2018 Doing business and investing in Estonia - www.pwc.ee
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2 PwC Contents 5 Office location in Estonia 1 Country profile and investment climate 6 1.1 Introduction 1.2 Government structure 1.3 Legal system 1.4 People 1.5 Economy 1.6 Foreign trade 1.7 Further reading 2 Business environment 12 2.1 Business climate 2.2 Free trade zones 2.3 International agreements 2.4 Legal environment 2.5 Regulations for business 2.6 Property market 3 Banking, finance and insurance 18 3.1 Banking system 3.2 Specialised financial institutions 3.3 Investment institutions 3.4 Capital markets 4 Importing and exporting 20 4.1 Trends in customs policy 4.2 Import restrictions 4.3 Customs duties 4.4 Temporary import relief 4.5 Documentation and procedures 4.6 Warehousing and storage 4.7 Re-exports 5 Business entities 22 5.1 Legal framework 5.2 Choice of entity and business forms 5.3 Private limited company (OÜ) and public limited company (AS) 5.4 Partnerships 5.5 Branches 5.6 Representative offices 5.7 Sole proprietorship 6 Labour relations and social security 26 6.1 Labour market 6.2 Labour relations 6.3 Working conditions 6.4 Social security system 6.5 Foreign personnel 7 Accounting and audit requirements 32 7.1 Accounting 7.2 Chart of accounts 7.3 Audit requirements
Guide to doing business and investing in Estonia 3 35 8 Tax system and administration 8.1 Tax system 8.2 Direct and indirect tax burden 8.3 Principal taxes 8.4 Legislative framework 8.5 Tax treaties 8.6 Tax returns and payments 8.7 Assessments 8.8 Appeals 8.9 Withholding taxes 8.10 Tax audits 8.11 Penalties 8.12 Advance clarifications 9 Taxation of corporations 41 9.1 Corporate tax system 9.2 Incentives 9.3 Taxable income 9.4 Deductibility of expenses 9.5 Related party transactions 9.6 Foreign exchange 9.7 Tax computations 9.8 Other taxes 9.9 Branch versus subsidiary 9.10 Holding companies 45 10 Taxation of individuals 10.1 Territoriality and residence 10.2 Taxable income 10.3 Non-taxable income 10.4 Deductions 10.5 Taxation of non-residents 10.6 Tax compliance 48 11 Value added tax (VAT) 11.1 Introduction 11.2 Scope of VAT 11.3 Zero-rating 11.4 Exempt supplies 11.5 Taxable amount 11.6 Non-deductible input VAT 11.7 VAT incentives 11.8 Simplification measures 11.9 Specific reverse charge 11.10 VAT compliance 52 12 PwC in Estonia 12.1 Assurance services 12.2 Tax services 12.3 PwC Legal 12.4 Advisory services 55 Appendices
4 PwC Foreword We welcome the opportunity through this Guide to provide relevant information for doing business and investing in Estonia. Estonia is a small country located at the heart of the Baltic Sea Region - Europe’s fast growing market of nearly 100 million people. Attractive location between East and West, an excellent business environment, stable government and liberal economic policy, moderate costs and the ease of doing business have already attracted numerous international companies to Estonia. Estonia’s economic freedom is among the highest in the world. In 2018 Index of Economic Freedom (prepared by the Heritage Foundation) Estonia is ranked 7th out of 180 countries. The Ease of Doing Business index by the World Bank (2017) sets Estonia at the 12th position. According to Transparency International (Corruption Perception Index 2017), Estonia is ranked 21st out of 180 countries. This Guide has been prepared for the assistance of those interested in doing business in Estonia. It does not cover exhaustively the subjects it treats, but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws, regulations and decisions of the country and to obtain appropriate accounting and legal advice. If you need additional information on doing business in Estonia, please do not hesitate to contact us in our office in Tallinn or through your nearest PwC office. Tiit Raimla Country Managing Partner
Guide to doing business and investing in Estonia 5 Office location in Estonia Tallinn Rakvere Kohtla-Järve Narva Paldiski Jõhvi Kärdla Haapsalu Rapla Paide Jõgeva Viljandi Pärnu Tartu Kuressaare Põlva Valga Võru The PricewaterhouseCoopers office in Estonia is located at the following address: Pärnu mnt 15 10141 Tallinn Tel. +372 614 1800 Fax. +372 614 1900 www.pwc.ee email@example.com
6 PwC 1 Country profile and investment climate Investor considerations: 1.1 Introduction be permanent snow cover from December to March and the sea may A small Nordic country, having close The Republic of Estonia is situated be iced over during these months. economic ties with Scandinavia and in Northern Europe along the Baltic Western Europe Sea. Finland lies to the north of History Estonia, across the Gulf of Finland. Estonians have been living in this A favourable geographic location on Sweden is the western neighbour territory since approximately 2500 the Baltic Sea, a region of intense across the Baltic Sea. Estonia B.C., making them among the economic activities and growth borders Russia in the east, with longest settled of the European potential with good access to Russia, St. Petersburg approximately 350 peoples. Due to Estonia’s strategic the CEE countries and the EU region kilometres across the north-eastern location as a link between East Member of both the EU and NATO border. In the south Estonia borders and West, it has been conquered starting from spring 2004 Latvia. Estonia has approximately numerous times, and under foreign 1.3 million inhabitants. rule for several centuries. Member of WTO Part of the Euro zone since 1 Tallinn, the capital of Estonia, lies At the beginning of the 13th century, January 2011 on the Baltic Sea coast, only about Estonia was conquered by the 80 kilometres (50 miles) south Teutonic knights whose castles still of Helsinki, across the Gulf of dot the countryside. By 1285, Tallinn Finland. The population of Tallinn is was a member of the Hanseatic approximately 450 thousand. Other League. During the Middle Ages, the bigger cities are Tartu, Narva and Hanseatic League, which combined Pärnu. 70 Baltic Sea cities, formed one of the most powerful trading blocs in The territory of Estonia covers 45 the world. The German merchant thousand square kilometres (17 families, which settled here, thousand square miles). Estonia dominated trading activities and is a lowland country with average successive generations of Germans elevation of about 50 meters (160 built their manor houses across the feet) and a considerable part of the country. territory covered with wetlands. Germans were only the first among The highest point, Suur Munamägi, successive waves of conquerors. is only 318m (1,043 feet) above Danes, Swedes, Poles and Russians sea level. More than 1,500 offshore all swept across Estonia, setting up islands make up 9 percent of the successive regimes, fortifying their country’s total territory. The largest towns and castles, and shipping their of the islands are Saaremaa and goods through Estonian ports. Hiiumaa. Estonia is a country of numerous lakes, the largest of which In the late 19th century a powerful are Lake Peipsi and Lake Võrtsjärv. Estonian nationalist movement arose and on 24 February 1918, Estonia Estonia has a temperate maritime declared its independence from climate. Russia. The period of independence Helsinki St. Petersburg was brief and Estonia was forcibly 80 km The Baltic Sea has a strong influence annexed by the Soviet Union in 350 km on local weather, especially in 1940. In 1991, Estonia regained its the coastal regions. Temperature independence, having managed to Tallinn ranges from -7ºC (19ºF) average break free from the Soviet Union daily in January to 17ºC (63ºF) without any acts of violence. average daily in July. Total rainfall Estonia became a member of NATO is between 500 and 700 millimetres on 29 March 2004 and joined the (20 to 28 inches) a year. There may European Union on 1 May 2004.
