Establishing and managing a limited partnership fund in Estonia  

Limited partnership fund (LPF) is a popular type of investment vehicle for operating a VC fund in Estonia. Also, other types of fund structures can be used (e.g., a contractual fund), but the LPF seems to provide the expected flexibility and advantages for the GPs and LPs active in early- and growth-stage financing.

The regulatory framework for the LPF in Estonia was established in 2016 and it was designed based on the best qualities of similar recognised structures elsewhere (e.g., UK, Luxembourg). The LPF is based on the limited partnership concept under the Estonian Commercial Code with the fund-specific elements added through the Investment Funds Act.

The key features of an LPF are:

• two categories of partners:
  
  • the GP (or GPs) – the partner that has control over the management of the LPF and unlimited liability to third parties for the debts and obligations of the LPF. Usually, an Estonian private limited company form (osaühing / OÜ) is used to take this role; and
  • the LPs - essentially passive investors without active management rights. A LP’s liability to the LPF and its creditors is limited to the amount of capital that it agrees to contribute to the LPF. Information regarding LPs is not registered in the Commercial Register.
• a limited partnership agreement that governs the relationship between the partners. The law sets out certain requirements for the content of the agreement, but the key terms and conditions shall be designed by the GP/fund manager and are subject to the agreement between the partners.
  
• freedom from many of the legal constraints and formalities usually applicable to corporate entities. This flexibility is a significant benefit allowing to tailor the capital contributions, investment management, income distribution, liquidation process, and also the matters related to shares and share transfers, according to the features of the specific fund.
• recognition as a “flow-through entity” under the Estonian income tax law and, as a consequence, “fiscal transparency”, meaning the partners are treated for tax purposes as having invested directly in the underlying partnership assets, with no taxation at the LPF level (with certain exceptions for affiliated non-resident partners whose country of residence do not recognise the look-through approach for LPF type of funds). The LPF must report its income annually together with the details of the partners entitled to the income.

Shares in the LPF cannot be offered publicly. Depending on the regulatory status of the AIFM managing the LFP, the AIFM shall either follow the marketing and disclosure rules under the Investment Funds Act (for authorised AIFMs) or ensure compliance with the private placement regime (for sub-threshold AIFMs). Respectively, marketing and offering the LPF outside Estonia is subject to the AIFMD regime in the EEA or applicable national laws and regulations (e.g., national private placement regime, if applicable).

The LPF can be managed either by the GP or by an external fund management company. The GP or the external fund management company can be either:

• an authorised Estonian or EEA fund management company; or
  
• a small AIFM registered in Estonia.
  

The AIFM registration and LPF registration processes can take approximately 6 months, or less, if the AIFM already has an authorisation / registration. The process would have the following steps:

• registering the GP or another person as the small AIFM with the FSA
• applying for the activity licence by the FIU (after the FSA registration)
• preparing and negotiating the LPF agreement and other documentation in parallel
• establishing and registering the LPF with commercial registry (after the FSA registration)

Fund manager registration with the FSA
Assuming that there is no requirement for the AIFM to operate under an authorisation, the activity of the small AIFM must be registered with the Estonian Financial Supervision Authority (FSA) (LINK). The small AIFM registration process is harmonised across EEA under the AIFMD. The details of the registration application are set out in the Investment Funds Act § 453 (2) and Commission Delegated Regulation (EU) No 231/2013 (Annex IV specifically). The requirements for ongoing reporting post-registration are set out in the Investment Funds Act § 454.
Information can be submitted to the FSA in English.

Please note that Estonia has established a specific requirement for the small AIFMs registered in Estonia.

• Namely, the law allows the FSA to reject the application if it is explicitly clear that the applicant’s seat and place of operations (permanent and continuous business activity) is not in Estonia. The FSA has further explained that the business activities of the AIFM should to a large extent be operated in Estonia and at least one board member responsible for the business activities should carry out its duties in Estonia. 
  
• Small AIFMs without an authorisation must have a share capital of at least EUR 25,000 and it must be paid up as a cash contribution upon the establishment of the small AIFM.
  
• Advertisements regarding the fund must be accompanied with the notice that the AIFM is registered and not authorised, and the FSA does not exercise supervision over the AIFM.
  

The FSA has up to 2 months for registering the small AIFM. The processing fee is EUR 2,000. After registration small AIFMs must pay a supervision fee of EUR 500 per year.

Activity licence by the FIU
Fund management companies that are registered in Estonia and do not hold the AIFM fund manager authorisation (i.e., are registered fund managers) need to apply for the activity licence issued by the Estonian Financial Intelligence Unit (FIU) (LINK). The requirement for this activity licence comes from the Money Laundering and Terrorism Financing Prevention Act. The aim is to ensure that also such type of fund managers apply appropriate systems and controls for tackling financial crime.

The main requirements under the licence include the following:

• appointment of the responsible board member and the money laundering reporting officer
• establishing and implementing internal rules for the prevention of money laundering, terrorism and weapon proliferation financing, and for applying international financial sanctions
• carrying out the risk assessment, setting out the risk appetite and operating efficient systems and controls for managing the risks
• reporting to the FIU of suspicious or unusual activities, and application or breach of financial sanction.

The FIU has up to 60 days for making the decision and they may extend the deadline by another 60 days. According to the FIU guidance, the application can be submitted after the fund manager has been registered with the FSA. The state fee for the activity licence is EUR 3,300.

The LPF registration with the Commercial Register
The application for registration of the LPF with the Commercial Register can be submitted either digitally (requires electronic signature) or through a notary public service. The processing time for the registration is up to 5 business days. The state fee for the registration is EUR 20 (+ notary fees, if any).

Prepared by the EstVCA Legal & Regulatory team (project led by Antti Perli and Gerd Laub from Ellex Raidla).

NB! Please note that the overview has been prepared on the basis of Estonian laws as applicable on 1 September 2024.