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Asset Finance

Recently, several amendments were made to the Estonian Property Law Act, including fundamental changes to the right of pledge. The amendments, which have already taken effect, broaden the possible uses of pledges in economic relations.


Including: Legal form and licensing; Financial supervision; Other requirements.

The Supreme Court recently highlighted an Estonian regulation related to loans granted to natural persons which is often forgotten or overlooked by creditors. Agreements for such loans are common. However, if they contain a jurisdiction clause under which all disputes arising between the parties in relation to such agreement must be settled in a specific court in Estonia, this clause may turn out to be void.

Under Estonian law, a guarantee is an independent obligation, the validity of which is not influenced by the validity of the obligations secured by it. The aim of the guarantee is to provide comfort; the beneficiary under the guarantee may enforce the guarantee once an obligor has failed to perform its obligations as secured by the guarantee. The Supreme Court has recently ruled on this issue.

In a recent ruling the Supreme Court provided important standpoints in connection with obligations secured under a security agreement. In its judgment, the court clarified the meaning of a 'global security arrangement'. The court found that global security arrangements are not always permissible and in some cases can be void. This ruling will have an impact on banks as lenders, as well as on borrowers.

The Estonian Central Bank and the Financial Supervision Authority often cooperate with their Scandinavian colleagues. Amendments to the Credit Institutions Act recently entered into force, introducing a new regulation on cross-border banking supervision and cooperation between financial supervision authorities. The amendments facilitate tighter cooperation between the financial authorities of EU member states.

The Parliament is in the process of drafting a law that will give the Financial Supervisory Authority (FSA) authorisation to impinge on banking secrecy when investigating alleged misdemeanours, an offence punishable by a fine or detention. The current Credit Institutions Act, which governs banking secrecy regulations, allows the FSA impinge on banking secrecy only in case of criminal offences.

The Estonian Supreme Court recently analysed a problem which emerged in conjunction with a decrease in the value of pledged shares upon a change in share capital, and explicitly confirmed that the value of a shareholding is also influenced by attached voting rights. Such decisions demonstrate the importance of the quality of collateral, with those that borrow against esoteric collateral, such as shares, likely to be penalised.

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Capital Markets

Including: Securities Market Regulation; Supervision

The call for tighter financial regulation can be heard everywhere - Estonia is no exception. The Financial Supervision Authority recently issued an advisory guideline to investment funds specifying the requirements for internal rules regarding risk management. The guideline, entitled "Requirements for the Management of Risks Related to the Investment of the Assets of a Fund", will enter into force on February 15 2010.

The harmonization of the EU Markets in Financial Instruments Directive with Baltic (Estonian, Latvian and Lithuanian) financial market regulation has given the Baltic Exchanges the opportunity to establish the Baltic alternative market - First North Baltic - as a component of the First North alternative market of the OMX Nordic Exchanges.

According to the Act on the Issue of 2002 Bonds of the Republic of Estonia, the government may issue bonds worth up to €100 million for a five-year term. The issuing is aimed at international financial markets, with bonds being offered to investors outside the Republic of Estonia.

The Estonian Parliament recently adopted amendments to the Act on Foreign Borrowings and Issuing of State Guarantees to Foreign Loans by the Republic of Estonia. The amendments pave the way for the first international bond issue by the Republic of Estonia and expedite the country's foreign borrowing procedure.

The new Guarantee Fund Act aims to protect investors by ensuring the functioning of guarantee schemes for compulsory pension funds in Estonia and introducing an effective mechanism for the administration of such schemes.

The new Securities Market Act replaces the Securities Market Act of 1993 for the purpose of regulating the domestic securities market in compliance with relevant EU and international standards, in order to ensure the efficient operation and transparency of the market and its integration with equivalent markets.

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Company & Commercial

According to Estonian law, a party is entitled to claim prearranged interest on payments that have been delayed (interest on late payment). However, certain activity can affect a claim of interest on late payment and may lead to the claim being abolished. Primarily, this happens when the principle of good faith is violated.

In recent years there has been much debate surrounding the liability of management board members, particularly where the board member has caused damage to the company through a null and void transaction. In a recent decision the Supreme Court increased the liability of management board members in such disputes.

