — still owns their own personal data. Estonia even uses public ledger technology in some cases to ensure individuals can control access.
The value of transparency in business
Entering into a relationship with any company as a customer, investor, supplier or other stakeholder can involve a certain level of risk, but this can be offset by conducting due diligence. Due diligence is the reasonable level of investigation required to understand if a company can be trusted. If this process doesn’t reduce risks to a satisfactory level or is simply more difficult to perform then the likelihood of proceeding with that business relationship is lower.
Fortunately, Estonia’s transparency means that due diligence is easier for anyone in the world that is interested in conducting business with an Estonian company. This therefore contributes to the second key claim about Estonia’s business environment, which is that it is trusted.
Entrepreneurs benefit from this both ways. They get the tools to conduct due diligence on specific companies they may want to work with, but they also benefit from increased trust when other people want to conduct due diligence into them — assuming everything is in order, of course.
This doesn’t mean that looking up company details is common though, especially as you have to pay for many of those documents. However, the mere fact that it is theoretically possible when needed already contributes to higher standards and protects the integrity of the entire business environment.
It might seem a little daunting at first to entrepreneurs who are not used to this transparency, but it’s already normal for Estonian entrepreneurs and our experience is that its usefulness far outweighs any initial concerns.
In fact, there is a strong business case for transparency. More companies around the world are lobbying for improved transparency rules as well as using their own initiatives to unilaterally improve the transparency of their own organisations. By doing so, they are improving their stakeholder relationships, especially with customers and suppliers, and helping create a better functioning business environment. Wide scale secrecy in business can erodes trust, conceal illegitimate business practises and reduce the ability for people to make decisions based on real market information. This ultimately distorts markets and harms societies.
E-residents are likely to benefit even more from Estonia’s transparency because the programme is particularly popular with people who fall into one of two categories: Either they are location-independent entrepreneurs (or ‘digital nomads’) for whom trust is a bigger challenge due to the nature of their global lifestyles or they are living in a place where companies registered locally have less trust and therefore have a harder time conducting business globally.
Less trust doesn’t just mean that potential customers and partners are less willing to interact with your company. It can also mean being denied access to the tools you need to grow your company, such as cross-border financial tools.
This a point often missed in discussions about setting up an ‘offshore company’. If you choose a secretive jurisdiction then it may be easier to conceal business activities, but it won’t be easier to actually conduct business legitimately using them. In contrast, Estonia won’t offer you secrecy in business for a range of good reasons, including the fact that transparency will help you more easily grow your company globally.
That’s why e-Residency is beneficial for legitimate entrepreneurs who want to grow a location-independent business and useless for criminals, which is fine by us.
So if you are a freelancer with no fixed location or an entrepreneur who can’t receive money from clients abroad then there are very clear benefits to operating online within a transparent business environment if that means being more trusted globally and gaining improved ease of business.
Due diligence and trust isn’t the only reason that this data is useful though. In addition, it helps when conducting market research on a wider industry. This is already possible now, but the Estonian Tax and Customs Board is also investing in improved processes for the collection and analysis of data so that entrepreneurs have access to valuable economic information in real-time.
As mentioned earlier though, all this only relates to company data so why did the name and birth date of an e-resident become publicly available?
Understanding company ownership is absolutely fundamental information for a transparent business environment so if you choose to create an Estonian company then you are choosing to make your full name and date of birth public as part of that company data. The contact details you choose to submit to the Business Registry will also be public company data so bear that in mind if you use a personal email address and want that to remain private. If you submit it as company data then it would not, for example, be covered by GDPR in the same way as your personal e-mail usually would be when it is not publicly available. Make sure you create separate company contact details if you would like to keep it separate from your personal contact details.
How to access public data about Estonian companies
The Estonian Tax and Customs Board has already put together an excellent overview about how to use Estonian e-services and other methods to conduct due diligence on companies here, but I’ll summarise it below too.
As mentioned, there are sometimes small fees involved in obtaining the data. In addition, much of this information is in English too, but some is only available in Estonian at present. We expect English options to be added for all Estonian e-services in future.
- Search engines. This is always an essential part of due diligence regardless of whether a company is operating in a transparent business environment. You might find useful references to the company in articles, forums, social media, or other public databases.
- Estonia’s Business Register. This is the best place to start for a wide range of official data about Estonian companies, including the documents that require a small fee.
- European Business Register. As an e-resident, this Estonian e-service will give you access to all the official data that is made public by other EU member states.
- The Estonian Tax and Customs Board. They have a number of useful tools including VAT ID verification (the EU-wide version is here) and a tax arrears verification tool.
- Credit data reporting databases. There are a range of private companies that specialise in gathering the public data about companies so they can use it as part of their own data analysis services. Examples include inforegister, creditinfo and teatmik.
- Register of economic activities. This provides information about activity licenses, activity notifications, precepts and prohibitions issued to companies. Many e-residents don’t require these licenses, but if they do then it will be listed here.
- Criminal Records database. This covers more extreme breaches, of course, but can sometimes be needed especially if you want to know if someone has tax and fraud related offenses.
- Register of judicial decisions. On a related note, you can also search for court decisions related to both individuals and companies here.
- Providers of government grants and registries. If a company claims to have a grant underpinning their business then this is worth checking. You can search for projects funded by Enterprise Estonia or the Estonian Agricultural Registers and Information Board.
- The Estonian patent office. This is where you will find all trademarks and designs owned by an Estonian company (although not the ones that they have purchased a license for).
Can e-Residency be more transparent about this transparency?
Here at the e-Residency programme, we do talk often about the transparent nature of Estonia’s business environment and why that is a good thing for location-independent entrepreneurs.
There have even been times, for example, when journalists have questioned whether e-Residency might be useful for hiding illegitimate business activity so we are always happy to respond by explaining in detail how e-residents are willingly submitting themselves to incredibly high standards of transparency and supervision. This becomes very clear when we ask those journalists to compare those standards to the level of transparency around their own companies that they work for.
However, in response to the critical email we received from an e-resident, we accept that not everyone might realise the full implications of this transparency when applying for e-Residency or even when starting a company. So, in addition to publishing this article, we’ll also add more information about how transparency works in Estonia’s business environment to our e-Residency Knowledge Base. This is a useful place to read up on a wide range of issues relating to being an e-resident and we are planning to continuously develop it with more helpful information in the very near future.
E-Residency is useful for people who want a paperless EU company that is trusted globally and can be run entirely online with minimal cost and hassle — thanks in part to Estonia’s very high level of transparency.
But our advice to anyone who would like to hide business activities is simple: Don’t use e-Residency.