Guide to doing business and investing in Estonia 7 Since 1 January 2011, Estonia is part All citizens over 18 years of age have Pursuant to the Constitution the of the Euro zone. the right to vote. Republic of Estonia is not to enter into international treaties which are 1.2 Government The Parliament is Estonia’s highest in conflict with the Constitution. structure legislative authority and it is vested with the right to adopt laws. If laws or other legislation in Estonia The highest authority of national are in conflict with international legislation in Estonia is the A distinction is made between treaties ratified by the Parliament, Constitution of the Republic of ordinary laws which are passed by the provisions of the international Estonia (Eesti Vabariigi põhiseadus). a simple majority of votes in the treaty shall apply. The constitution was adopted by a Parliament, and constitutional laws, referendum and came into effect the adoption and amendment of The President on 29 June 1992, after Estonia had which requires a vote by the majority The President of Estonia is elected regained its independence. of all members of the Parliament. for five years by the Parliament or, under specific circumstances, Any other legislative acts must be in In addition, the Parliament has the by an electoral body consisting of conformity with the Constitution as right to ratify and withdraw from the members of the Parliament well as with the generally recognised international treaties and decide on and representatives of local principles and rules of international government loans. governments. The President is law which are an inseparable part of the Estonian legal system. The Parliament According to the Constitution, Estonia is an independent and sovereign democratic republic wherein the supreme power of state is vested in the people. The people exercise their supreme power of state through the election of the Estonian parliament (Riigikogu). Ordinary elections of the 101 members of the unicameral Parliament are held every four years.
8 PwC the formal head of state and the emergency, the President of the is founded upon the principle of the commander-in-chief of the Estonian Republic may, in matters of urgent priority of legislative acts as a source Defence Forces. state need, issue decrees which of law and their precedence over have the force of law. any other sources, such as judicial The laws passed by the Parliament practice, doctrine or custom. are presented to the President for As a member of EU since 1 May proclamation. The President has 2004, Estonia is bound by EU Courts a right to veto the laws passed by law. The Ministry of Justice is Estonia has a three-level court the Parliament pursuant to which responsible for the coordination of system, where: he/she may return the act to the the harmonisation of Estonian law Parliament. and EU law, making suggestions (i) county courts and administrative about harmonising Estonian legal courts adjudicate matters in the first If the Parliament does not thereafter acts with EU legal acts and giving instance; amend the law, the President can the ministries and other institutions proclaim the law or has the right advice about the EU legal system (ii) appeals against decisions of to propose that the Supreme Court and the principles of legislation. courts of first instance are heard by declare the law unconstitutional. courts of second instance and; If the Supreme Court finds that Local government councils the law is in conformity with the Local Government Councils (iii) the Supreme Court is the court Constitution, then the President are regional representative and of the highest instance. proclaims the law. legislative bodies, elected by the residents of a rural municipality or County courts as courts of first The Government city for the period of three years. instance hear all civil, criminal and Under certain conditions other All permanent residents (including misdemeanor matters. The decisions state institutions may also exercise citizens and non-citizens) of at least of county courts can be appealed legislative power. The Government 18 years of age are eligible to vote. to the courts of appeal (also called of the Republic (Vabariigi Valitsus) Local executive power is vested in circuit courts), being the courts of and the ministers carry out the local governments that resolve local second instance. Administrative legislative function by using the right issues and have local budgets to fulfil courts hear administrative matters to pass regulations on the basis of their duties. as courts of first instance. and for the implementation of laws (so called intra legem regulations). 1.3 Legal system The decisions of county and administrative courts are reviewed If the Parliament is unable Like all continental European legal by courts of appeal in the second to convene in a situation of systems, the Estonian legal system instance by way of appeal
Guide to doing business and investing in Estonia 9 proceedings on the basis of an third rural. 69% of the population Estonians are predominantly appeal, an appeal against a ruling, is of Estonian ethnicity. The second Lutherans, but religion does not or a protest. largest ethnic group is Russian, have any considerable impact on forming approximately 25% of the daily life. There are small Russian The Supreme Court is the court of population. 1.7% of the population Orthodox, Baptist and other the highest instance, which reviews has Ukrainian roots, and Belarusians communities across the country. decisions by way of cassation and Finns make up approximately proceedings, i.e. the parties to 0.9% and 0.6% of the population Estonia has been reforming its the proceedings have the right respectively. education system since regaining to appeal to the Supreme Court independence in the beginning of against the decisions of the courts The official language is Estonian. 