Doing business and investing in Estonia 2014 Contents

Contents

6 Office location in Estonia 1 Country profile and investment climate 7 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 14 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 21 3.1 Banking system 3.2 Specialised financial institutions 3.3 Investment institutions 3.4 Capital markets 4 Importing and exporting 24 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 27 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

2 Guide to doing business and investing in Estonia PwC 6 Labour relations and social security 31 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 39 7.1 Accounting 7.2 Chart of accounts 7.3 Audit requirements 8 Tax system and administration 43 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 49 9.1 Corporate tax system 9.2 Incentives 9.3 Taxable income 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 10 Taxation of individuals 54 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

PwC Guide to doing business and investing in Estonia 3 11 Value added tax (VAT) 57 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 12 PwC in Estonia 62 12.1 Assurance services 12.2 Tax services 12.3 PwC Legal 12.4 Advisory services 66 Appendices

4 Guide to doing business and investing in Estonia PwC Partner 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 more than 90 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 one of the highest in world being ranked 11th out of 183 countries by annual survey Economic Freedom of the World and 22th in Ease of Doing Business by IMF. 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.

Ago Vilu Country Managing Partner

PwC Guide to doing business and investing in Estonia 5 Office location in Estonia

Tallinn Rakvere Kohtla-Järve Narva Paldiski Jõhvi The PricewaterhouseCoopers Kärdla office in Estonia is located at Haapsalu Rapla Paide the following address: Jõgeva Pärnu mnt 15

10141 Tallinn Viljandi Tel. +372 614 1800 Pärnu Tartu Kuressaare Fax. +372 614 1900 Põlva www.pwc.ee

Valga Võru

6 Guide to doing business and investing in Estonia PwC 1 Country profile and investment climate

1.1 Introduction Investor considerations: A small Nordic country, having close economic ties with Scandinavia and The Republic of Estonia is situated in Western Europe Northern Europe along the Baltic Sea. A favourable geographic location on the Baltic Sea, a region of intense Finland lies to the north of Estonia, economic activities and growth potential with good access to Russia, the across the Gulf of Finland. Sweden is the CEE countries and the EU region western neighbour across the Baltic Sea. Member of both the EU and NATO starting from spring 2004 Member of WTO Estonia borders Russia in the east, with St. Part of the Euro zone since 1 January 2011 Petersburg approximately 200 kilometres across the northeastern border. In the south Estonia borders Latvia. Estonia has The Baltic Sea has a strong influence on approximately 1.3 million inhabitants. local weather, especially in the coastal regions. Temperature ranges from - 7ºC Tallinn, the capital of Estonia, lies on the (19ºF) average daily in January to 17ºC Baltic Sea coast, only about 60 kilometres (63ºF) average daily in July. Total rainfall (40 miles) south of Helsinki, across the is between 500 and 700 millimetres (20 to Gulf of Finland. The population of Tallinn is 28 inches) a year. There may be permanent approximately 400 thousand. Other bigger snow cover from December to March and cities are Tartu, Narva and Pärnu. the sea may be iced over during these The territory of Estonia covers 45 thousand months. square kilometres (17 thousand square History miles). Estonia is a lowland country with average elevation of about 50 meters (160 Estonians have been living in this territory feet) and a considerable part of the territory since approximately 2500 B.C., making covered with wetlands. them among the longest settled of the European peoples. Due to Estonia’s strategic The highest point, Suur Munamägi, is only location as a link between East and West, it 318m (1,043 feet) above sea level. More has been conquered numerous times, and than 1,500 offshore islands make up 9 under foreign rule for several centuries. percent of the country’s total territory. The largest of the islands are Saaremaa and At the beginning of the 13th century, Estonia Hiiumaa. Estonia is a country of numerous was conquered by the Teutonic knights lakes, the largest of which are Lake Peipsi whose castles still dot the countryside. and Lake Võrtsjärv. By 1285, Tallinn was a member of the Hanseatic League. During the Middle Ages, Estonia has a temperate maritime climate.

PwC Guide to doing business and investing in Estonia 7 the Hanseatic League, which combined 70 the European Union on 1 May 2004. Since Baltic Sea cities, formed one of the most 1 January 2011, Estonia is part of the Euro powerful trading blocs in the world. The zone. German merchant families, which settled 1.2 Government structure here, dominated trading activities and successive generations of Germans built The highest authority of national legislation their manor houses across the country. in Estonia is the Constitution of the Republic of Estonia (Eesti Vabariigi põhiseadus). The Germans were only the first among constitution was adopted by a referendum successive waves of conquerors. Danes, and came into effect on 29 June 1992, after Swedes, Poles and Russians all swept across Estonia, setting up successive regimes, fortifying their towns and castles, and shipping their goods through Estonian ports. In the late 19th century a powerful Estonian nationalist movement arose and on 24 February 1918, Estonia declared its independence from Russia. The period of independence was brief and Estonia was forcibly annexed by the Soviet Union in 1940. In 1991, Estonia regained its independence, having managed to break free from the Soviet Union without any acts of violence. Estonia became a member of NATO on 29 March 2004 and joined

