The board of an e-resident’s company cannot be required to be located in Estonia

Estoinan professor Marju Lauristin humorously said in August 2013, that “there are two options for increasing Estonia’s GDP per capita, to either increase GDP or reduce capita” i.e. the number of inhabitants. Succeeding with the latter does not require significant exertion from anyone and not too much thought either. Increasing the GDP on the contrary requires joint effort and a lot of thinking. The 10 million e-residents aim presented in 2014 is the best example of this. This would broaden the service area of the economy here and grow the number of foreign customers of Estonian companies.

Laws must be updated

After the primary regularisation of e-residency that took place in December 2014 there are hundreds of more details, which should be fixed to make the Estonian business environment attractive and convenient for a foreigner. Renewing legislation is a part of this. Business organisations, companies servicing foreigners and the e-residency team are interested in this and there is plenty of work for Ministries.

It has for example become evident in the context of the e-residency project, that the General Part of the Civil Code Act (which is often unknown to a person without a legal background) takes precedence over other civil legislation, which does not fit with the e-residency model in any way, as pursuant to subsection 29 (1) of that Act the seat of a legal person is the location of its management board. It has been found in the analysis “Mapping the civil law risks of the e-residency project” prepared by the University of Tartu Centre for Applied Social Sciences (CASS), that this norm in conjunction with certain provisions of the Commercial Code in theory precludes the opportunity to manage a company registered in Estonia from a foreign country.

Ministry of Justice v Ministry of Finance

On 20 October 2015 the Ministry of Justice sent the intention to develop the draft legislation of amending the Commercial Code and other legislation to other Ministries for coordination. One part of the IDD was also to remove the board’s seat requirement from the General Part of the Civil Code Act.
Feedback to the respective amendments signed by the Minister of Finance Sven Sester was devastating. A review of the text sent to BNS from the Ministry of Finance with the title “Sester wants the companies of e-residents to stay in Estonia” was published in Postimees on 17 December.

To a person aware of the e-residency business model the point of this heading seems incomprehensible, because the business idea of e-residency is the establishment of companies in Estonia by foreigners and earning revenue on it. A company, which foreigners have established in Estonia is in Estonia, regardless of where the founders or the management themselves are.

Reading on in the 17 December article it becomes evident, that it may be one great mistake, of which the Minister of Finance was not aware of when signing. If the Minister really does wish for the boards of the companies established by e-residents to be located in Estonia, a position has to also be taken in relation to thousands of other companies, nobody on the boards of which is living in Estonia. One may think there are many of those among such companies, the contribution of which to the Estonian economy is very large.

Let’s focus on the letter prepared by the Ministry of Finance

There are many claims in the coordination letter and published review of the Ministry of Finance, with which negative sides in losing the seat requirement of the board are highlighted. I will comment on four of the most striking of those.

1. Increase of inequality
It does not become evident from the letter, how exactly the planned amendment increases inequality or the administrative burden of existing enterprises. There are no mandatory activities, which the existing enterprises should do pursuant to the amendment and therefore an administrative burden will also not arise. If e-residents are not enabled to create companies, the existing companies and the Estonian service providers will be left without an important client base, which would enable to grow your business and thereby the Estonian economy. The Estonian seat requirement of the board is a prerequisite, which brings about popularisation of the services of local figureheads for doing business in Estonia. A stupid regulation will create the market. Business services companies aiming low are rubbing their hands together over any dumb law, which enables to ask for more money for its services from foreigners – but this can probably not be deemed the result wished for.

2. Risk of developing into an offshore country
The tax haven story in the letter is incomprehensible for m. a tax haven should mean, that the company established by an e-resident would be treated somehow more favourably in respect of taxes. Rather a warning can be seen from the Ministry of Finance’s document, that the risk of double taxation may arise in case of an e-resident’s company. Therefore a risk will definitely not arise that Estonia will obtain the reputation of a tax haven. Developing into an offshore country is primarily related to such legislation, which is impossible to pass in a Member State of the European Union and the OECD.