1990s. The current system consists of appeal. A matter is accepted for More than one million people speak of compulsory basic education, proceedings in the Supreme Court Estonian, which belongs to the followed by upper-secondary if the statements presented in the Finno-Baltic group of the Finno- education, at either a general high appeal show an opinion that the Ugric language family. Estonian school or a vocational school. The appeals court applied incorrectly, is closely related to Finnish (the general education process then or materially violated a procedural similarity is comparable to that offers higher education at university rule that may involve an incorrect between Italian and Spanish), while or at an applied higher education judicial decision. The Supreme Hungarian is a more distant relative. institution, and the vocational Court is also the constitutional Estonia uses the Latin alphabet. As process offers post-secondary review court. a majority of the Estonian business education at a technical school. The community is internationally reformed educational system does, 1.4 People oriented, English is understood and however, provide for movement spoken fluently by a large number between the general and vocational The total population of Estonia is of businesspeople. Furthermore, processes. Education is mostly around 1.3 million people. As in many Estonians speak Russian and, provided in Estonian. State and other countries in the region, the especially in Northern Estonia, municipal education establishments population growth rate has been Finnish, among other foreign are mostly free of charge. There are very modest recently. Average life languages. 20 institutions of higher education expectancy was 78 years in 2015; in Estonia, including the renowned 73 years for men and 82 years for Overall, most Estonians are not University of Tartu, Tallinn women. The population density is religious. There is a tolerance toward University of Technology, and other approximately 30 inhabitants per all religions and in general religious universities. The study programs square km. Around two-thirds of beliefs do not affect business of the bigger universities tend to be the population is urban, and one- activities in Estonia. Formally, internationally accredited. Some
10 PwC universities have programs in the over the last twenty years. Estonia fishing, timber and wood products, English language. has a liberal market-based economy. shipbuilding, electronics, The government has pursued nearly transportation and various services After regaining independence balanced budgets and low public debt. remain key sectors of the Estonian from the Soviet Union, Estonia has economy. Estonia produces nearly been among the most advanced Oil shale-based energy production, all of the energy needed for the emerging markets in Central and telecommunications and IT country, supplying large part of its Eastern Europe, mostly owing to the products, textiles, chemical electricity needs with locally mined success of its socio-economic reforms products, banking, food and oil shale. Alternative energy sources such as wood, peat, and biomass Key economic indicators 2007–2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GDP In current prices (EUR billion) 16.2 16.5 14.2 14.7 16.7 18.0 19.0 20.0 20.4 21.0 23.0 Real growth (%) 7.2 (5.0) (14.2) 1.8 7.6 4.3 2.0 2.8 1.8 2.2 4.8 Prices Consumer price index (%) 6.6 10.4 (0.1) 3.0 5.0 3.9 2.8 (0.1) (0.5) 0.1 3.4 Labour market and wages Unemployment rate (%) 4.6 5.5 13.5 16.7 12.3 10.0 8.6 7.4 6.2 6.8 5.8 Average monthly gross wages 726 825 784 792 839 887 949 1005 1065 1146 1221 and salaries (EUR) General government budget Revenue (EUR billion) 6.0 6.1 6.2 6.0 6.4 7.0 7.2 7.7 8.2 8.5 - Expenditure (EUR billion) 5.5 6.6 6.5 6.0 6.2 7.0 7.3 7.6 8.2 8.5 - Balance (+/-) (EUR billion) 0.4 (0.4) (0.3) 0.0 0.2 (0.0) (0.0) 0.1 0.0 0.0 - Foreign trade (special trade system) Exports (EUR billion) 8.0 8.5 6.5 8.7 12.0 12.5 12.3 12.0 11.6 11.9 12.9 Imports (EUR billion) 11.4 10.9 7.3 9.3 12.7 14.1 13.9 13.8 13.1 13.6 14.8 Balance of payments Current account balance (EUR (2.4) (1.4) 0.4 0.3 0.2 (0.3) (0.1) 0.2 0.4 3.9 4.0 billion) Current account balance/GDP (%) (17.1) (9.8) 2.9 1.8 1.3 (1.9) (0.5) 0.3 2.0 1.9 - Direct investments assets’ 1.7 0.9 1.0 0.9 (1.0) 1.0 0.6 0.8 (0.5) 1.6 - transaction (EUR billion) Direct investment liabilities’ 2.2 1.3 1.3 1.9 0.8 1.4 0.8 1.3 (0.6) 0.7 - transaction (EUR billion) International investment position (at end of year) International investment position (11.6) (12.5) (11.3) (10.5) (9.1) (9.2) (9.5) (9.2) (8.1) (7.8) - (EUR billion) Direct investment assets’ 5.6 6.3 6.0 6.5 6.1 7.1 7.7 8.8 8.5 8.9 - positions at the end of period (EUR billion) Gross external debt (EUR billion) 17.4 19.0 17.3 16.5 16.7 18.0 17.6 19.1 19.2 19.0 - Source: Bank of Estonia
Guide to doing business and investing in Estonia 11 contribute approximately 20% of flight network via its international General information about Estonia: primary energy production. airport in Tallinn, serving direct http://www.visitestonia.com/ flights to numerous European cities. Key economic indicators over the Statistical information about period 2007–2017 are summarised 1.6 Foreign trade Estonia: http://www.stat.ee/en in the table below. In 2017, the export of goods totalled Background on the investment 1.5 Economy EUR 12.7 billion and total imports climate in Estonia: amounted to EUR 14.7 billion. http://www.investinestonia.com/ Transport and telecommunications Estonian foreign trade is mostly are well developed in Estonia. An based on strong economic ties with Information about foreign trade: efficient road network covers the Finland, Sweden, Russia, Latvia, http://www.estoniantrade.ee whole of Estonia, though the quality Lithuania and Germany, as well as of some secondary roads remains with other countries. Information about the Estonian below western standards. There is language: a well-developed rail connection 1.7 Further reading http://www.einst.ee/publications/ between Estonia and Russia. In language/ combination with the well-located Some general tips for business ice-free ports in the northern part of visitors on visas, currency and public Information about the capital city the country (the Port of Muuga near holidays can be found in Appendix Tallinn: Tallinn being the largest), Estonia B. For further background reading http://www.tourism.tallinn.ee/eng has served as a major transit corridor on Estonia, the web pages referred between the West and East. Estonia to below contain some very reliable is connected to the international material. Estonian exports and imports by commodity groups, 2017 EUR in billions Exports % of total Imports % of total Food and live animals 1.0 8% 1.2 8% Beverages and tobacco 0.1 1% 0.3 2% Crude materials, inedible, except fuels 1.2 9% 0.6 4% Mineral fuels, lubricants and related 1.2 14% 1.4 10% materials Animal and vegetable oils, fats and 0.0 0% 0 0% waxes Chemicals and related products 0.9 6% 1.7 12% Manufactured goods classified chiefly 2.0 14% 2.3 16% by material Machinery and transport equipment 4.1 34% 5.6 38% Miscellaneous manufactured articles 2.1 13% 1.5 10% Commodities and transactions not 0.1 1% 0.1 1% classified elsewhere in the SITC Source: Statistical Office of Estonia