8 Guide to doing business and investing in Estonia PwC Country profile and investment climate

Estonia had regained its independence. which requires a vote by the majority of all members of the Parliament. Any other legislative acts must be in conformity with the Constitution as well In addition, the Parliament has the right as with the generally recognised principles to ratify and withdraw from international and rules of international law which are treaties and decide on government loans. an inseparable part of the Estonian legal Pursuant to the Constitution the Republic system. of Estonia is not to enter into international The Parliament treaties which are in conflict with the Constitution. According to the Constitution, Estonia is an independent and sovereign democratic If laws or other legislation in Estonia are in republic wherein the supreme power of state conflict with international treaties ratified is vested in the people. The people exercise by the Parliament, the provisions of the their supreme power of state through international treaty shall apply. the election of the Estonian parliament The President (Riigikogu). The President of Estonia is elected for Ordinary elections of the 101 members of five years by the Parliament or, under the unicameral Parliament are held every specific circumstances, by an electoral body four years. All citizens over 18 years of age consisting of the members of the Parliament have the right to vote. and representatives of local governments. The Parliament is Estonia’s highest The President is the formal head of state legislative authority and it is vested with the and the commander-in-chief of the Estonian right to adopt laws. Defence Forces. A distinction is made between ordinary laws The laws passed by the Parliament are which are passed by a simple majority of presented to the President for proclamation. votes in the Parliament, and constitutional The President has a right to veto the laws laws, the adoption and amendment of

PwC Guide to doing business and investing in Estonia 9 passed by the Parliament pursuant to which coordination of the harmonisation he/she may return the act to the Parliament. of Estonian law and EU law, making suggestions about harmonising Estonian If the Parliament does not thereafter amend legal acts with EU legal acts and giving the law, the President can proclaim the law the ministries and other institutions advice or has the right to propose that the Supreme about the EU legal system and the principles Court declare the law unconstitutional. If of legislation. the Supreme Court finds that the law is in conformity with the Constitution, then the Local government councils President proclaims the law. Local Government Councils are regional The Government representative and legislative bodies, elected by the residents of a rural municipality Under certain conditions other state or city for the period of three years. All institutions may also exercise legislative permanent residents (including citizens power. The Government of the Republic and non-citizens) of at least 18 years of age (Vabariigi Valitsus) and the ministers carry are eligible to vote. Local executive power out the legislative function by using the is vested in local governments that resolve right to pass regulations on the basis of and local issues and have local budgets to fulfil for the implementation of laws (so called their duties. intra legem regulations). If the Parliament is unable to convene in a 1.3 Legal system situation of emergency, the President of the Like all continental European legal systems, Republic may, in matters of urgent state need, the Estonian legal system is founded upon issue decrees which have the force of law. the principle of the priority of legislative acts As a member of EU since 1 May 2004, as a source of law and their precedence over Estonia is bound by EU law. The Ministry of any other sources, such as judicial practice, Justice is responsible for the doctrine or custom. Courts Estonia has a three-level court system, where: (i) county courts and administrative courts adjudicate matters in the first instance; (ii) appeals against decisions of courts of first instance are heard by courts of second instance and; (iii) the Supreme Court is the court of the highest instance. County courts as courts of first instance hear all civil, criminal and misdemeanor matters. The decisions of county courts can be appealed to the courts of appeal (also called circuit courts), being the courts of second instance. Administrative courts hear administrative matters as courts of first instance. The decisions of county and administrative

10 Guide to doing business and investing in Estonia PwC Country profile and investment climate

courts are reviewed by courts of appeal Furthermore, many Estonians speak Russian in the second instance by way of appeal and, especially in Northern Estonia, Finnish, proceedings on the basis of an appeal, an among other foreign languages. appeal against a ruling, or a protest. Overall, most Estonians are not religious. The Supreme Court is the court of the There is a tolerance toward all religions highest instance, which reviews decisions and in general religious beliefs do not affect by way of cassation proceedings, i.e. the business activities in Estonia. Formally, parties to the proceedings have the right to Estonians are predominantly Lutherans, appeal to the Supreme Court against the but religion does not have any considerable decisions of the courts of appeal. A matter impact on daily life. There are small Russian is accepted for proceedings in the Supreme Orthodox, Baptist and other communities Court if the statements presented in the across the country. appeal show an opinion that the appeals Estonia has been reforming its education court applied incorrectly, or materially system since regaining independence in violated a procedural rule that may involve the beginning of 1990s. The current system an incorrect judicial decision. The Supreme consists of compulsory basic education, Court is also the constitutional review court. followed by upper-secondary education, at 1.4 People either a general high school or a vocational school. The general education process then The total population of Estonia is around offers higher education at university or at 1.3 million people. As in other countries an applied higher education institution, in the region, the population growth rate and the vocational process offers post- has been very modest recently. Average secondary education at a technical school. life expectancy was 76 years in 2012; 71 The reformed educational system does, years for men and 81 years for women. however, provide for movement between the The population density is approximately general and vocational processes. Education 31 inhabitants per square km. Around is mostly provided in Estonian. State two-thirds of the population is urban, and and municipal education establishments one-third rural. 70% of the population is of are mostly free of charge. There are 28 Estonian ethnicity. The second largest ethnic institutions of higher education in Estonia, group is Russian, forming approximately including the renowned University of Tartu, 25% of the population. 2% of the population Tallinn University of Technology, and other has Ukrainian roots, and Belarussians and universities. The study programs of the Finns make up approximately 1% and 0.5% bigger universities tend to be internationally of the population respectively. accredited. Some universities have programs The official language is Estonian. More in the English language. than one million people speak Estonian, After regaining independence from the which belongs to the Finno-Baltic group of Soviet Union, Estonia has been among the the Finno-Ugric language family. Estonian most advanced emerging markets in Central is closely related to Finnish (the similarity and Eastern Europe, mostly owing to the is comparable to that between Italian and success of its socio-economic reforms over Spanish), while Hungarian is a more distant the last twenty years. Estonia has a liberal relative. Estonia uses the Latin alphabet. market-based economy. The government has As a majority of the Estonian business pursued nearly balanced budgets and low community is internationally oriented, public debt. English is understood and spoken fluently by a large number of businesspeople. Oil shale-based energy production,

