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Residence requirement of members of the management board of public and private limited companies in Estonia

11.09.2006

Piret Luiga

Probably many foreign companies have had problems when establishing Estonian subsidiaries with the requirement that the residence of at least half of the members of the management board must be in Estonia. The Commercial Code sets out that in the case of both private limited companies (§ 180 (2)) and public limited companies (§ 308 (4)), the residence of at least half of the members of the management board must be in Estonia.

Such strict residence requirement has quite often caused problems related to nominating members of the management board. Not all companies wish to have more than one member in the management board, and as this one member of the management board, they wish to appoint a person residing out of Estonia. As the chosen member of the management board is not an Estonian resident, in order to meet the residence requirement, the company has to find another member to the management board with his or her place of residence in Estonia. In addition, the foreign company founding a subsidiary in Estonia might already have chosen members to the management board but in order to comply with the residence requirement, the company has to find a relevant number of persons residing in Estonia to become members of the board.

As of the accession of Estonia to the European Union on 1 May 2004, the principle of freedom of establishment should be applicable in Estonia. But as Estonian Commercial Code is not in accordance with the named principle to this day, in reality the Commercial Register still refuses to register members of the management board in many instances, if the Estonian residence requirement is not fulfilled. The Commercial Register fails to accept the prevalence of European law over Estonian Commercial Code.

Amendment of the Commercial Code is necessitated by the principle of freedom of establishment with which the restriction imposed by the Estonian residence requirement is in conflict. The unclear situation is about to change since pursuant to the Draft Amendment Act of the Commercial Code, which has been assigned to the first reading at the Parliament, § 180 (2) and § 308 (4) of the Commercial Code will be amended. According to the amendment provided in the Draft Amendment Act, at least half of the members of the management board must be residing either in Estonia or another member state of the European Union. By this amendment, in the near future the requirement that the members of management board of private and public limited companies must be residing in Estonia will be replaced with the requirement of residing in the European Union.

This new regulation based on the principle of freedom of establishment will certainly make it much more comfortable for foreign companies to establish subsidiaries in Estonia. Both in the case of private and public limited companies, there will be no more† problems related to finding suitable members of the management board residing in Estonia and the board can be compiled according to the wishes of the founders. However, the current Estonian residence requirement will still remain applicable in case of branches and there will be no amendment with this regard in the residence of at least one of the directors of the branch of a foreign company must be in Estonia.

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