Latvia vs Estonia: Company incorporation process
GATE TO BALTICS has offices in Latvia and Estonia and it is natural to compare both countries in literally everything. As much as we would like to write about the best pubs or beer prices in Riga and Tallinn, this comparison will be about business setup and every-day management. The goal is to illustrate the main differences between both jurisdictions and help people to decide which one of these two lovely countries suits best for their business. The comparison will be about limited liability companies, as this is the most common company type in both jurisdictions. The article is divided in two parts where the first part will cover company incorporation process and the second part will illustrate daily business management.
General overview about business environments in both countries you can find here: Estonia; Latvia. If you don’t want to be directed to another tab to read additional information, then briefly we can tell you that both countries are doing well. They are running balanced budgets and are in leading positions in several macroeconomic criteria among EU Member States. Both countries are members of EU, has Euro as official currency and are members of OECD.
Countries have a lot in common. Both are small – there are 1,3M inhabitants in Estonia and 1,9M inhabitants in Latvia. Both are located next to the Baltic Sea and the largest neighbour to both of them is Russia. Distance between capitals (Riga in Latvia; Tallinn in Estonia) is only 311 km and takes 4-hour drive or 45-minute flight. Both countries were occupied by Soviet Union in 1940 and regained their independence after the collapse of the Soviet Union in 1991.
One of the most significant similarities between Latvia and Estonia in terms of running business is that countries have very similar corporate tax system. Corporate income tax is applied only on distributed profits with corporate tax rate of 20%. In real life this means that if company decides to reinvest the profit in development of the company, then it is not taxed. If shareholder of the company decides to withdraw the profit, then corporate tax rate of 20% will be applied. Such corporate tax rate system places both countries in the top position in International Tax Competitiveness Index with Estonia being on the first place and Latvia on the second place.
Company incorporation in both countries is very simple, compared to Western or Central European countries.
This is where Estonia beats Latvia. Actually, not only Latvia, but the whole world. Estonia has developed e-governance system which grants e-Residency card to people from all across the world. You don’t have to be Estonian resident to obtain e-Residency card. In terms of company incorporation this is a very big deal if you are interested in remote company management. E-Residency card gives rights to electronically sign and submit all sorts of documents related with company incorporation and every-day management. You can read more about e-Residency and benefits it grants in our article here (right below the nice picture).
2. e-signature in Latvia
As a member of EU, Latvia has to work in accordance with eIDAS Regulation which means that Commercial Registry of Latvia has to accept electronically signed documents which are signed with eID card issued by EU Member States. People with eID cards issued within EU are able to sign and submit documents in electronic form to Commercial Registry for company incorporation. Advantage compared with Estonian e-Residency card is that eID card holders don’t have to wait 30 days to obtain e-Residency card and can move along with company incorporation right away. Disadvantage is that it limits e-signature just among EU Member States.
3. Process of company incorporation
The Register of Enterprises in Latvia vs Company Registration Portal in Estonia
To begin comparison about company incorporation process, it is important to briefly illustrate how companies are registered in both countries. In Latvia there is a physical institution where people can go with printed papers and register their companies – the place is called The Register of Enterprises of the Republic of Latvia and according to their annual report from 2016, it employs 176 people all across the country, because it has branches in cities outside of Riga as well. If new business owner decides to incorporate a company he has several options: go to one of branches of Register of Enterprises and submit verified documents there; register company through online portal www.latvija.lv (only for residents of Latvia); register company through e-mail with electronically signed documents; or even by sending verified documents by mail. Certainly, sounds like a challenging task, especially for person from outside of Latvia, because all documents must be submitted in Latvian.
Estonia does not have a physical Register of Enterprises where person can go with printed documents and register a company. There are two ways how to incorporate a company in Estonia: through notary office or by using Company Registration Portal. Company Registration portal can be accessed with Estonian ID card (also e-Residency); Latvian e-ID card; Belgian eID card; Finnish eID card and with Lithuanian mobile-ID. All company incorporation requests are viewed by Tartu County Court instead of “Register of Enterprises notary”. Our experience shows that such system makes company registration highly efficient, because it limits so called “human errors”, as documents are either prepared by professionals (notaries) or customers are using already created templates within online registration portal.
One of the most significant differences is that it is possible to submit relevant documents in Business Registration portal in English. Also, all interface is in Estonian and English, which means that company articles and other relevant documents are automatically bilingual.
Step-by-step registration process in Latvia:
- Company decides on business name. Name can be checked via Commercial Registry website.
- Selection of registered address;
- Preparation of corporate documents: Shareholders agreement on company incorporation; Articles; Shareholders Registry (signature must be verified); KR4 Application for company registration (signature must be verified); PLEASE NOTE that Commercial Registry is accepting documents only in Latvian, therefore all above mentioned documents must be in Latvian language when they are submitted.