12 PwC 2 Business environment Investor considerations: 2.1 Business climate and implementing e-government solutions and cyber security. 99% of Estonia is one of the most politically Estonia is the leading country in people use Internet banking services stable countries in CEE region a Central and Eastern Europe in and more than 95% complete their membership in Eurozone, WTO, terms of attracting foreign direct income tax return over the Internet. NATO and OECD. investments. Estonia is within a Estonia hosts both the cyber security 3-hour flight from most major centre of NATO and the IT-agency of Estonia does not have corporate European, Scandinavian and the European Union. income tax on reinvested profits and Russian cities. Overall, the business it has the lowest public debt in the climate in Estonia is characterised as 2.2 Free trade zones EU. free business and trade in alignment Estonia has a highly educated and with EU practices. Many companies There are three free trade zones motivated workforce. are subsidiaries of European, established under separate orders particularly Scandinavian, firms. of the Estonian Government: at the Estonia is a frontrunner in applying Estonia has some of the highest ports of Muuga; Paldiski and Sillamäe modern IT solutions having a wide credit ratings in the region in the northern coast of Estonia as range of state e-services, e-banking, (Standard & Poor: AA-; Moody's: A1; well as in Valga in the south-east nation-wide ID-card and a digital Fitch IBCA: A+). Estonia (see also chapter 4.6). signature legally equal to handwritten signature. In 2014, Estonia launched Estonia is a member of euro area 2.3 International its e-residency program, which allows since 2011, but the country’s cost agreements non-Estonians to access Estonia’s level is still significantly lower than e-services and run an Estonian that of neighbouring Scandinavian Estonia is a member of the WTO company remotely. countries. from 1999 and the European Estonia is the most transparent Throughout the and the least corrupt country in period of regained CEE (Transparency International independence, Corruption Perception Index 2017, the economic and 21st out of 180 countries) fiscal policy of the Economic freedom is regarded as Government has one of the highest in the World and mostly been aimed at achieving long- one of the best in EU (Economic term economic Freedom World Ranking 2018, 7th growth. The overall out of 180 countries) Government attitude Regulatory environment is conducive is very welcoming for starting and operating a company towards foreign (World Bank Ease of Doing Business capital, especially 2017, 12th out of 190 countries) into sectors that are export-oriented, innovative and support regional development. 0% corporate income tax is imposed on all reinvested earnings in Estonia. Estonia is one of the leading countries in the world in creating
Guide to doing business and investing in Estonia 13 Union and NATO from 2004. 2.5 Regulations for basic fees, premiums, additional fees, In 2010, Estonia became the business interest rates, rent or lease payments 34th member of OECD, the applicable to third parties are organisation that includes most of Competition policy prohibited. This principle is applied the world's wealthiest and most Estonian competition policy in conformity with the European developed countries. Currently is generally in line with EU Commission Notice on Vertical Estonia has 58 double taxation competition principles. Restraints (2000/C 291/01), which treaties in force. prohibits the establishment of a fixed The Estonian Competition Authority resale price. However, the provision 2.4 Legal environment is the responsible body for of a list of recommended prices or supervisory and regulatory activities maximum prices by the supplier to Estonia has systematically reformed in this area. The Authority consists the buyer is not considered in itself a its legal system since the 1990s of the Competition Division, Energy violation of price controls regulation. with the top policy priority being and Water Regulatory Division facilitation of entrepreneurship. and Communications Regulatory Consumer protection Legislators and governments have Division. Estonia is one of the The principal legal acts regulating always displayed the clear will to few countries in the European consumer protection are the make the business environment Union, where the anti-competitive Consumer Protection Act, the attractive in order to benefit from agreements, so-called cartels, are Trading Act, the Advertising Act tax revenues and the jobs created by processed in criminal proceedings. and the Law of Obligations Act. The attracting foreign investors. protection of the legitimate rights of Price controls consumers and development and the The Estonian legal environment The Estonian Competition Act implementation of consumer policy favours entrepreneurship and the provides a general rule under in accordance with the provisions entrepreneurial mind-set. Foreign which agreements between of UN Guidelines, the Consumer investors have equal rights and concerted practices and decisions Protection Act and of EU consumer obligations with local entrepreneurs. by associations of undertakings policy is vested mainly in the Estonian All foreign investors may establish which directly or indirectly fix prices Consumer Protection Board (CPB). a company and conduct business or any other trading conditions, in Estonia in the same way as local including prices of goods, tariffs, The three most important functions investors; no restrictions apply. fees, mark-ups, discounts, rebates, of the CPB are to supervise the