PwC Guide to doing business and investing in Estonia 11 telecommunications and IT products, energy sources such as wood, peat, and textiles, chemical products, banking, food biomass contribute approximately 13% of and fishing, timber and wood products, primary energy production. shipbuilding, electronics, transportation and Key economic indicators over the period various services remain key sectors of the 2004-2013 are summarised in the table Estonian economy. Estonia produces nearly below. all of the energy needed for the country, supplying large part of its electricity needs 1.5 Economy with locally mined oil shale. Alternative Transport and telecommunications are well developed in Estonia. An efficient

Key economic indicators 2005-2013

2005 2006 2007 2008 2009 2010 2011 2012 2014 GDP In current prices (EUR billion) 11.2 13.4 16.1 16.2 14.0 14.3 16.2 17.4 18.4 Real growth (%) 8.9 10.1 7.5 -4.2 -14.1 2.6 9.6 3.9 0.8 Prices Consumer price index (%) 4.1 4.4 6.6 10.4 -0.1 3.0 5.0 3.9 2.8 Labour market and wages Unemployment rate (%) 7.9 5.9 4.7 5.5 13.5 16.7 12.3 10.0 8.6 Average monthly gross wages and salaries (EUR) 516 601 725 825 784 792 839 887 948 General government budget Revenue (EUR billion) 3.9 4.8 5.8 6.0 6.0 5.8 6.3 6.8 7.0 Expenditure (EUR billion) 3.8 4.5 5.5 6.4 6.3 5.8 6.1 6.9 7.1 Balance (+/-) (EUR billion) 0.2 0.3 0.4 -0.5 -0.3 0.0 0.2 -0.1 -0.03 Foreign trade (special trade system) Exports (EUR billion) 6.2 7.7 8.0 8.5 6.5 8.8 12.0 12.5 12.3 Imports (EUR billion) 8.2 10.7 11.4 10.9 7.3 9.3 12.7 13.9 13.6 Balance of payments Current account balance (EUR billion) -1.1 -2.1 -2.6 -1.5 0.5 0.4 0.3 -0.3 -0.2 Current account balance/GDP (%) -10.0 -15.3 -15.9 -9.2 2.7 2.8 1.8 -1.8 -1.0 Foreign direct investment inflow (EUR billion) 2.3 1.4 2.0 1.2 1.3 1.2 0.2 1.2 0.7 Foreign direct investment outflow (EUR billion) -0.6 -0.9 -1.3 -0.8 -1.1 -0.1 1.0 -0.7 -0.3 International investment position (at end of year) International investment position (EUR billion) -9.5 -9.9 -11.6 -12.5 -11.3 -10.4 -9.1 -9.4 -8.3 Direct investment in Estonia (EUR billion) 9.6 9.6 11.4 11.8 11.7 12.5 13.1 14.7 15.6 Gross external debt (EUR billion) 9.7 12.9 17.4 19.0 17.2 16.4 15.2 16.6 16.1

Source: Bank of Estonia

12 Guide to doing business and investing in Estonia PwC Country profile and investment climate

road network covers the whole of Estonia, 1.6 Foreign trade though the quality of some secondary roads In 2013, the export of goods totalled EUR remains below western standards. There is 12.3 billion and total imports amounted to a well-developed rail connection between EUR 13.6 billion. Estonian foreign trade is Estonia and Russia. In combination with the mainly based on strong economic ties with well-located ice-free ports in the northern Finland, Sweden, Russia, Latvia, Lithuania part of the country (the Port of Muuga and Germany, as well as with other countries. near Tallinn being the largest), Estonia has served as a major transit corridor between The main export goods are machinery and the West and East. Estonia is connected equipment, wood and paper products, to the international flight network via its textiles, food products, metals and chemical international airport in Tallinn, serving products. direct flights to numerous European cities.

Estonian exports and imports by commodity groups, 2013

% of % of EUR billion Exports total Imports total Machinery and transportation related equipment 4.3 35% 5.2 38% Consumer goods 1.8 15% 2.0 15% Fuels, oils and related materials 1.2 10% 1.7 12% Food and related products 1.2 9% 1.4 10% Raw materials (excl. fuel and food related) 1.0 8% 0.4 3% Chemicals and related products 0.8 7% 1.4 10% Other 2.0 17% 1.5 11% Total 12.3 100% 13.6 100%

Source: Statistical Office of Estonia

The main imported goods are machinery General information about Estonia: and equipment, fuel and other chemical http://www.visitestonia.com/ products, textiles, food products, and means Statistical information about Estonia: of transport. Estonia imports 2.7 thousand http://www.stat.ee/en gigawatt hours of electricity annually. Background on the investment climate in Estonia: http://www.investinestonia.com/ 1.7 Further reading Information about foreign trade: Some general tips for business visitors http://www.estoniantrade.ee on visas, currency and public holidays Information about the Estonian language: can be found in Appendix B. For further http://www.einst.ee/publications/language/ background reading on Estonia, the web Information about the capital city Tallinn: pages referred to below contain some very http://www.tourism.tallinn.ee/eng reliable material.

