The Estonian Parliament adopted the Foreign Investment Reliability Assessment Act on 25 January 2023. The Act is set to enter into force on 1 September 2023. The primary objective of the Act is to screen both direct and indirect investments made by non-EU investors in strategically important and sensitive areas in Estonia. The Act contributes to the effective implementation of Regulation (EU) 2019/452 on the screening of foreign direct investments (FDI). A transaction caught by the Estonian FDI regime cannot be completed before the transaction is cleared by the Estonian Consumer Protection and Technical Regulatory Authority.

With the adoption of the FDI regime, Estonia has finally caught up with countries such as Latvia, Finland and Germany, where a foreign investment assessment process has been in place for several years. From 1 September 2023 non-EU investors need to add Estonia to the list of countries where FDI filing requirements need to be checked in case of any M&A activity.

Investors covered by the Estonian FDI regime

The Estonian FDI regime applies to direct or indirect investments made by non-EU investors who meet at least one of the following criteria:

(i) a natural person who holds:

  • a citizenship of a non-EU state
  • several citizenships, at least one of which is of a non-EU state
  • no citizenship

(ii) an undertaking established under the law of a non-EU state

(iii) an undertaking controlled either by:

  • a natural person specified in clause (i)
  • an undertaking specified in clause (ii)

regardless of the place of establishment of the controlled undertaking.

Targets covered by the Estonian FDI regime

The Estonian FDI regime applies to investments in a relatively small number of target undertakings. The legislator estimated the number of targets covered by the Estonian FDI regime to be below 350. There are 11 groups of target undertakings:

  • providers of vital services, such as electricity supply, natural gas supply, liquid fuel supply, ensuring the operability of national and local roads, phone and mobile phone services, data transmission services, digital identification and digital signing, emergency care services, payment and cash circulation services, district heating, water supply and sewerage
  • undertakings in which the state of Estonia has a qualifying holding (“qualifying holding” is defined below, under “Transactions caught by the Estonian FDI regime”)
  • undertakings which produce or, on the basis of a valid contract, supply military goods and/or dual-use items, or provide technical assistance related to such goods and/or items to state authorities (exceptions apply to undertakings which are already subject to investment restrictions under the Estonian Weapons Act)
  • providers of national television or radio broadcasting services and providers of on-demand audiovisual media services; as well as publishers of news, newspapers and magazines in the print media and on the internet, whose turnover in Estonia in the preceding calendar year in relation to the relevant activity was at least EUR 3 million
  • undertakings holding a geological exploration or extraction licence for the exploration or extraction of oil shale, or for the exploration or extraction of a raw material found in Estonia and included in the List of Critical Raw Materials for the EU as drawn up by the EC
  • undertakings with whom the state’s operation stockpile contract or delegated stockpile contract has been concluded
  • undertakings that own a permanent national defence object
  • undertakings that own a piece of mast infrastructure with a height of at least 200 metres necessary for the functioning of national communications or the transmission of broadcasting programmes
  • railway infrastructure managers who operate a public railway
  • certified aerodrome or heliport operators, if the aerodrome or heliport is open to international scheduled air traffic, and the air navigation service provider providing air traffic services in the Tallinn Flight Information Region
  • operators of Estonian seaports belonging to the trans-European transport network (as defined in the list of ports in Annex II to Regulation (EU) No 1315/2013).

Transactions caught by the Estonian FDI regime

The Estonian FDI regime does not have any size or value thresholds. Instead, a transaction is automatically caught by the Estonian FDI regime if a non-EU investor acquires any of the following:

  • (i) direct or indirect qualifying holding* in the target undertaking
  • (ii) direct or indirect control over the target undertaking
  • (iii) a part of the target undertaking*

* A qualifying holding is any direct or indirect holding in the share capital of an undertaking which represents 10% or more of the share capital of the undertaking, of all rights related thereto or of the voting rights in the undertaking, or which makes it possible to exercise a significant influence over the management of the undertaking in which that holding subsists (Section 9 of the Securities Market Act)

* A part of the target undertaking is defined as an asset of the target undertaking, or an organisationally autonomous part of the relevant undertaking, which forms the basis of the relevant economic activity and is necessary for the operation of the target undertaking (Subsection 4(2) of the said Act).

A transition from a qualifying holding to control is deemed to be a separate transaction requiring a new prior authorisation.

Authority responsible for granting authorisations

The Consumer Protection and Technical Regulatory Authority (“CPTRA”) is the competent authority responsible for reviewing foreign investments and granting authorisations. However, the responsibility for carrying out a substantial assessment of foreign investments lies with the Foreign Investment Committee (“FIC”), a newly formed body operating under the CPTRA. The FIC consists of representatives of various authorities, such as the Ministry of Economic Affairs and Communications, the Financial Intelligence Unit, etc.

The CPTRA may be consulted on Estonian-FDI-regime-related questions, both prior to applying for authorisation and during the authorisation process. The CPTRA is also responsible for monitoring compliance with the Estonian FDI regime.

Authorisation process and main evaluation criteria

An authorisation must be obtained prior to the closing of the foreign investment transaction. The notifying party should be the non-EU investor. Similar to merger notifications, an FDI notification can be made after an agreement concerning the foreign investment has been signed or any other transaction concerning the foreign investment has been made. The notification must be submitted electronically. There is no state fee for FDI notifications.

The CPTRA adopts an official decision concerning the foreign investment within 30 calendar days of the submission of a complete filing. The review period may be extended by up to 90 calendar days if the CPTRA requires more time for assessing the impact of the foreign investment or if other member states or the Commission have notified of their intention to provide comments. The review period may also be extended by up to 60 calendar days if the CPTRA and the non-EU investor engage in commitment negotiations.

The authorisation process focuses on assessing whether the foreign investment endangers the security and/or public order of Estonia or any other member state of the EU. In particular, account will be taken of the circumstances relating to the foreign investor (e.g. countries and sectors of the economy the investor operates in, and whether the investor is controlled by a foreign state) and the economic activities of the target company (e.g. the economic sector in which the undertaking operates and its importance in the relevant sector, intellectual property owned by the target).

The authorisation may be granted with an ancillary condition which is essentially a commitment by the foreign investor or the target undertaking to take measures to avoid endangering national security and/or public order. Such commitments may include an obligation to transfer shares in the target undertaking, continue performance of pre-existing agreements, a prohibition on certain persons serving on the target undertaking’s management bodies or a restriction of access to certain information.

Consequences of non-compliance

If a notifiable foreign investment is completed without a prior authorisation, the CPTRA may order the non-EU investor, the target undertaking and any other participant in the foreign investment transaction to transfer the relevant shares or part of the target undertaking, reverse the transaction or carry out other operations to restore the pre-investment situation. In the event of non-compliance with the said order, the CPTRA may impose a non-compliance levy of up to EUR 100,000. The non-compliance levy can be imposed repeatedly until the order is complied with.

In addition to the above, closing a transaction without a prior FDI authorisation may result in the closing transactions being void. Under Estonian law, transactions that violate prohibitions provided by law are void if the purpose of the prohibition is to render the transaction void in the event the prohibition is violated. The standstill obligation is a prohibition provided by law but it is currently unclear if the legislator’s intention was to render the transaction void in the event the prohibition is violated. The Act and its explanatory memorandum do not address this question.