Estonia vs Latvia: Part III - Remote business management
Remote management usually is important for “one-man companies” in cases when person is conducting business related with services which does not require a physical presence in one certain location. However, this article could also help to larger companies who intend to have a physical presence in Latvia or Estonia, but their management will be located abroad. The article will be divided in two main parts – 1) legislative analysis of remote management; 2) practicalities in remote company management in Latvia and Estonia.
As we already wrote in the article about company incorporation in Latvia and Estonia, registered address is required for every company in Latvia and that Latvia supports so called “real-seat theory” from perspective of company law. This is supported by legislation – Article 8 (1) 3) of The Commercial Law says that every company must have a registered address and it is supported by Articles 78 (2) and 139 (1) of the same Commercial Law which say that company’s registered address is considered the place where management board is located. According to such provision, if company’s management board is located abroad, then company may lose its legal rights in Latvia (can be dissolved in Latvia). Further, this is supported by Article 3141 (1) 2) which says that Enterprise Registry has a right to dissolve the company if it is not possible to “reach the company” in registered address within 2 months from sending the notice to the company. Also, Article 73 (1) 6) of Value Added Tax Law sets out provision which says that the State Revenue Service might exclude registered taxable company from VAT Register if company is not accessible at registered address.
However, situation in de facto is not so bad as it might seem. There are companies which are being managed from abroad and there are ways how to register the company in Latvia while being abroad. This is usually happening through service providers in Latvia who are specializing in establishing corporate entities. According to current legislation, the Enterprise Registry has a data base of so called “risky” addresses which means that if they receive application for company registration in address where are registered more than 10 companies, then they will send this application further to State Revenue Service and will wait 10 business days for confirmation whether this particular company can be registered. This results in longer company incorporation time and, in our opinion, too many bureaucratic procedures.
The good news is that there are people from governing authorities who realize that current system is not suitable for business management in 21st century and Ministry of Justice of Republic of Latvia are working on amendments in the Commercial Law where the most significant changes will be that company’s legal address will be the one which is indicated in the Registry of Enterprises and not the place where management board is located. Among many other things, this will significantly support remote management of the company. The Ministry of Justice should submit the amendment project to Cabinet of Ministers (executive body in Latvia) until April 2019. We will follow this process and will keep you informed.
It is important to mention that from 2020 legal entities registered in Latvia will have a requirement to create an official e-mail address through portal www.latvija.lv for communication with Latvian authorities. Such provision will take away the necessity of having physical registered address even more in the future.
Article 631 of Commercial Code of Estonia sets out provisions with regards to contact person in Estonia. More specifically subsection 2 of Article 631 states that if management board of a company is located in a foreign state, the company must designate a contact person. In such case, only a notary, advocate, law office, sworn auditor, audit firm, tax representative may be designated as a contact person. For the purpose of self-advertising we will mention that GATE TO BALTICS hold the necessary operating license to be appointed as a contact person for Estonian company. When contact person is appointed, then the address of the contact person shall be considered the address of the company. Therefore, it is safe to say that with regards to legislation, Estonia has already established legislation where it is allowed to manage the company from abroad.
System of licensed contact persons in Estonia is solving several issues. It solves the above-mentioned registered address issue, because this is such an old-school concept to have physical registered address of company if you are managing your business from several locations. Contact person system creates order in the field of provision of corporate services. To receive a license for provision of corporate services, company has to submit an application to Financial Intelligence Unit where company presents internal policy documents with regards to customer identification and due diligence. This creates win-win situation for all involved parties: 1) customers; 2) state; 3) service providers. Customers are benefactors, because they have safety feeling that company they are in business with has gone through background check by FIU and must qualify certain criteria to provide corporate services. Benefit for the state is that in situation where they have to locate certain company “X”, they will first go to the contact person who will be able to provide them detailed information about this company – because to provide contact person services, this service provider must have KYC and due diligence documents in order. And last but not least, also service providers have benefit from this system, because it clears the market from shady competitors who are interested to make deals “under the table”.
With regards to legal requirements towards remote management of business and more specifically requirement of registered address, Estonia is in front of Latvia because of Contact person provision in their Commercial Code. Latvia is changing the current system, but if we have to compare it as it is now, then Estonia is ahead in that category. The current amendments on which Ministry of Justice of Latvia is working does not include something like contact person, however it is still an improvement compared to the existing system.