PwC Guide to doing business and investing in Estonia 13 2 Business environment

Investor considerations: Estonian law is harmonised with EU legislation The workforce is highly educated and motivated A relatively good and rapidly-developing production infrastructure (ports, roads, telecommunications, warehouse facilities) supports the development of the nation Estonia has highly-developed electronic communications: good access to internet, digital signatures, ID cards, web based projects Estonia is the most transparent and the least corrupt country in the CEE region (Transparency International Corruption Perception Index 2013, 28th out of 175 countries) Estonia’s economic freedom is regarded as one of the highest in the World and the best in the CEE region (Economic Freedom World Ranking 2014, 11th out of 178 countries) Regulatory environment is conducive for starting and operating a company in Estonia (IMF Ease of Doing Business 2013, 22th out of 189 countries)

14 Guide to doing business and investing in Estonia PwC Business environment

2.1 Business climate under separate orders of the Estonian Government: at the ports of Muuga; Paldiski Estonia is the leading country in Central and Sillamäe in the northern coast of and Eastern Europe in terms of attracting Estonia as well as in Valga in the south-east foreign direct investments. Estonia is within Estonia (see also chapter 4.6). 3 hours flight from most major European, Scandinavian and Russian cities. Overall, the business climate in Estonia is characterised as 2.3 International agreements free business and trade in alignment with EU practices. Many companies are subsidiaries of Estonia is a member of the WTO from 1999 European, particularly Scandinavian, firms. and the European Union and NATO from Estonia has some of the highest credit ratings 2004. In 2010, Estonia became 34th member in the region (Fitch IBCA, Standard & Poor’s, of OECD, the organisation that includes Moody’s). Estonia is a member of euro area most of the world’s wealthiest and most from 2011, but the country’s cost level is still developed countries.Currently Estonia has significantly lower than that of neighbouring 56 double taxation treaties in force. Scandinavian countries.

Throughout the period of regained 2.4 Legal environment independence, the economic and fiscal policy of the Government has mostly been Estonia has systematically reformed its legal aimed at achieving long-term economic system since the 1990s with the top policy growth. The overall Government attitude priority being facilitating entrepreneurship. is very welcoming toward foreign capital, Legislators and governments have always especially into sectors that are export displayed the clear will to make the business oriented, innovative and support regional environment attractive in order to benefit development. 0% corporate income tax from tax revenues and the jobs created by is imposed on all reinvested earnings in attracting foreign investors. Estonia. The Estonian legal environment favours Estonia is one of the leading countries in entrepreneurship and the entrepreneurial the world in creating and implementing mindset. Foreign investors have equal rights e-government solutions and cyber and obligations with local entrepreneurs. All security. Most investment and business is foreign investors may establish a company concentrated in Tallinn and its surrounding and conduct business in Estonia in the same areas The government has voiced its concern way as local investors; no restrictions apply. for small enterprises and export industries as well as for agriculture. In this respect the most important action taken on the part of 2.5 Regulations for business Government was an alignment of policies, Competition policy institutions and standards with EU norms, to enable participation in financing from Estonian competition policy is generally in EU structural funds. This has facilitated line with EU competition principles. standards closer to the western European The Estonian Competition Authority is level, though there is still much to achieve. the responsible body for supervisory and regulatory activities in this area. The Authority consists of the Competition 2.2 Free trade zones Division, Energy and Water Regulatory There are four free trade zones established Division and Communications Regulatory

PwC Guide to doing business and investing in Estonia 15 Consumer protection The principal legal acts regulating consumer protection are the Consumer Protection Act, the Trading Act, the Advertising Act and the Law of Obligations Act. The protection of the legitimate rights of consumers and development and the implementation of consumer policy in accordance with the provisions of UN Guidelines, the Consumer Protection Act and of EU consumer policy is vested mainly in the Estonian Consumer Protection Board (CPB). The three most important functions of the CPB are to supervise the consumer market, settle consumer complaints and inform and advise consumers. The CPB constitutes an inexpensive alternative to the civil courts, and the decisions of the Board serve as guidelines for trade enterprises. The Board is entitled to impose fines and Division. Estonia is one of the few countries prescriptive orders in case of violation of in the European Union, where the anti- the Consumer Protection Act and other competitive agreements, so-called cartels, regulations. Together with other state and are processed in criminal proceedings. local government institutions the Board also In 2012 a conviction was made in three monitors the following fields: product safety criminal cases handled by the Competition misleading advertising, consumer contracts, Authority. public services, product labelling, etc. Price controls Patents, trademarks, copyrights The Estonian Competition Act provides The principal Estonian laws governing a general rule under which agreements intellectual property are the Copyright Act, between concerted practices and decisions the Patents Act, the Trademark Act, the by associations of undertakings which Utility Models Act, the Industrial Design directly or indirectly fix prices or any other Protection Act and the Geographical trading conditions, including prices of Indication Protection Act. Business names goods, tariffs, fees, mark-ups, discounts, and trade secrets are protected under the rebates, basic fees, premiums, additional Commercial Code and the Competition Act. fees, interest rates, rent or lease payments Estonia has been a member of the WIPO applicable to third parties are prohibited. (World Intellectual Property Organization) This principle is applied in conformity since 1994, and also a signatory to several with the European Commission Notice on international treaties, including the Paris Vertical Restraints (2000/C 291/01) which and Berne Conventions, the Geneva Act prohibits the establishment of a fixed resale of the Hague Agreement and the Madrid price. However, the provision of a list of Protocol. recommended prices or maximum prices by Patents the supplier to the buyer is not considered in itself a violation of price controls regulation. Inventions in any field of technology are