- Opening of company’s initial bank account;
- Payment of share capital. Share capital of limited liability company in Latvia is EUR 2800. At least 50% of share capital must be paid in to company’s initial bank account prior to company’s registration. There are exceptions to this provision if company decides to register “Small-capital” limited liability company;
- Payment of state fees and submission of documents. As stated above, there are several ways on how to submit documents. In most cases, we recommend submitting documents by e-mail with e-signature verification;
- Timescale of company registration in Latvia is up to 5 business days.
If company’s structure is simple and there is only 1 shareholder who is a natural person, then process of company registration is simple, because it does not involve translation of corporate documents which would be necessary in situations where shareholders are legal entities. GATE TO BALTICS prepares all company registration documents on behalf of the customer and takes care of document submission as well.
Step-by-step registration process in Estonia (through Company Registration Portal):
Possible in cases where shareholder and director is physical person and holds e-Residency card.
- Login in to Company Registration Portal;
- Follows guidelines for submission of registration for company incorporation;
- Electronically confirms corporate documents which are generated in English;
- Selects registered address if applicable;
- Appoints contact person if applicable*;
- Electronically signs the petition;
- Covers the state fee via bank link or by bank transfer;
- Submits the documents;
- Timescale for company registration in Estonia is up to 3 business days.
*Legal contact person is required if management board of Estonian limited company is located abroad. Legal contact person of Estonian company can be licensed service provider with physical office in Estonia. In situations where company has appointed legal contact person, then registered address of contact person shall be considered as registered address of the company.
In situations if company wishes to establish a subsidiary in Estonia, then company incorporation must be carried out through notary office and all corporate documents must be apostilled and in Estonian or English languages. This is advantage of Latvia, because even in cases where shareholders are legal entities, it is possible to submit documents electronically, provided that all corporate documents are translated in to Latvian language and verified by sworn notary in Latvia. Additional advantage for Latvia in situations of incorporating subsidiaries is that Latvia does not require documents to be apostilled if shareholder is from EU Member State. Even though, companies who are incorporating subsidiaries usually have no problems with traveling to Riga or Tallinn as they are interested to set up their business here, it is still comfortable that there is possibility to submit incorporation documents electronically.
LEGAL REQUIREMENTS FOR COMPANY REGISTRATION
Required in Latvia. Post box is not allowed at the moment. This basically means that according to the Civil Code and The Commercial Law of the Republic of Latvia all companies which are registered in Latvia must be managed from Latvia. Such position is explained by country’s supported “real-seat theory” according to principles of Company Law. It is possible that in the future Latvian Government will adopt changes allowing post box as registered address, considering that international business is becoming more virtual. The real-life situation shows that it is possible to manage Latvian company remotely at the moment as well, however, there are slightly better options (Estonia).
According to amendments in Estonian Commercial Code which came in to effect in January 2018, management board of the company can be located abroad. If management board is located abroad, then company must appoint licensed corporate service provider as their legal contact person in Estonia. GATE TO BALTICS is licensed service provider in Estonia and we are acting as contact persons to several of our customers who are managing their Estonian company from abroad.
Share capital contribution:
In Latvia share capital of standard limited liability company is EUR 2800 and at least half must be contributed during company registration process. Share capital contribution can be made via initial bank account which can be opened in one of Latvian retail banks or licensed payment service provider institution operating within EEA, with pre-condition that Registry of Enterprises will accept statement from it.
In Estonia share capital of limited liability company is EUR 2500 and it can be contributed within one year from company incorporation. From January of 2019 share capital in Estonian companies can be contributed from payment service provider account which operates within EEA. The main difference between Estonia and Latvia with regards to share capital contribution is that in Estonia company doesn’t have to open initial account before being incorporated which will save some time to the owner of the company.
With regards to company incorporation process, it is possible to conclude that company incorporation in Estonia is more advanced for single and physical person as a shareholder, because the process of company incorporation would be faster and there would be no need for document translation as all documents can be submitted in English. Also, according to registered address requirements, Estonian company has significant advantage, because of existing provisions in Commercial Code which allow to manage company from abroad if certain criteria is fulfilled. Therefore, from perspective of remote management of the company, we would suggest incorporating business in Estonia. Experience shows that Estonian companies are suitable for digital nomads and other professionals who are constantly on the road; don’t have physical office premises in Estonia; does not hire employees and they need legal entity from EU to make agreements with business partners in order to conclude their business operations in legal manner. This does not mean that Estonia is a bad place where to move or expand your existing business operations, more about this see here.
Company incorporation in Latvia is recommended for business owners who are interested to have physical office premises in there and move at least part of their business to Latvia. Such conclusion is made due to several factors, including process of company incorporation and registered address requirement. Remote management of Latvian companies is more complicated, compared with Estonia, therefore we would not recommend this option. However, Latvia has created good environment for new companies to start their business operations in there by implementing advanced “Start-up” Law which will be more analysed next week.