Until recently, a business could register several areas of activity in connection with its name in the Commercial Register. However, on January 1 2007 amendments to the Commercial Code came into force that replace the phrase "area(s) of activity" with the phrase "principal activity". This means that a company can notify the Commercial Register of only one area of activity.

The new Commercial Code, which came into force last year, gives companies broader powers to determine the procedure for the payment of dividends. However, these powers are limited by other considerations, such as ensuring that the process of determining how to pay dividends is in line with good practice and the principle of good faith.

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Competition & Antitrust

After conducting a thorough analysis of the directory media market, the Competition Board has unconditionally cleared a merger between two leading Estonian directory media companies which will result in a joint market share of 66%. The decision is significant because of the issues surrounding the board's market definition and its consideration of the Internet as a valuable alternative to traditional information sources.

The Competition Board recently fined Narva Elektrijaamad AS, a subsidiary of the state-owned electricity monopoly Eesti Energia, Ekr250,000 for an abuse of its dominant position. This is one of the biggest fines to be imposed in the board's history, confirming that the board is taking serious action against dominant companies that abuse their dominant position.

The Competition Board has initiated investigations into the local water supply and wastewater discharge services market in order to verify its compliance with competition laws. The main reason behind the investigations is the dramatic increase in the prices charged for water supply and wastewater discharge services in Estonia over the last three years.

The Ministry of Justice has drafted amendments to the Penal Code, the Code of Criminal Procedure and the Competition Act regarding the introduction of a leniency programme designed to assist in the battle against cartels. The amendments were presented to the public at the beginning of 2009.

In the past the Competition Board has been accused of being too passive and ignoring severe competition law infringements. The board is eager to disprove these accusations and has thus taken on a more active investigatory role. Since the beginning of 2008 the Competition Board, along with the Public Prosecutor's Office, has commenced six criminal cases investigating cartel infringements.

The Competition Board recently issued a precept to AS Narva Elektrijaamad regarding abuse of its dominant position in the wholesale electricity market. Two small undertakings engaged in the sale of electricity had filed a complaint against Narva Elektrijaamad regarding the termination of a provision of a fixed supply of electricity.

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Corporate Finance/M&A

The Commercial Code has been amended in order to reduce the time it takes to carry out a merger procedure. The burdensome and unreasonable requirements of the earlier law have been amended to enable a merging company to file an application to register the merger in the Commercial Register just one month after the merger decision is made.

Since January 1 2006 the closing of transactions regarding the transfer of shares of public limited liability companies has become easier due to an amendment to the Commercial Code. The amendment abolishes the requirement to notarize the minutes of the shareholders' meeting when changing the supervisory board at the closing of a share sale transaction.

Amendments to the Commercial Code coming into effect on January 1 2006 will clarify the consequences of breaching financial assistance provisions and may affect acquisition financing. At present, the law does not specify the legal consequences of breaching certain loan prohibitions.

The right of first refusal is often at the centre of hostile takeover battles. For many years the use of this right has been heavily disputed and the rules relating to it have been criticized - it has seemed as though the concept will remain ineffective forever. However, recently Parliament made yet another effort to remedy the situation.

It is customary in Estonia to carry out due diligence investigations in relation to corporate acquisitions. However, the law imposes no duty of due diligence on the purchaser. Only at the point when the purchaser knows or should know about the shortcomings of the object of sale is the seller released from liability for the object's non-conformity with its contract.

Earlier this year Swedbank acquired Hansapank, the largest public company in the Baltic states. Due to its size, the transaction represented a serious test for the public takeover rules and financial supervision authorities in Estonia. A high level of public and media interest in the transaction drew attention to some original legal issues in Estonian practice

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Corporate Tax

Including: Corporate Income Tax; Double Tax Treaties; Value Added Tax; Social Tax.

In March 2008 Parliament adopted amendments to the Income Tax Act to bring it into compliance with the EU Parent-Subsidiary Directive. Among other things, the amendments introduced an annual taxable period and advance payments for corporate taxpayers. However, following developments in European Court of Justice case law, new amendments have now been adopted.

The Supreme Court of Estonia recently rendered a decision that will no doubt catch the attention of tax advisers and taxpayers involved in assessing the tax consequences of corporate restructurings. The decision concerned the applicability of tax avoidance rules and it may potentially have a wider impact on the tax authorities’ use of the ‘substance over form’ principle.