16 Guide to doing business and investing in Estonia PwC Business environment

entitled to patent protection provided they protection for registered trademarks lasts for meet the criteria set forth in the Patent ten years and is renewable for further ten- Act. An invention may be in the form of year periods. a device, process or material, including Copyrights biological material, or their combination. An invention is patentable if it is new, involves Copyright protection extends to any original an inventive step and is capable of industrial works in the realms of literature, art or application. The creator of a patented science that are expressed in an objective invention has a moral right of authorship. form and are perceived and reproduced This right is inalienable and extends for in this form either directly or by means of an indefinite term. Creators also have the technical devices. A copyright to a work economic right to receive fair proceeds from arises automatically upon the creation of the profits made on the invention. Economic work; neither publication of the work nor rights are transferable and inheritable. registration of a copyright is necessary. An invention is granted patent protection Estonian copyright law provides for both upon its registration in the State Registry moral and economic rights. Protection of of Patents. The owner of the patent has moral rights is perpetual while economic exclusive rights to the patented inventions rights are subject to protection for 70 years throughout the validity of the patent term from the author’s death. (20 years). The right to apply for and hold Anti-dumping a patent is, as a general rule, vested in the author of the invention and the author’s Estonia applies EU trade policy such as anti- legal successors. Patent applications are filed dumping or antisubsidy measures. The EU with the Patent Office and an applicable import regime applies to Estonia. state fee is paid. The Patent Office will As stated in the law, dumping is the export then conduct an investigation to determine of goods by a foreign exporter to Estonian whether the invention meets the criteria customs territory for free circulation of those and either issues a patent or rejects the goods, below their normal value according application. to the Customs Code. The anti-dumping Trademarks measures are customs taxes applicable with the rate ascertained by investigative The Trademark Act defined trademarks and procedure for reducing damage to Estonian service marks as signs used to distinguish industry resulting from the import of goods the goods and services of a particular person at dumping prices. from similar types of goods and services offered by other persons. Trademarks are While the EU has a rather liberal foreign entitled to protection if they are registered trade policy, some products need import in the Estonian Registry of Trade and Service licenses. There are some restrictions, Marks, with the WIPO or the EU Office for especially on farm products, following Harmonisation in the Internal Market. the implementation of the CAP (Common Agricultural Policy): the application of To register a trademark with the Estonian compensations on import and export of Registry of Trade and Service Marks, an farm products, aimed at favouring the application has to be filed with the Estonian development of agriculture within the EU, Patent Office and the applicant has to pay a implies a certain number of control and state fee. The Patent Office will review the regulation systems for goods entering the application and issue a decision granting EU territory. or denying the application. The term of

PwC Guide to doing business and investing in Estonia 17 In practice, the investor is mostly interested in certain assets, rights and goodwill of the target company and negotiates the price accordingly. Nevertheless, under the Law of Obligations Act, upon transfer of assets that form a business enterprise, obligations related to the assets sold are also transferred to the buyer. As a result, the buyer of the assets will be jointly and severally liable for the enterprise- related obligations of the seller which are created before the transfer of the enterprise and the due date of which falls within five years after the transfer of assets. A similar regulation is included in Estonian labour law for the protection of employees in case of a business transfer. There is no statutory requirement regarding the form of the asset purchase. However, if particular assets involved require a particular form of contract (e.g. transfer of Acquisitions real estate must be notarised), the entire The two main types of acquisitions are purchase agreement needs to be in the same acquisition by way of business (asset) form, unless the particular assets (such as purchase, and acquisition by way of share real estate) are transferred separately from purchase. The actual type of acquisition the rest of assets. depends on the intentions of the parties, Alternatively, the acquisition may be e.g. whether the investor is interested in performed by different transactions in whole or part of the business of the target different forms. company, and what are the outstanding liabilities of the target company, etc. It is It should also be noted that public permits always recommended to conduct the due and licenses cannot be transferred upon diligence before the acquisition, regardless sale of the business enterprise and must of the type of acquisition. be obtained by the acquiring company separately. Transfer of business Transfer of shares The Estonian Commercial Code defines business as an economic entity through If the shares in a company are acquired, the which the company is operating. One buyer acquires all rights and obligations as a company can have several enterprises, e.g. shareholder of the company. structural entities like production plants, The assets and liabilities of the company will retail stores, etc. not be modified, i.e. no “pick and choose” A transfer of business enterprise is usually like in the transfer of business. undertaken when the buyer is not interested In the case of a private limited company in some parts or liabilities of the company. (OÜ), the acquisition of shares generally