As the last important difference between Latvia and Estonia, we should look at remuneration of the member of the board. Latvia has provision in law “On Personal Income Tax” which says that if company’s monthly turnover is higher than 5 minimum salaries (430 X 5 = 2150) and company has no employee who receives at least minimum salary, then it is considered that member of the board has obtained income taxable with the salary tax which conforms to the amount of minimum monthly salary. This provision is not applied in the calendar year when company is registered. To companies who have physical offices and employees in Latvia and are managed from abroad, this obviously wouldn’t apply. However, this provision would apply to “one-man” companies who are used by digital nomads and other location independent professionals. Estonia, on other hand does not have such provision and issue of the salary to member of the board is up to company to decide.
For people who don’t want to get in to deeper analysis, we will tell that from the perspective of practical management it is easier to manage the company remotely in Estonia. This is due to advanced e-governance model which is accessible also for people who are not Estonians. It is possible to obtain e-Residency card in Estonia and this “magic” card will grant you access to all state portals which are necessary for running your remote business. In Latvia it all would come down to the fact that you would need to have a local representative (accountant, for example) who could take care of your administrative tasks. In any case, every company will require a local accountant – either it is in Latvia or Estonia and further we will illustrate the main things what will occur during business management in Estonia and Latvia.
Once you have found corporate service provider in Latvia who has provided you with registered address and company incorporation, the next logical step is to set up your accountancy. Most of the corporate service providers have in-house accountants (we certainly do). Your company concludes an agreement with the accountant and based on this agreement accountant is able to represent your company in most of the dealings with state authorities. It is possible that accountant will require power of attorney in certain situations, but in most cases PoA doesn’t have to be notarized and it is fine to send just a scan to the accountant. All tax administration in Latvia is made via electronic declaration system, which is also available in English. This is the most important portal for your company and the place where you are able to see status of your relationship with SRS. Accountant of the company will create your account in tax portal and usually there is no struggle in this step. Company in Latvia is eligible to obtain e-signature card in order to sign documents electronically on behalf of the company. However, there is a catch – in order to obtain e-signature card company’s representative must have Latvian ID number and production of this card costs EUR 52,00 with monthly fee of EUR 5,50. Therefore, we would recommend other options for digital signature – either to use your existing e-signature in case if you have eID which is issued within EU or to apply for e-Residency card in Estonia.
As we mentioned above, from January 2020 every company which is registered in Latvia will have to use official e-mail address through portal www.latvija.lv. The idea is not bad as it will (or it should) create more efficient communication between state authorities and entrepreneurs. However, the implementation could be slightly better, because at this particular moment login and authentication in the portal is available only with Latvian or Estonian ID cards. With Estonian ID it is not possible to create e-address as system requests to change the method of authentication and use e-ID card or e-signature card. Note: we used Estonian e-ID card. Therefore, we can safely say that as of this moment (March 7, 2019) login in to portal www.latvija.lv with Estonian e-ID is purely theoretical. It is possible to issue PoA to Latvian representative who could create official e-mail address for your company, but obviously this would come with additional costs. There are still 9 months to implement this system and we are looking forward to it.
As mentioned in introduction of this chapter, remote management in Estonia is easier. It is because of well-functioning e-governance portals. The key to all these portals is e-Residency card which is available for people from every continent in the world. With e-Residency card person can login to portals like Business Registration Portal and Tax and Customs portal which are the most important portals for remote business management. And the difference between functions of Latvian newly “refurbished” website of Registry of Enterprises and Estonian Business Registration portal is “sky-high”. So here are just the few of the things you can do via Business Registration Portal in Estonia: 1) change company name; 2) change the registered address of the company; 3) add / remove officers; 4) increase share capital; 5) submit annual reports once they are uploaded in there by your accountant. These are just few of things which person is able to do online in a matter of few clicks. For example, to change the company name, representative of the company has to make the amendments online and previously created online template will automatically amend all corporate documents within the portal and submit application for change of name. The system is created in very efficient way, because there are not so many places for so called “human error”. Tax administration in Estonia is also easier, because all payments can be done to one account (in Latvia for every tax there is a different account) and in months where company has overpaid taxes (for example VAT), the system automatically deducts this amount from your due taxes – all this information you can overview in Tax and Customs portal by entering there with e-Residency card.
After thorough analysis of legislation and practical nuances for remote company management, we conclude that at this moment Estonia is a better location for remote company management if company does not have a local presence in the country. The main reason is well functioning e-Residency card which grants access to main e-governance portals which are important for every – day business management. Therefore, if you are a location independent professional who is in search of EU jurisdiction for company incorporation, we would recommend company in Estonia along with e-Residency card. In general, Estonia is very advanced with regards to digital governance – just to illustrate this – Estonians are able to participate in elections online since … 2005!
At the same time, we are glad that Latvia is amending legislation towards registered addresses and is moving to e-governance model with official e-addresses for the companies. We will monitor the progress in this area in terms of implementation and functionality and will analyse the progress accordingly.