Estonia

The most commonly used types of for-profit corporate organizational forms used in Estonia are private limited company („osaühing“, abbrev. „OÜ“) and public limited company („aktsiaselts“, abbrev. „AS“). The vast majority of all registered companies are private limited companies due to lower share capital requirements and more simple management structure.

Private limited companies tend to be closely-held businesses formed and managed by a relatively small group of shareholders. The minimum share capital of a private limited company is EUR 2,500. Private limited company is characterized by a simple, 1-tier management structure, consisting of a management board and a shareholders’ meeting. A supervisory council is required only if the company’s articles of association require it. Auditing of annual accounts of the private limited company is not required, unless certain thresholds are exceeded. Private limited companies may, but are not required to register their shares with the Estonian Register of Securities (ECS).

Public limited company is characterized by greater capital requirements (EUR 25,000). It is required to register its shares with ERS. Public limited company’s account must be audited in case of more than 2 shareholders or in case certain thresholds (of sales revenue, assets and number of employees) are exceeded. The management structure of a public limited company must include a supervisory council in addition to the shareholders’ meeting and the management board.

Other types of companies include general and limited partnership, neither of which is used much in practice due to unlimited personal liability of the general partner(s), and commercial associations, used mostly by agricultural and producers’ associations or various service recipients.

a. The vast majority of enterprises that seek financing from investors and will have multiple owners are private limited companies.

b. Private limited companies.

Limited liability companies have no requirement to consider interests other than shareholder value. Boards may be permitted to consider other factors by the articles of association, shareholders’ agreement or resolutions, but such other considerations are permissible only to the extent they do not harm the company or the interests of creditors.  

No.

Yes. Social Enterprises are permitted to be formed and operated as Nonprofits.

a. Nonprofits operating in the public interest or for charitable purposes can benefit from income tax incentives that are not available to other Nonprofits.

b. Please see above.

c. No, there is no lesser reporting or faster formation process for Social Enterprise Nonprofits as compared to other Nonprofits.

d. Where their businesses fall in the category of activity permitted to Nonprofits, it is indeed very prevalent for Social Enterprises to form as Nonprofits.

Yes, commercial association (“tulundusühistu”, abbrev. “TuÜ”). The main benefits relating to the use of this legal form relate to various grants available to commercial associations such as producers’ associations. On the downside, enterprises that form as commercial associations have limited rights to distribute profits to their members. Further, outside investors are also not incentivized to make investments since the level of financial investment does not determine control (each member can only have one vote). 

No. The same reporting requirements apply as to other entities.

No.

No.

No.

No.

Major investor classes are not required to look at ESG issues. However, since several studies have found that an approach based on ESG analysis has made it possible to better assess companies’ business risks, strategies and overall performance, and since ESG topic is widely discussed and recognized in the investment industry, major investor classes are likely to consider ESG factors in practice.

The principles of responsible investment and analysis of ESG factors are often part of the investment analysis process. ESG factors are assessed and considered alongside other traditional investment analysis methods, such as fundamental analysis and valuation.

Some funds exclude companies involved in the production or distribution of weapons and the development or production of nuclear weapons programs. Alcohol, tobacco, gambling and / or porn industries may also be excluded.

Last year, the first fully “green” pension fund was launched in Estonia, where the investments in index-based investment funds are marked as an index that considers ESG factors.

The type of funding typically varies based on the Enterprise form that the Social Enterprise chooses. Registering as a Non-profit has been the most common option for Social Enterprises, as over 80% of them have done so. The rest are registered as Foundations or limited liability companies.

For example, Social Enterprises formed as Non-profits commonly receive local government grants, state budget grants, project-based donations and sponsorships. Enterprises formed as limited liability companies received more traditional investments.

The main financial supporter for Social Enterprises is the National Foundation of Civil Society. It is important to note that Non-profit Social Enterprises registered as private companies or founded by public sector are ineligible for the grants of this Foundation.

For-profit impact investments are not really prevalent, but they are on the rise in Estonia. Most impact investments still tend to be more philanthropic than profit-oriented.

The most significant impact fund is the Good Deed Impact Fund, which is the first venture philanthropy fund in Estonia. The fund mostly invests in education, social inequity, public health and the environment.

There is no special government support specifically available to Social Enterprises as such. Social Enterprises often receive different state budget grants.

a. Obtaining government funding as a Social Enterprise is not overly difficult. In order to improve the development of Estonia's various regions, about a dozen regional development support programs are financed from the state budget every year. For example, the Ministry of Finance mediates national grants for the local initiative program. In addition to that, there are numerous social, educational, cultural and environmental project-based grants.

b. N/A

No, there are no Social Enterprises listed on the securities exchange.

Publicly traded Enterprises are not required to disclose ESG related factors in annual reports/public filings. There are very few publicly traded Enterprises that choose to do so.

Impact bonds are not prevalent in our jurisdiction. About six years ago the Good Deed Foundation initiated a feasibility study and cost-benefit analysis for launching the first ever social impact bond in Estonia. However, the actual setup still requires additional preparations and efforts by all interested parties.

There are no restrictions on foreign investments or donations that would be unique to Social Enterprises. However, there is a legislative initiative for enacting stricter background checks on foreign investors.

Crowdfunding is legal and usually takes the form of joint sponsorship, loan-based co-financing, or investment-based co-financing.