18 Guide to doing business and investing in Estonia PwC Business environment

requires a notarised share transfer 2.6 Property market agreement, unless the shares of an OÜ Estonian property market is still recovering are registered with the Estonian Central from the recession but is nevertheless ahead Registry of Securities. In the latter case the of the curve compared with the rest of the transfer of shares may be made on the basis economy. It was booming until 2008, resulting of a simple written contract. In the case of in the modernisation of many existing a public limited company (AS), a written production and service facilities, office spaces share transfer agreement is sufficient. and residential buildings as well as in the The parties are free to determine the date construction of plenty of new ones. In the last when the title to the shares is transferred, few years, the real estate industry has grown but for the purposes of the target company in average 10 percent per year. (i.e. with regard to the right to vote, right to Many foreign-owned construction and dividends, etc.), the shares are deemed to property management companies operate in be transferred as of the entry of the transfer Estonia along with local competitors. There is into the list of shareholders. a moderate supply of various office spaces in If the buyer is not an existing shareholder of all the major cities but a distinct lack of first- the target company and does not acquire a rate office space. The market is lively, with 100% shareholding in the target company, Tallinn and Harju County, which constitutes 70 the other shareholders of the private limited percent of capital on the market. company (OÜ) have a pre-emptive right A major problem is that there are few new to purchase the shares, unless the articles buildings coming onto the market, and old of association of the target company say properties are rapidly aging. otherwise. This is due to the weak purchasing power and In the case of a public limited company relatively low demand for new properties in (AS), the shareholders have the pre-emptive a country where the average gross monthly right only if it is prescribed in the articles of income is around 1,000 euros. association. One of the biggest concerns for realtors is the It should also be noted that transfer of rising cost of construction, which is currently majority shareholding, or acquisition of still a reasonable 1,000 euros per square control over the company by some other meter. means, may be (if the sales in Estonia of the target company and the sales in Estonia The cheapest going rate for new properties in of the buyer exceed a certain threshold) Tallinn is around 1,300-1,400 euros per square considered as a merger for the purposes of meter. In the city center, the rate is between Estonian Competition Act. 2,000 to 3,000 euros and for unique and exclusive properties about 5,000 euros. Thus, acquisition by way of share purchase may be subject to merger control but the acquisition by way of business (asset) purchase is not. The legal aspects of acquisitions in Estonia are not very different from countries in the EU and there are no special restrictions on foreign capital.

PwC Guide to doing business and investing in Estonia 19 20 Guide to doing business and investing in Estonia PwC 3 Banking, finance and insurance

Investor considerations: Estonia is part of the Euro zone since 1 January 2011 The largest banks are subsidiaries and affiliates of Scandinavian banking groups A wide range of financial services is available to both local and foreign customers

3.1 Banking system welcoming foreign capital. The banking sector has gone through major restructuring The Bank of Estonia (Eesti Pank) is the as a result of privatisation, consolidation independent central bank. As Estonia is part and bankruptcy in late 1990s, following a of the Euro zone, the core tasks of the Bank relatively stable period in the 2000s. The are to help to define the monetary policy of banking sector is dominated by two major the European Community and to implement commercial banks, Swedbank and SEB, the monetary policy of the European Central owned by Swedish banking groups. These Bank. Eesti Pank is also responsible for two banks control approximately 62% of the holding and managing Estonian official financial services market. The third largest foreign exchange reserves as well as bank is an affiliate of the Finnish Nordea supervising overall financial stability and group and the fourth largest bank is an maintaining reliable and wellfunctioning affiliate of the Danish Danske Bank. There payment systems. Eesti Pank is responsible are no state-owned commercial banks or for the circulation of cash in Estonia. other credit institutions. The developments in the banking sector Estonian banks offer a full range of services. since Estonia regained independence There is no differentiation between local have been rapid, along with the trend of

PwC Guide to doing business and investing in Estonia 21 Market share of banks by total asset s as of 31 March 2013

EUR in billion Total assets Market share Swedbank 7.78 42.0% SEB 3.66 19.7% Nordea Bank Finland 2.90 15.7% Danske Bank 1.96 10.6% Bank DNB 0.48 2.6% BIGBANK 0.37 2.0% LHV Pank 0.32 1.8% Krediidipank 0.32 1.7% Citadele 0.22 1.2% UniCredit Bank 0.22 1.2% Pohjola Pank 0.14 0.8% Tallinna Äripank 0.13 0.7% Others 0.32 1.7% Total 18.53 100.0%

Source: Estonian Banking Association

and foreign businessmen and entities, growing extensively as a result of the which can generally access the same range decline in interest rates and the increase in of banking services in Estonia as they do in customers’ welfare. The range of potential Western European countries. leasing objects has grown to include anything from bikes, home furniture and Estonian banking has achieved significant travelling arrangements up to real estate, success in the development of electronic personal vehicles, trucks and farming transaction systems. The number of equipment. internet clients is growing continuously. Active co-operation between major banks The factoring services include domestic and mobile operators has also led to factoring, export factoring, invoice innovative solutions for customers. Debit factoring as well as tax factoring. There and credit cards are widely used in everyday are also options to finance VAT returns. transactions. For international companies, the available factoring services include the handling of the entire accounts receivable portfolio of 3.2 Specialised financial local companies. institutions The Estonian insurance market has similarly Estonian commercial banks are the largest gone through a major consolidation over providers of leasing and factoring services, the years since independence and has with the Swedbank group being a market reached stability. A wide choice of insurance leader. The services provided are becoming services is available from Estonian insurance more sophisticated and diverse while the companies as well as from international clients are also becoming more aware of service providers. the services on offer. The sector has been

