Estonia has developed a business infrastructure that is very attractive to foreign capital holders. This small Baltic country has been able to offset its scarcity of natural resources with a powerful digital network that has made it one of the leading technological powers in Europe and around the world.

As we have talked about in other articles, Estonia has become a very attractive investment destination. Its friendly tax policies, low state intervention in private enterprise, and a high score on the economic freedom index are just some of Estonia's arguments for establishing itself as a more than respectable candidate for incorporating your next company. What's the main advantage? You can do it without even being in the country, thanks to the Electronic Residency Program.

To attract this foreign capital, and in addition to the arguments we have already mentioned, Estonia has promoted the creation of different investment funds, presented as profit opportunities and good benefits for those interested in investing; and in 2016 it implemented a new Investment Funds Law, even more attractive than the previous one.

An investment fund is recognized by Estonian law as a legal person or a group of assets in which the capital of several investors is raised to invest by a defined investment policy for the benefit of those investors and in the common interest. In Estonia, these funds are known as Limited Partnership Fund (LPF).

Benefits of Limited Partnership Funds in Estonia

If you want to invest, have the means, and also have a group of qualified investors interested in investing in an attractive market, without major regulations, and with many benefits, an LPF is for you.

Among the benefits that this structure can bring, we can list:

-No requirement to publish the identity of its investors.

-No requirement to publish the amount of the investments made by each investor.

-Considerably lower cost of establishment compared to the UK and Luxembourg, the other main actors in Europe.

-Fast registration process. This one could take from 5 working days for the LPF, up to 2 months if the General Partner registers its activities with the Estonian Financial Supervision Authority (EFSA).

-Tax Transparency: LPF is not considered a taxpayer or an Estonian resident for Estonian tax laws, and the income earned by LPF is immediately allocated to its investors in proportion to their stakes in LPFs.

According to Estonian law, one of the objectives of this approach is to ensure that the foreign investors of the LPF are tax-treated in the same way as when investing directly in company shares. One important consequence of fiscal transparency is that foreign investors should normally have full access to tax treaties between the residence state of the investor and the source state of the respective income.

How to Register a Limited Partnership Fund?

The registration process of the fund consists of the following steps:

a)Registering a General Partner in Estonia. You can also use one already registered.

b)Once the General Partner is registered, it has to request a statement from the Estonia Financial Supervisory Authority (EFSA), acknowledging that the partner has been authorized as a fund manager.

c)The General Partner must apply together with the statement from the EFSA to the Estonian Commercial Register to establish the LPF.

The timeframe for this process to receive an answer goes up to 2 months after the General Partner has been registered.

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How to Manage an LPF Being a General Partner or Fund Manager?

As a fund manager, you may manage an LPF, provided you have met one of the following 3 characteristics:

- Have obtained from a European Economic Area (EEA) State, an operating license to act as an investment fund manager.

- To have obtained a license to operate as an investment fund manager from EFSA.

- Register their activities with EFSA.

The last option is the most popular among General Partners, and that is because it is the one with the least restrictions and regulations. It can be only used if the GP manages small funds, described by Estonian law as:

- Funds with less than EUR 100M total assets.

- Funds with less than EUR 500M total assets if all managed funds are unleveraged and any investments made into any funds do not allow exits within 5 years as of the date of the investments made.

A management company of an unlicensed small fund that does not wish to apply to EFSA for an operating license as a small fund manager must register its activities with EFSA. Its supervision over registered unlicensed small fund managers is limited to the registration process and later collection of statistical reporting.

We can see then that the Estonian authority is quite permissive when it comes to the administration and management of investment funds. This is further proof of the freedom that investors have in establishing their business in this small Baltic country. Estonia has established a great infrastructure that is friendly to foreign businesses and investors. We have already talked about the tax advantages of the different companies that can be established in Estonia, being the investment funds, one more option... and a quite attractive one.

Types of Funds in Estonia

Contractual fund: A contractual fund is a group of assets that is formed based on money collected by the issue of units or other assets and assets received from the investment of money and which belongs jointly to unit-holders. You need to pay attention to these aspects:

- The current law also allows the creation of contractual funds.

- Most of the current contractual funds are public funds.

- A contractual fund is not a separate legal entity but a pool of assets. The fund must always have a fund manager.

- There are no initial capital requirements. The assets of the fund are valued based on their net asset value.

- The fund is constituted by approval of the fund rules by the EFSA. Contractual funds are also the most common type registered with the Financial Supervision Authority.

- The new law provides for a separate insolvency regime for funds, the aim of which is to ensure that the insolvency of one fund does not lead to the transfer or liquidation of other funds managed by the same management company.

Public limited company fund: this is a fund established as a public limited company based on the Investment Fund Act. The provisions of the Commercial Code apply to the establishment, operation, and termination of which, unless otherwise provided by the Act.

To operate, a public limited company fund must enter into a management agreement with a management company that has obtained an activity license or alternative fund manager license in another Contracting State. The assets of a public limited company fund are not divided into sub-funds.

You should know that current law does not allow shares to be repurchased daily - capital conversion under the Commercial Code. In practice, few funds established as public limited companies have been created so far. This is something to think about.

Trust fund: With this type of fund, you will be able to manage your assets or enter into a management agreement with a management company. Only a management company which has obtained an activity license or which has been granted an activity license of an alternative fund manager in another Contracting State or which has registered its activities with the Financial Supervision Authority may be a trust fund manager or a general partner of a trust fund managing its assets.

What Can We Do for You?

Starting an investment fund in Estonia is an excellent idea for those interested in investing in a country open to foreign business, and with a more than investor-friendly tax policy. Moreover, its huge digital infrastructure provides more than one advantage for the establishment of this business. Whoever starts an investment fund, can register and manage it completely remotely, and without the need to be in Estonia.

Undoubtedly, this small Baltic country continues to prove to be an admirable example of the transition to an economic model that defends private enterprise, guarantees economic freedom, and promotes foreign investment.

Our experts are waiting for you to help you start this new stage. Contact us now and we will help you with everything you need to start your business in Estonia.