3. Unascertained risks
The claim contained in the letter, that risks related to e-residency have not been mapped or opportunities to manage risks have been sought, is wrong. The Enterprise Estonia’s e-residency team has already been analysing the risks in cooperation with all ministries for over half a year. The proposal according to which the company should be able to be deleted from the commercial register by expedited procedure, if the only owner or board member of the company is an e-resident, whose digital ID is invalid for some reason, also remains unclear. If the identity document of an Estonian board member becomes invalid, it does not change the company’s legal status. Otherwise the situation of for example the creditors of a company would be extremely uncertain: if the ID card of a board member expires, then his or her company may be quickly deleted.

4. Using front men and the risk of money laundering
It also remains unclear, how the planned amendment would increase the using of front men or the risk of money laundering. If a random foreigner can currently be designated to the board, about whom the Estonian state has no background information, then in case of an e-resident the Estonian state has checked his or her background, taken biometric data from him or her, etc.

Context of the analysis was different

With regard to the risks specified in the analysis of University of Tartu “Mapping the civil law risks of the e-residency project”, then two extremes were mainly compared there:
• the current situation and
• the situation where the seat requirement of a company would overall disappear in Estonia.
The so-called in-between option, where Estonia would be deemed the company’s registered location, but the board does not have to have its seat in Estonia, University of Tartu did not thoroughly analyse. Therefore many risks taken from the analysis, which the Ministry of Finance names in its letter, do not exist in reality.

Reality runs its own course

The requirement that at least half of the board members of a private limited or public limited company should live in Estonia, in another member state of the European Economic Area or Switzerland was removed from the Commercial Code in 2011. The obligation to designate a contract person applies to a company with board members located outside the specified countries (section 63¹ of the Commercial Code).

Section 7 of the Money Laundering and Terrorist Financing Prevention Act among others determines the persons that provide the service of enabling use of the address of the seat or place of business as company service providers. Therefore in practice these amendments have been understood such that managing the company at a distance is allowed in Estonia. This means that even though the General Part of the Civil Code Act provides the seat of the legal person very generally as the location of the board member, the logic of the Commercial Code allows a company to designate its seat in the articles of association, the validity of which is the basis in commerce.

It is difficult to believe that when losing the residence requirement the legislator and the Ministry of Justice presumed, that the sole board member living in a foreign country will come to Estonia to take decisions concerning managing the company. This would be unreasonable also from the position of the EU’s freedom of establishment. A lot of companies already exist in Estonia today, the factual place of management of which is not Estonia, and more are being created. Some of them are small and others are among international large enterprises. For example Microsoft’s lawyer Benjamin Orndorff that lives in Seattle is on the board of the Estonian companies of Microsoft and Skype. Is Sven Sester himself going to tell him that “Ben, you can no longer be on the board”?

According to the commercial register in January 2016 there were 16,420 such companies in Estonia, that only have a foreign board member. Anyone can buy this data at a price of 2 euros per company. The Ministry of Finance probably gets them free of charge from the division of the Ministry of Justice. Has the commercial register made an error, entering all these board members living abroad on the register, and are these entrepreneurs facing forced removal?

Life has moved on Mr Minister

Now that the e-residency project is moving at full speed, obstacles cannot be put in colleagues’ way. The e-residency project is the best the government has and this should be the joint priority of parties.

Officials in the Ministry of Justice are now in a situation, where the Minister of Justice has been left to convince government partners, that they are doing the right thing. It may of course be a mistake of the officials of the Ministry of Finance, coming out of which the Minister of Finance is quickly adjusting himself. Such a situation could be avoided in the future by there being an entrepreneur in residence in each Ministry that would advise the Minister and could foresee errors.

We can also settle with the fact, that it is a legal-theoretical tug-of-war of officials taking place in the quiet of the office. I do not believe, that the e-residency project will stop because of it. In the current legal practice the commercial register does not have grounds to refuse to register a company, which has an e-resident founder and member of the board. The law does not establish any norm about how to identify the board being located in Estonia. Life will go on in the current form, if it is not discovered though that one more prohibition is missing from the laws.

Author:
Ivar Veskioja
1Office Group
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