22 Guide to doing business and investing in Estonia PwC Banking, finance and insurance

3.3 Investment institutions 3.4 Capital markets Investment funds provide a wide range of All Estonian public limited company (AS-type) different investment options. There are securities are registered in the Estonian Central four types of investment funds allowed Security Depository. Transactions with securities in Estonia. Contractual investment and can be made using over-the-counter systems or investment funds founded as a joint-stock on the regulated market. company are the main types of funds used The regulated stock market operates in the for investment purposes. The majority of context of a cross- Baltic stock exchange Estonian investment funds are managed maintained by the NASDAQ OMX Group that by Estonian commercial banks. Operations coordinates the trading process and imposes of mandatory and voluntary pension funds regulations. Investors can enjoy simplified build on the pension reform that was access and minimised investment barriers when gradually implemented by 2003. operating on Estonian, Latvian and Lithuanian Contributions into the pension fund are markets. Overall, the Baltic stock markets compulsory for young people. Others have similar market practices and rules for all may voluntarily join the system but they three Baltic countries, with common market cannot cancel the contract afterwards. The information and trading systems. contribution to the mandatory pension fund is calculated as 2% of the salary to which the state add 4% of the individuals’ salary. Overall, mandatory pension funds have become popular among individuals. Voluntary pension funds offer aside pension, and also traditional insurance services as for example life insurance. There is a tax incentive according to which individuals can make contributions up to 15% of their income that are considered to be exempt from income tax. Venture capital facilities have become more and more accessible. In addition to expanding small and medium enterprises, it has become easier to gain access to financing through EBRD and other development programs. Nevertheless, the amount of venture capital committed to Estonia is still relatively small when compared to developed countries and some CEE countries. The capital is usually of foreign origin although many local brokerage and investment banking units are also involved in direct investment activity by providing companies with private equity finance.

PwC Guide to doing business and investing in Estonia 23 4 Importing and exporting

Investor considerations: and dependent on the type of goods and All customs clearance procedures are carried out electronically. Common the country of origin. Imports from EFTA customs tariff duties are applicable to all goods imported into the EU. countries, Switzerland, and EU candidate Large importers may apply for deferred taxation. VAT is not imposed on or associated countries are generally free of 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. duty. The duty rate usually stays between Exporters and importers must have EORI registration. zero and 10%. Additional rates are usually levied as a result of anti-dumping cases. Estonia’s membership in the EU implies that 4.1 Trends in customs policy all aspects of customs duties are decided by the common customs tariff -- TARIC. As the member of EU Estonia implements Customs duties on imports and exports and common customs regulation. Thereof no charges having an equivalent effect are country-specific trends exist. The priority of prohibited between member states. Estonian customs authorities has been and will be in the future the contraband trade, In TARIC all measures relating to tariffs, especially tobacco products and alcohol. commercial and agricultural legislation are integrated. This database gives economic operators a clear view of measures to be 4.2 Import restrictions undertaken when importing or exporting goods. The TARIC does not contain There is no banned list in Estonia, but some information relating to national levies as goods (e.g. drugs, military equipment, rates of VAT and excises. cultural objects, hazardous waste, CITES goods) need specific permission for Valuation rules are based on the WTO importation which is given by the authorities Customs Valuation Agreement transposed concerned. onto the applicable European Community legislation. Some quotas for certain types of goods are imposed by the EU and are applied to The customs value usually includes the all member states. The quotas enable the charges for goods, transportation, insurance importation of duty-free goods or goods at a and other services provided for importing lower rate, until the quotas are filled. the goods into the EU. Usually the import taxes should be paid at the point of entry. Large importers may 4.3 Customs duties apply for deferred taxation. Common customs tariff duties are generally applicable to all goods imported into the EU. However, in certain circumstances, such 4.4 Temporary import relief duties are not applied. Under the temporary admission procedure, The customs duty rates are based on value non-Community goods intended for

24 Guide to doing business and investing in Estonia PwC Importing and exporting

re-export may be used in the customs the intra-Community supply of the goods; territory of the Community, with total • a security is provided in order to or partial relief from import duties, guarantee the performance of the tax and without being subject to any of the liability which may arise as a result of following: the failure to perform the tax obligation • other charges as provided for under the provided in this subsection. The security other relevant provisions in force; is given, released, used and calculated • commercial policy measures, insofar as pursuant to the procedure provided by the they do not prohibit the entry or exit of customs rules. goods into or from the customs territory of VAT is not imposed on the import of the the Community. following goods: • VAT is not imposed on the import of goods • books, periodicals or other electronic subject to immediate tax warehousing media sent to libraries or to research, on the condition that the recipient of the development or educational institutions; imported goods is the keeper of the tax • confiscated counterfeit clothes and warehouse. The import of goods specified footwear transferred to state or local in Chapter 1 of Council Regulation government health care or social welfare 918/83/EEC and goods with customs institutions pursuant to law. preferences specified in Title 6 of the Community Customs Code is not subject to VAT under the conditions prescribed for 4.5 Documentation and entitlement to customs duty relief. procedures VAT is not imposed on the import of goods Starting from 1 July 2009 any economic upon the placing of non-Community goods operator established in the EU needs to under the customs procedure of release for have an EORI number. Economic operators free circulation, provided that the following established outside the EU have to be conditions are met: assigned an EORI number if they lodge a • the importer of the goods is an Estonian customs declaration, an Entry or an Exit taxable person; Summary Declaration. • immediately after the goods have been imported, they are transported, in the A special authorisation from the customs same condition, to another member state authorities is required for the following: where such goods will be received by a • the use of the inward- or outward- taxable person or a taxable person with processing procedure, the temporary limited liability of the other member state; admission procedure or the end-use • intra-Community supply is created as a procedure. result of the transport of the goods to • the operation of storage facilities for another member state; the temporary storage or customs • upon importation of the goods, the warehousing of goods, except where the importer confirms the intention to storage facility operator is the customs transport the goods to another member authority itself. state where such goods will be received by The conditions under which the use of one a taxable person or a taxable person with or more of the procedures referred to above limited liability registered by the other or of the operation of storage facilities is member state and, after the goods have permitted is set out in the authorisation. been transported, provides the customs authority with documentation of proof of The authorisation will be effective from the date of issue and is usually at a fixed date.

