Estonia to Start Reviewing the Credibility of Foreign Investments

As of September 01, 2023, the credibility of foreign investors from third countries will be assessed prior to allowing investments into economic sectors that are important for Estonia’s security or public order. The new Law on Assessment of Credibility of Foreign Investments establishes a legal framework for the prudential assessment of foreign investments aimed at ensuring the security of Estonia and other EU member states. Prior assessment of foreign investrors will be obligatory our if the investments are aimed into the following sectors of the Estonian economy:

• critical service providers;
• state-owned enterprises;
• manufacturers or suppliers of military or dual-use goods;
•  owners of defence assets;
• certain media enterprises; and
• transport and infrastructure companies.

A foreign investment approval is granted by the Consumer Protection and Technical Surveillance Authority (CTA) after prior coordination with a Foreign Investment Committee composed of representatives of various ministries and other government agencies, including security services. Foreign investment is not authorised if it threatens the security or public order of Estonia or of another EU Member State. The aim is to keep Estonia open to foreign investments as these are important for economic growth, competitiveness, employment and innovation, but the risks of foreign economic pressure need to be mitigated as well. Unfortunately foreign investments may also be used to achieve unfriendly security policy objectives and may pose a threat to Estonia’s strategic economic interests and public order.

Acquisition of control or a significant shareholding shall be subject to prior authorisation

The foreign investments to be assessed are the acquisition of a direct or indirect qualifying holding (generally a holding of at least 10% of voting rights or other rights attaching to a holding), the acquisition of a direct or indirect control of the target enterprise (whether through a controlling holding (50 % + 1 vote) or similar) or the acquisition of a share in the target enterprise (the acquisition of an undertaking, establishment or property necessary for the operation of the target enterprise). A foreign investor within the meaning of the new law is considered to be:

• a natural person: who is a national of a third country (i.e. a non-EU Member State), who has several nationalities, at least one of which is a national of a third country, or who is stateless;
• a company established in a third country; or.
• a legal entity controlled by any of the above.

The approval procedure shall take time and may be subject to ancillary conditions

The time limit for processing an application for a foreign investment approval is generally 30 + 90 calendar days. A further extension of 60 calendar days is possible if it is necessary to negotiate ancillary conditions to the approval. Notably, the CTA may grant an FDI authorisation with ancillary conditions (including an obligation to transfer a certain size of shareholding in the target company; to continue contracts for the supply of products or services, etc). As the national supervisory authority, the CTA has the power to apply respective measures in case of unauthorised foreign investment or breach of the conditions of the authorisation. In the event of failure to comply with a precept issued during the supervision, the CTA has the power to impose a penalty (up to €100 000).

The approval for foreign investment may be subsequently withdrawn

The CTA may revoke a foreign investment permit if:

1. the foreign investor or the target company fails to comply with the ancillary condition imposed on it at the time the authorisation was granted;
2. the foreign investor has provided incorrect or misleading information or documents which were decisive for the decision.

In the event of revocation of the approval of the foreign investment, the foreign investor, the target enterprise and the other party to the foreign investment shall be obliged to immediately take the necessary steps to restore the pre-investment situation to the greatest extent possible. The new law provides for the possibility to seek clarification from the CTA before applying for a foreign investment approval or during the approval granting procedure, as well as to seek advice from the CTA as to whether the foreign investment is subject to a permit requirement. This is an option that we recommend the businesses to take early in order to avoid unnecessary misunderstandings and time-delays at a later stage. TRINIT’s experienced transaction lawyers have been advising on complex and large-scale foreign investments into the Estonian economy already since the mid-1990s. Do not hesitate to contact us if you would like more information or specific legal advice on the application of the new law. Tõnis Tamme Partner