14 PwC consumer market, settle consumer Patents, trademarks, Berne Conventions, the Geneva Act complaints and inform and advise copyrights of the Hague Agreement and the consumers. The CPB constitutes an The principal Estonian laws Madrid Protocol. inexpensive alternative to the civil governing intellectual property courts, and the decisions of the are the Copyright Act, the Patents Patents Board serve as guidelines for trade Act, the Trademark Act, the Utility Inventions in any field of technology enterprises. The Board is entitled Models Act, the Industrial Design are entitled to patent protection to impose fines and prescriptive Protection Act and the Geographical provided they meet the criteria orders in case of a violation of Indication Protection Act. Business set forth in the Patent Act. An the Consumer Protection Act and names and trade secrets are invention may be in the form of other regulations. Together with protected under the Commercial a device, process or material, other state and local government Code and the Competition Act. including biological material, or institutions, the Board also monitors Estonia has been a member of the their combination. An invention the following fields: product safety, WIPO (World Intellectual Property is patentable if it is new, involves misleading advertising, consumer Organization) since 1994, and also an inventive step and is capable of contracts, public services, product a signatory to several international industrial application. The creator labelling, etc. treaties, including the Paris and of a patented invention has a moral
Guide to doing business and investing in Estonia 15 right of authorship. This right is of the invention and the author’s measures. The EU import regime inalienable and extends for an legal successors. Patent applications applies to Estonia. indefinite term. Creators also have are filed with the Patent Office and the economic right to receive fair an applicable state fee is paid. The As stated in the law, dumping is the proceeds from profits made on the Patent Office will then conduct an export of goods by a foreign exporter invention. Economic rights are investigation to determine whether to Estonian customs territory for free transferable and inheritable. the invention meets the criteria and circulation of those goods, below either issues a patent or rejects the their normal value according to the An invention is granted patent application. Customs Code. The anti-dumping protection upon its registration in measures are customs taxes the State Registry of Patents. The Trademarks applicable with the rate ascertained owner of the patent has exclusive The Trademark Act defined by investigative procedure for rights to the patented inventions trademarks and service marks reducing damage to Estonian throughout the validity of the as signs used to distinguish the industry resulting from the import of patent term (20 years). The right goods and services of a particular goods at dumping prices. to apply for and hold a patent is, as person from similar types of goods a general rule, vested in the author and services offered by other While the EU has a rather liberal persons. Trademarks are entitled to foreign trade policy, some products protection if they are registered in need import licenses. There are the Estonian Registry of Trade and some restrictions, especially Service Marks, with the WIPO or the on farm products, following EU Office for Harmonisation in the the implementation of the CAP Internal Market. (Common Agricultural Policy): the application of compensations on To register a trademark with the import and export of farm products, Estonian Registry of Trade and aimed at favouring the development Service Marks, an application has of agriculture within the EU, to be filed with the Estonian Patent implies a certain number of control Office and the applicant has to pay and regulation systems for goods a state fee. The Patent Office will entering the EU territory. review the application and issue a decision granting or denying the Acquisitions application. The term of protection The two main types of acquisitions for registered trademarks lasts are acquisition by way of business for ten years and is renewable for (asset) purchase, and acquisition further ten-year periods. by way of share purchase. The actual type of acquisition depends Copyrights on the intentions of the parties, Copyright protection extends to e.g. whether the investor is any original works in the realms interested in whole or part of the of literature, art or science that are business of the target company, expressed in an objective form and are and what are the outstanding perceived and reproduced in this form liabilities of the target company, either directly or by means of technical etc. It is always recommended to devices. A copyright to a work arises conduct the due diligence before automatically upon the creation of the acquisition, regardless of the the work; neither publication of the type of acquisition. work nor registration of a copyright is necessary. Transfer of business The Estonian Commercial Code defines Estonian copyright law provides business as an economic entity through for both moral and economic which the company is operating. One rights. Protection of moral rights is company can have several enterprises, perpetual while economic rights are e.g. structural entities like production subject to protection for 70 years plants, retail stores, etc. from the author’s death. A transfer of business enterprise is Anti-dumping usually undertaken when the buyer Estonia applies EU trade policy such is not interested in some parts or as anti-dumping or anti-subsidy liabilities of the company.
