Expanding Cross-Border: Legal and Regulatory Challenges of Fintech

There are many challenges to structuring the legal framework of even the simplest financial technology startup. To start the basic operation, one must expend money and time establishing the basic legal framework: setting up the appropriate legal entity, drafting contracts, making sure the activity does not fall under regulatory supervision or acquiring the appropriate authorisation.

But to truly grow, a startup must expand beyond its original market. And with that comes a new set of legal and regulatory challenges. This article brings out some of the challenges that we see our clients based in Estonia struggling with the most.

Diverse Regulatory Requirements

In the European Union (EU), regulated fintech companies enjoy a rare privilege  – they can get a license in one EU country and use it across many others — a process called passporting. It requires notification of the company’s financial supervisory authority and allows to offer services in any EU member state without going through a licensing in each separate country. However, this advantage reaches its limits once you look beyond the EU, notably with countries like the UK, where the system no longer applies, and obtaining a separate license becomes a necessity.

The situation is further complicated within the EU itself. A startup that is unregulated and freely operates in one EU country may find itself under the regulatory microscope in another. This is because, despite a common framework, each country’s regulators may interpret rules differently, and local legislation might impose additional requirements or their own separate licenses. For example, this is still the case with crypto until the EU-wide MiCA regulation comes into full effect in 2025. Therefore, a fintech firm’s legal compliance in one jurisdiction doesn’t automatically transfer across all others. Beyond the licensing, there are critical considerations like the validity of contracts and marketing practices, which are also governed by local laws and can vary drastically. Requirements can range from the mandatory use of state language to the use of specific wording and the use of disclaimers.

Risk Management and Security Concerns

One big hurdle is the compliance with the Anti-Money Laundering (AML) regulations. For instance, while the regulators of some countries might accept digital forms of identification, others may insist on more traditional, in-person verification methods. Even if digital forms are considered acceptable, the procedure for their application can be so technically and operationally complicated that operating in a country may become simply unreasonable. The situation is made more difficult for non-EU clients that may be deemed too risky or that may fall off the onboarding flow due to being required to submit countless documents simply to open an account. Moreover, one must comply with the numerous reporting obligations and monitor transactions for suspicious activity, which can vary greatly in definition from one country to another.

Legal Structure and Taxation

One of the most important choices in going cross-border is whether to establish a branch, create a subsidiary, or engage in direct cross-border sales. It is influenced by several factors, including administrative ease and taxation implications.

Operating through a foreign branch can offer a simpler, more direct way to expand into a new market. However, it often means that the parent company is fully liable for the actions and obligations of the branch, including tax liabilities. Creating a subsidiary provides a legal barrier between the parent company and the new entity, but also requires dealing with the complexities of founding and managing a separate legal entity in a foreign jurisdiction. Lastly, selling services directly, without establishing a physical presence, can be the least complex option initially but may trigger tax obligations and regulatory compliance issues in the target country.

The legal structure influences the resulting taxation obligations, including employment taxes, Value-Added Tax (VAT) and income tax. It is a common misconception that absence from a country in a physical sense equates to non-liability for local taxes. In fact, depending on the local rules, a company may be liable to register itself as an employer, pay VAT on local sales or even pay income tax, if it is deemed to have a permanent establishment.


In summary, the expansion of fintech startups into new markets introduces complex legal and regulatory challenges, from navigating diverse regulations to handling compliance and taxation issues. This highlights the role of legal expertise in helping companies identify and mitigate risks. Engaging with lawyers who specialize in fintech and international regulations is crucial for startups aiming for global growth, ensuring compliance and minimizing potential risks.

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Our memberships:
FinanceEstonia, Lexing®,
Estonian Service Industry Association,
Estonian Chamber of Commerce and Industry,
EstVCA, EstBan, FECC,
IBA & IBA European regional Forum