Applicable securities laws enable to attract financing from retail investors without prospectus and other public offering related regulatory requirements in certain exceptional cases. In the context of Social Enterprises, the following exceptions may be relevant: the total amount raised is less than EUR 2.5 million, fewer than 150 potential investors are approached per EU Member State, securities are issued by associations with legal status or non-profit-making bodies, recognized by the state, for the purposes of obtaining the funding necessary to achieve their non-profit-making objectives.

Social Enterprises have begun to utilize the possibilities of crowdfunding, especially through joint sponsorship platforms. For example, a Social Enterprise that offers mindfulness programs mainly for schools and kindergartens recently received funding through crowdfunding and was able to develop a mindfulness mobile application and a handbook for parents.

There are no tax exemptions available for Social Enterprises in particular. As per the general Estonian income tax system, Social Enterprises would be liable for income tax on all distributed profits (including hidden profit distributions) while no tax would be charged payments related to the objectives set out in the articles of association.

There are some tax incentives for Nonprofits from which a Social Enterprise established as a Nonprofit could benefit. To qualify for the incentives, the Social Enterprise must operate in the public interest, for charitable purposes, either acting primarily free of charge, not seeking revenue or being publicly accessible. Additionally, the Social Enterprise may not distribute its assets or income to its founders, members and other associated persons, including upon dissolution, in which case any assets must be transferred to a similar association or public body. Furthermore, the administrative expenses of the Social Enterprise must correspond to its activity and objectives, while the remuneration for the personnel must not exceed the common remuneration for similar work. The tax authority keeps a list of qualified associations.

The primary exemptions for listed Nonprofits are for scholarships and grants issued through public competitions, transferring assets during charitable activities carried out in the public interest and gifts and donations to other listed Nonprofits (full exemptions).

Tax deductible donations can be made to listed Nonprofits.

Donations made by other listed Nonprofits are fully tax exempt. Other legal persons can provide tax free donations to listed Nonprofits up to a yearly cap. The cap is equal to either 3% of the total social tax paid during that year or 10% of the previous years’ profits (whichever is less).

Individual donors may deduct the amount from their taxable income up to a yearly cap of 1,200 euros (this amount is shared between all deductions).

No.

No. Organizations established within the European Economic Area may benefit from the incentives provided to listed Nonprofits, provided they meet the same requirements.

No.

There are government grants, trainings, loans and guarantees available for start-ups as well as operating companies. Kredex, administers the respective loan and guarantee programs as well as much of the COVID-19 relief in Estonia. Enterprise Estonia provides various grants and services, such as training programs. None of these measures are specifically designed for Social Enterprises.

No, same rules apply.

There is no dedicated government agency or department that oversees Social Enterprises.

Estonian Social Enterprise Network, which is a Non-profit association, offers practical support to Social Enterprises. The Non-profit develops programs for Social Enterprise development and currently has 54 Estonian Social Enterprises as its members.

No.

Most Enterprises in Estonia are formed online within a single day. This accelerated procedure is not applicable to Nonprofits and Cooperatives the registration of which can take up to 5 business days (generally takes less).

State fees levied upon forming an Enterprise fall between 20 and 190 euros and are dependent on the type of entity formed, whether documents are submitted online or through a notary and whether or not the accelerated procedure fee is paid.

Being listed as a Nonprofit benefiting from tax incentives requires filing an application with the tax authority which should be reviewed within 4 weeks.

Being listed as a Nonprofit benefiting from tax incentives can provide some advantages, perhaps the most relevant being the possibility to receive tax deductible donations (for additional information, please refer to answers 1 and 2 in Section III).

Yes, startups can easily form and flourish in Estonia. Forming an Enterprise is quick and relatively low cost, particularly due to the possibility of establishing an Enterprise without making a capital contribution. General operating costs are low, there are relatively few reporting obligations and almost all operations can be done online using a digital ID. There is no traditional corporate income tax as profits are only taxed upon distribution (including hidden profits distributions), while reinvested profits are not taxed, resulting in low tax burden for new businesses (provided they refrain from distributing profits e.g., paying dividends or having expenses unrelated to business etc.).

Social Enterprises do not enjoy any significant benefits compared to other Enterprises, but considering Estonian current legal landscape, there are no significant obstacles to Social Enterprises forming and flourishing in Estonia.

As one example, public procurement participation can in some cases be linked to social objectives (participation can be limited to certain Social Enterprises, particularly those employing people with disabilities).

The legislation does not actively penalize the formation of Social Enterprises, however, all for‑profit Enterprises are managed with a view to increase profits for the shareholders and thus social and environmental objectives are given less prominence.

Cooperatives could benefit from amendments providing a greater degree of flexibility, i.e., making the supervisory board a voluntary body, removing limitations on dividend payments, waiving the minimum capital requirement, enabling transformation into another type of entity etc.

No.

Although there is no specific type of Enterprise available for Social Enterprises to set themselves up in Estonia, most Social Enterprises operate in the form of Nonprofits in Estonia. Operating in the form of Nonprofits is considered to be suitable for Social Enterprises and no significant amendments to laws are intended.

Introducing additional tax incentives for Social Enterprises established in the form of for-profit Enterprises may, however, prove useful in increasing the number of Social Enterprises in Estonia.

Implementing a uniform set of standards for ESG policies and reporting of public companies would make it easier for investors and consumers to compare and evaluate which enterprises are in fact doing good in the world, which would drive companies to perform better.

There are other ideas that are too “pie-in-the-sky” to implement in this country (for example, one could amend the corporate code to require that any publicly traded company have at least one director elected by the workers of the company, but this would not be a realistic change for our jurisdiction).

No.