16 PwC In practice, the investor is mostly particular assets (such as real estate) shares may be made on the basis interested in certain assets, are transferred separately from the of a simple written contract. In the rights and goodwill of the target rest of assets. case of a public limited company company and negotiates the price (aktsiaselts or AS), a written share accordingly. Alternatively, the acquisition may be transfer agreement is sufficient. performed by different transactions Nevertheless, under the Law of in different forms. The parties are free to determine the Obligations Act, upon transfer of date when the title to the shares is assets that form a business enterprise, It should also be noted that public transferred, but for the purposes of obligations related to the assets sold permits and licenses cannot the target company (i.e. with regard are also transferred to the buyer. be transferred upon sale of the to the right to vote, right to dividends, business enterprise and must be etc.), the shares are deemed to be As a result, the buyer of the obtained by the acquiring company transferred as of the entry of the assets will be jointly and severally separately. transfer into the list of shareholders. liable for the enterprise-related obligations of the seller, which Transfer of shares If the buyer is not an existing are created before the transfer of If the shares in a company are shareholder of the target company the enterprise and the due date of acquired, the buyer acquires and does not acquire a 100% which falls within five years after all rights and obligations as a shareholding in the target company, the transfer of assets. shareholder of the company. the other shareholders of the private limited company (OÜ or osaühing) A similar regulation is included The assets and liabilities of the have a pre-emptive right to purchase in Estonian labour law for the company will not be modified, i.e. no the shares, unless the articles of protection of employees in case of a “pick and choose” like in the transfer association of the target company business transfer. of business. say otherwise. There is no statutory requirement In the case of a private limited In the case of a public limited regarding the form of the asset company (osaühing or OÜ), the company (AS or aktsiaselts), the purchase. However, if particular acquisition of shares generally shareholders have the pre-emptive assets involved require a particular requires a notarised share transfer right only if it is prescribed in the form of contract (e.g. transfer of agreement, unless the shares of an articles of association. real estate must be notarised), the OÜ are registered with the Estonian entire purchase agreement needs Central Registry of Securities. It should also be noted that to be in the same form, unless the In the latter case the transfer of transfer of majority shareholding,
Guide to doing business and investing in Estonia 17 or acquisition of control over the their way of doing business. In the segments has increased the prices company by some other means, second half of 2011 and in 2012, considerably. The average price might be (if the sales in Estonia of the real estate market recovered and per square meter of an apartment the target company and the sales both the transaction volumes and in 2017 in Tallinn was 1751 €/m2. in Estonia of the buyer exceed a values started to increase again. Apartments in a new residential certain threshold) considered as a building cost between 2500-3500 €/ merger for the purposes of Estonian In 2013, the Estonian real estate m2 (excluding unique apartments). Competition Act. market continued to rise. The rise has mainly been based on The number of transactions has Thus, acquisition by way of share the positive developments of the increased considerably due to the purchase may be subject to merger Estonian economy, the growing low interest rates, which has kept the control but the acquisition by way of confidence of people, low interest real estate market accessible to many business (asset) purchase is not. rates and the gradual addition of buyers. In recent years the monthly new real estate developments. average interest rate of housing loan The legal aspects of acquisitions in has steadily been around 2-3%. Estonia are not very different from In 2017, 51,780 purchase-sale countries in the EU and there are no transactions of real estate with the special restrictions on foreign capital. total value of about 3.24 billion euros were notarized. Over half Apartments' 2.6 Property market of the purchase-sale transactions concerned apartments. The real average price per m2 1751 The Estonian real estate market estate market was the most active €/m2 Tallinn was the most active in the period of in Harju and Tartu Counties, which 2017 2004-2006, but in 2007 the number accounted for 44% and 10% of all and value of real-estate transactions transactions, respectively. began to fall gradually. From 2007 to 2011, the real estate market went The most active part of the real through a severe recession. To cope estate market in Estonia is the with the new situation, market market of apartments. However, participants had to face a number the high number of transactions of difficult decisions and reorganize and limited offering in some market
18 PwC 3 Banking, finance and insurance Investor considerations: 3.1 Banking system Estonia is part of the Euro zone since The Bank of Estonia (Eesti Pank) is 1 January 2011 the independent central bank. As The largest banks are subsidiaries Estonia is part of the Euro zone, the and affiliates of Scandinavian core tasks of the Bank are to help banking groups to define the monetary policy of the European Community and to A wide range of financial services implement the monetary policy of is available to both local and foreign the European Central Bank. Eesti customers Pank is also responsible for holding and managing Estonian official foreign exchange reserves as well as transaction systems. The number supervising overall financial stability of internet clients is growing and maintaining reliable and continuously. Active co-operation well-functioning payment systems. between major banks and mobile Eesti Pank is responsible for the operators has also led to innovative circulation of cash in Estonia. solutions for customers. Debit and credit cards are widely used in The developments in the banking everyday transactions. sector since Estonia regained 39.5% independence have been 3.2 Specialised financial rapid, along with the trend of institutions welcoming foreign capital. The Swedbank banking sector has gone through Estonian commercial banks are the major restructuring as a result largest providers of leasing and of privatisation, consolidation factoring services. The services and bankruptcy in late 1990s, provided are becoming more 23.4% 14.2% Luminor following a relatively stable period sophisticated and diverse while SEB in the 2000s. The banking sector is the clients are also becoming more dominated by two major commercial aware of the services on offer. The banks, Swedbank and SEB, owned sector has been growing extensively by Swedish banking groups. These as a result of the decline in interest Market share in Estonia two banks control approximately rates and the increase in customers’ 31 Dec 2017 63% of the financial services market. welfare. The range of potential The third largest bank is an affiliate leasing objects has grown to include of the Finnish Nordea group and the anything from bikes, home furniture fourth largest bank is an affiliate of and travelling arrangements up to the Danish Danske Bank. There are real estate, personal vehicles, trucks no state-owned commercial banks or and farming equipment. other credit institutions. The factoring services include Estonian banks offer a full range of domestic factoring, export factoring, services. There is no differentiation invoice factoring as well as tax between local and foreign factoring. There are also options to businessmen and entities, which can finance VAT returns. For international generally access the same range of companies, the available factoring banking services in Estonia as they services include the handling of the do in Western European countries. entire accounts receivable portfolio of local companies. Estonian banking has achieved significant success in the The Estonian insurance market development of electronic has similarly gone through a major