Parliament recently adopted long-awaited amendments to the Income Tax Act. The amendments are based on concerns over the concordance of the present law with EU regulations, in particular Article 5 of the EU Parent-Subsidiary Directive. This update provides an overview of the amendments and their impact on corporate taxpayers.

In a recent decision the Supreme Court declared part of the Value Added Tax Act unconstitutional and invalid. The case reflects how the court interprets the Constitution and attempts to harmonize basic indirect taxation rights with EU standards.

Under the EU Accession Treaty, Estonia can operate its current corporate tax system (under which undistributed corporate profits remain tax exempt) until December 31 2008. In early July 2007 the government adopted its position on the post-2009 tax system - a position which seems to correspond to one of the six options proposed earlier by the Ministry of Finance.

Estonia has modified the exemption rules for the taxation of dividends. Previously, the Income Tax Act required that, for the exemption to apply, the income tax had to be paid in another country by the company or its subsidiary and the shareholder receiving the dividends had to hold at least a 20% share of the company. However, the amended rules exempt dividends from taxation if certain new conditions are met.

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Insolvency & Restructuring

Estonian bankruptcy law gives pledge creditors several advantages over other creditors in bankruptcy proceedings, including the priority to satisfy their claims out of the money received from the sale of the pledged asset in the first ranking of claims. However, uncertainty arises regarding the division of expenses between pledge creditors in cases where a pledged asset has been encumbered with several rights of security.

The Bankruptcy Act allows for a prohibition on business for the duration of bankruptcy proceedings regarding both natural and legal persons. However, since the act is broadly worded and it is unclear for what purpose a prohibition on business may be applied with respect to a board member, and what restrictions limit the application of such prohibition, the Supreme Court has attempted to fill the legal gap.

If a company becomes permanently insolvent, the management board must promptly submit a bankruptcy petition for the company to a court. If the bankruptcy petition is not submitted on time, company board members risk both civil and criminal liability. Thus, to ensure all obligations have been met and board member liability is excluded, the main issue is how to determine whether a company is permanently insolvent.

The nature of the liability of a company board member in situations relating to insolvency is complex. Filing a bankruptcy petition in a situation where a company could still be saved may make the board member liable to the company; however, if the board member fails to file a bankruptcy petition on time, he or she could be liable to the company, as well as its creditors. The Supreme Court recently set out its position on the matter.

The Debt Restructuring and Debt Protection Act aims to help natural persons who are experiencing financial difficulties. The act complements the Reorganisation Act, which fulfils a similar function for businesses. Since the acts entered into force, other legal policy measures have been suggested for the swift non-judicial reorganisation of businesses facing financial problems.

Estonian bankruptcy law, in line with that of many other countries, offers greater protection and rights to creditors whose claims are secured by a pledge. In bankruptcy cases involving pledged creditors, concern often arises in relation to the circumstances under which a pledgee may contest the final report on the bankruptcy proceedings. The Civil Chamber of the Supreme Court has analysed this issue in a recent ruling.

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The Civil Chamber of the Supreme Court of Estonia has found that a standard term precluding an insured event if a vehicle is stolen using previously stolen keys would be so surprising to a policyholder acting in good faith that, under Section 37(3) of the Law of Obligations Act, such a standard term cannot be regarded as part of the insurance contract.

Offshore Services

The Estonian Parliament recently finished the first reading of its draft law to amend the Income Tax Act in order to facilitate investments in financial assets by natural persons. According to the amendments, income tax will not be imposed on income (interest or capital gains) from financial assets.

Projects & Procurement

Several amendments to the Public Procurement Law recently came into force. Most of them resulted from the implementation of the Remedies Directive into national law. Independently, the locus of supervisory powers was moved so that, as of July 1, the independent Public Procurement Agency ceased to exist. Rather, supervisory tasks are now carried out by a public procurement unit within the Ministry of Finance.

Real Estate

Under Estonian law, a preliminary contract for the transfer or sale of real estate must be concluded in notarized form. A contract concluded in simple written form is null and void, even if it is a preliminary contract. However, real estate brokers and developers have invented new agreements to avoid obligatory notarization.

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The new Cable Distribution Act creates opportunities for healthy competition in the cable distribution market. It lays down detailed requirements for the provision of services and for customer agreements, providing better protection for customers and ensuring the quality of services.