Guide to doing business and investing in Estonia 19 Market share of banks by total asset s as of 31 December 2017 Total assets EUR in billion Market share % Swedbank AS 9,96 39,5% AS SEB Pank 5.92 23.4% Luminor Bank AS 3.58 14.2% AS LHV Pank 1.73 6.8% Danske Bank A/S Eesti filiaal 1.56 6.2% OP Corporate Bank plc Eesti filiaal 0.65 2.6% Bigbank AS 0.46 1.8% AS Eesti Krediidipank 0.37 1.5% Versobank AS (in liquidation) 0.29 1.2% Tallinna Äripanga AS 0.23 0.9% AS Citadele banka Eesti filiaal 0.18 0.7% Svenska Handelsbanken AB Eesti filiaal 0.15 0.6% AS Inbank 0.13 0.5% Scania Finans AB Eesti filiaal 0.05 0.2% Nordea Bank AB Eesti filiaal 0.00 0.0% Folkefinans AS Eesti filiaal 0.00 0.0% Total 25.25 100% Source: Financial Supervision Authority consolidation over the years since cancel the contract afterwards. investment banking units are also independence and has reached The contribution to the mandatory involved in direct investment activity stability. A wide choice of insurance pension fund is calculated as 2% of by providing companies with private services is available from Estonian the salary to which the state add 4% equity finance. insurance companies as well as from of the individuals’ salary. Overall, international service providers. mandatory pension funds have 3.4 Capital markets become popular among individuals. 3.3 Investment Voluntary pension funds offer All Estonian public limited company institutions aside pension, and also traditional (AS-type) securities are registered insurance services as for example life in the Estonian Central Security Investment funds provide a wide insurance. There is a tax incentive Depository. Transactions with range of different investment options. according to which individuals can securities can be made using There are four types of investment make contributions up to 15% of over-the-counter systems or on the funds allowed in Estonia. Contractual their income that are considered to regulated market. investment and investment funds be exempt from income tax. founded as a joint-stock company The regulated stock market operates are the main types of funds used for Venture capital facilities have become in the context of a cross- Baltic stock investment purposes. The majority more and more accessible. In addition exchange maintained by the NASDAQ of Estonian investment funds are to expanding small and medium OMX Group that coordinates managed by Estonian commercial enterprises, it has become easier the trading process and imposes banks. Operations of mandatory and to gain access to financing through regulations. Investors can enjoy voluntary pension funds build on the EBRD and other development simplified access and minimised pension reform that was gradually programs. Nevertheless, the amount investment barriers when operating implemented by 2003. of venture capital committed to on Estonian, Latvian and Lithuanian Estonia is still relatively small when markets. Overall, the Baltic stock Contributions into the pension compared to developed countries markets have similar market fund are compulsory for young and some CEE countries. The practices and rules for all three Baltic people. Others may voluntarily capital is usually of foreign origin countries, with common market join the system but they cannot although many local brokerage and information and trading systems.
20 PwC 4 Importing and exporting Investor considerations: All customs clearance procedures are carried out electronically. Common customs tariff duties are applicable to all goods imported into the EU. Importers may apply for deferred taxation. VAT is not imposed on the import of goods subject to immediate tax warehousing on the condition that the recipient of the imported goods is the keeper of the tax warehouse. Exporters and importers must have EORI registration. 4.1 Trends in customs imported into the EU. However, in policy certain circumstances, such duties are not applied. As the member of the EU, Estonia has implemented the EU customs The customs duty rates are based legislation. As of May 1 2016, a new on value and dependent on the Union Customs Code and related type of goods and the country of acts became applicable, which origin. Imports from EFTA countries, replaced Community Customs Code Switzerland, and EU candidate or and its implementing provisions associated countries are generally effective before that. free of duty. The duty rate usually stays between zero and 10%. The priority of Estonian customs Additional rates are usually levied as authorities has been and will be in the a result of anti-dumping cases. future the contraband trade, especially tobacco products and alcohol. Estonia’s membership in the EU implies that all aspects of customs 4.2 Import restrictions duties are decided by the common customs tariff - TARIC. Customs duties There is no banned list in Estonia, on imports and exports and charges but some goods (e.g. drugs, military having an equivalent effect are prohib- equipment, cultural objects, ited between member states. hazardous waste, CITES goods) need specific permission for importation In TARIC all measures relating to which is given by the authorities tariffs, commercial and agricultural concerned. legislation are integrated. This database gives economic operators Some quotas for certain types of a clear view of measures to be goods are imposed by the EU and undertaken when importing or are applied to all member states. The exporting goods. The TARIC does quotas enable the importation of not contain information relating to duty-free goods or goods at a lower national levies as rates of VAT and rate, until the quotas are filled. excises. 4.3 Customs duties Valuation rules are based on the WTO Customs Valuation Agreement Common customs tariff duties are transposed onto the applicable generally applicable to all goods European Community legislation.
Guide to doing business and investing in Estonia 21 The customs value usually • persons who are established or free-zone procedure in includes the charges for goods, in the customs territory of the accordance with the customs transportation, insurance and other Community; legislation or Community services provided for importing the • persons who provide the necessary legislation governing specific goods into the EU. assurance of the proper conduct of fields, or in order to benefit from operations and, in cases where a a decision granting repayment Usually the import taxes should be customs debt or other charges may or remission of import duties. paid at the point of entry. Importers be incurred for goods placed under Generally there is no limit to the may apply for deferred taxation. a special procedure, provide a length of time goods may remain guarantee required; in case of the under a storage procedure. 4.4 Temporary import temporary admission or inward relief processing procedure, the person 4.7 Re-exports who uses the goods or arranges Under the temporary admission for their use or who carries out Non-Community goods destined procedure, non-Community goods processing operations on the to leave the customs territory of intended for re-export may be goods or arranges for them to be the Community are subject to a used in the customs territory of the carried out, respectively. re-export notification to be lodged at Community, with total or partial the relevant customs office and with relief from import duties. 4.6 Warehousing and the exit formalities. The re-export storage notification should meet the 4.5 Documentation and requirements for customs clearance procedures Under a storage procedure, non- documentation. Community goods may be stored All customs clearance is carried in the customs territory of the The re-export procedure is not through electronically. Community without being subject to applied for: any of the following: • goods placed under the external Any economic operator established • import duties; transit procedure which only pass in the EU needs to have an EORI • other charges as provided for under through the customs territory of number. Economic operators other relevant provisions in force; the Community; established outside the EU have to • commercial policy measures, insofar • goods trans-shipped within, or be assigned an EORI number if they as they do not prohibit the entry or directly re-exported from, a free lodge a customs declaration, an Entry exit of goods into or from the cus- zone; or an Exit Summary Declaration. toms territory of the Community. • goods under the temporary storage procedure which are directly A special authorisation from the Community goods may be placed re-exported from an authorised customs authorities is required for: under the customs warehousing temporary storage facility. • the use of the inward- or outward- processing procedure, the temporary admission procedure or the end-use procedure. • the operation of storage facilities for the temporary storage or customs warehousing of goods, except where the storage facility operator is the customs authority itself. The conditions under which the use of one or more of the procedures referred to above or of the operation of storage facilities is permitted is set out in the authorisation. The authorisation will be effective from the date of issue and is usually at a fixed date. Except where otherwise provided for in the customs legislation, the authorisation mentioned above is granted only to the following persons:
22 PwC 5 Business entities Investor considerations: A foreign investor may operate through the following corporate forms that should be registered within the commercial register: a public limited company, a private limited company, a general partnership, a limited partnership, a commercial association or a branch. The private limited company and public limited company are the most commonly used forms of entities for doing business in Estonia due to their most essential characteristic – the limitation of the shareholders’ liability. Business units like permanent establishments or representative offices are not registered with the Commercial Register. A permanent establishment should be registered in the registry of Estonian Tax and Customs Authorities. As a general rule, Estonian legislation does not recognise the concept of a representative office. However, the branch must be registered in the Commercial Register. The estimated minimum cost of setting up a branch or subsidiary in Estonia may range between EUR 1,000 to EUR 3,000 (excluding a 5.1 Legal framework may not be misleading with regard minimum compulsory share capital). to the legal form, area or scope The legal environment for business of activity of the undertaking nor Establishing a company in Estonia entities in Estonia is mostly contrary to good morals. may take from few days up to a regulated by the Commercial Code couple of weeks. Foreign investors (Äriseadustik). When starting operations in Estonia, may also buy ready-made companies it should be kept in mind that there (in this way, these procedures The passive legal capacity of an are certain areas of activity for which might take only a few days upon entity commences as of its entry a license is required or in which receiving all the relevant information/ in the commercial register and only a particular type of entity may documents). terminates as of its deletion from the operate, as well as areas of activity in Commercial Register. which operation is prohibited by law. Every entity must have a business There may also be special name which is entered in the requirements deriving from the law Commercial Register and under with respect to the obligations of which the undertaking operates. companies which are dependent on the area of business of the The business name always contains company (e.g. banking, investment, the appendage referring to the legal insurance, lending, sale of fuel or form of the entity. A business name alcohol, etc.).
Guide to doing business and investing in Estonia 23 As a general rule, entities are subject most essential characteristic – the to the Commercial Register to accounting obligations and need limitation of the shareholders’ electronically and authenticated to submit financial statements to the liability. with digital signatures. Commercial Register. An audit of the financial statements may be required Consequently the main emphasis of Even though the number of depending on the legal form and the this chapter is on these two forms of shareholders is unlimited by law amount of share capital of the entity. business, and the central aspects of in both cases, the private limited their operation are presented in the company is suited for a more closed Entities may merge, divide or be form of a comparison. circle of contributors. transformed only in the cases and pursuant to the procedure provided 5.3 Private limited Accordingly, safeguards enabling by law. In the cases provided by company (OÜ) and public respective control are provided by law, the permission of a competent limited company (AS) law, including rights of pre-emption agency is required for merger, in case of the sale of shares to non- division or transformation. Private limited companies and shareholders, and even the possibility public limited companies have a of prescribing (in the articles of 5.2 Choice of entity and share capital divided into private association) that a resolution of the business forms limited company shares and public partners is required to transfer a share limited company shares, and the or a part thereof to a third party. The Commercial Code provides shareholders are not personally for five types of business entities: liable for the obligations of the The shares of a public limited general partnership (täisühing), companies – the companies are company are freely transferable, limited partnership (usaldusühing), liable for the performance of their but shareholders may establish private limited company (osaühing), obligations with all of their assets. pre-emptive rights in the articles of public limited company (aktsiaselts) association. and commercial association Limited companies are established (tulundusühistu). by concluding notarised certified As for the minimum share capital, foundation agreements and it is EUR 25,000 in the case of a Of the five types of entities regulated adopting articles of association. public limited company and EUR under the Commercial Code, the 2,500 in the case of a private limited private limited company and public Private limited companies may also company. In certain fields of activity limited company are the most be established with an expedited (e.g. banking, insurance companies, commonly used forms of entity for procedure. In such cases all the etc.) the laws may provide for higher doing business. This is due to their necessary documents are presented share capital requirements.
24 PwC each EUR 1 of the share generally public limited company shares are gives one vote at the meeting of registered in the CRS. shareholders unless articles of association states otherwise. Corporate governance The The management structure of € 2,500 The shares of a public limited company must be registered with the public limited company consists of three levels, the shareholders’ Private limited company the Estonian Central Registry of general meeting, the supervisory minimum share capital Securities (CRS). The shares of a board and the management board, private limited company can be whereas the management structure registered with the CRS if desired. of the private limited company The private limited companies If the shares of the private limited usually lacks the levelof the may also be established without company are not registered in the supervisory board. contribution of share capital, CRS, the share registry is kept by the provided that the founders are company’s management board. However, a private limited company private individuals only and the must have a supervisory board if planned minimum share capital Transactions for transferring and it is prescribed by the articles of does not exceed EUR 25,000. The pledging the shares of private association. share capital of such a company limited companies must be will consist of claims against the notarised, unless the shares are The management board, the shareholders, who are liable with all registered in the CRS. members of which are elected of their assets up to the amount they by the supervisory board, is a have promised to pay to the share Thus registration of the shares of a directing body of the limited capital of the company. private limited company in the CRS company, which represents and is advisable if numerous transactions directs the company, whereas In a public limited company with the shares are anticipated. the supervisory board plans each share grants one vote at the There are no similar requirements the activities and organises the shareholders’ general meeting. In as to the form of transactions with management of the company as a private limited company each shares of public limited companies. well as supervising the activities of shareholder holds one share and Transfers as well as pledges of the management board.
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