PwC Guide to doing business and investing in Estonia 25 No special charges are applied. Community goods may be placed under the customs warehousing or free-zone Except where otherwise provided for in procedure in accordance with the customs the customs legislation, the authorisation legislation or Community legislation mentioned above is granted only to the governing specific fields, or in order to following persons: benefit from a decision granting repayment • persons who are established in the or remission of import duties. Generally customs territory of the Community; there is no limit to the length of time goods • persons who provide the necessary may remain under a storage procedure. assurance of the proper conduct of operations and, in cases where a customs debt or other charges may be incurred for 4.7 Re-exports goods placed under a special procedure, provide a guarantee required;in the case Non-Community goods destined to leave of the temporary admission or inward the customs territory of the Community processing procedure, the person who uses are subject to a re-export notification to the goods or arranges for their use or who be lodged at the relevant customs office carries out processing operations on the and with the exit formalities. The re-export goods or arranges for them to be carried notification should meet the requirements out, respectively. for customs clearance documentation. All customs clearance is carried through The re-export procedure is not applied for: electronically. • goods placed under the external transit procedure which only pass through the customs territory of the Community; 4.6 Warehousing and storage • goods trans-shipped within, or directly re-exported from, a free zone; Under a storage procedure, non-Community • goods under the temporary storage goods may be stored in the customs territory procedure which are directly re-exported of the Community without being subject to from an authorised temporary storage any of the following: facility. • import duties; • other charges as provided for under other relevant provisions in force; • commercial policy measures, insofar as they do not prohibit the entry or exit of goods into or from the customs territory of the Community.

26 Guide to doing business and investing in Estonia PwC 5 Business entities

5.1 Legal framework Investor considerations: The legal environment for business entities A foreign investor may operate through the following corporate forms that in Estonia is mostly regulated by the should be registered in the Commercial Register: a public limited company, Commercial Code (in Estonian Äriseadustik) a private limited company, a general partnership, a limited partnership, a commercial association or a branch. which entered into force in 1995. The private limited company and public limited company are the most The passive legal capacity of an entity commonly used forms of entities for doing business in Estonia due to their commences as of its entry in the Commercial most essential characteristic – the limitation of the shareholders’ liability. Business units like permanent establishments or representative offices are Register and terminates as of its deletion not registered with the Commercial Register. A permanent establishment from the Commercial Register. should be registered in the registry of Estonian Tax and Customs Every entity must have a business name Authorities. As a general rule, Estonian legislation does not recognise the concept of a representative office. However, a branch must be registered which is entered in the Commercial Register in the Commercial Register. and under which the undertaking operates. Establishing a company in Estonia may take from a few days up to a The business name always contains the couple of weeks depending on providing of information and the availability of the signatories. Foreign investors may also buy ready-made companies appendage referring to the legal form of (in this way, these procedures might take only a few days upon receiving the entity. A business name may not be all the relevant information/documents). misleading with regard to the legal form, area or scope of activity of the undertaking nor contrary to good morals. When starting operations in Estonia, it should be kept in mind that there are certain areas of activity for which a permit or additional registration is required or in

PwC Guide to doing business and investing in Estonia 27 which only a particular type of entity may of business. The central aspects of their operate, as well as areas of activity in which operation are presented in the form of a operation is prohibited by law. comparison. There may also be special requirements deriving from the law with respect to 5.3 Private limited company the obligations of companies which are dependent on the area of business of (OÜ) and public limited the company (e.g. banking, investment, company (AS) insurance, lending, sale of fuel or alcohol, Private limited companies and public limited travel agency services, etc.). companies have a share capital divided into As a general rule, entities are subject to shares. The shareholders are not personally accounting obligations and need to submit liable for the obligations of the companies – financial statements to the Commercial the companies are liable for the performance Register. An audit of the financial statements of their obligations with all of their assets. may be required depending on the legal Limited companies are established by form of the company and the scale of its concluding notarised certified foundation operations (thresholds to revenue, assets, agreements and adopting articles of employees). association. Entities may merge, divide or be Private limited companies may also be transformed only in the cases and pursuant established with an expedited procedure. to the procedure provided by law. For In such cases all the necessary documents certain cases, a permission of a competent are presented to the Commercial Register agency (e.g. the Estonian Competition electronically and authenticated with digital Authority) may be required for a merger, signatures. division or transformation. Even though the number of shareholders is unlimited by law in both cases, the private 5.2 Choice of entity and limited company is suited for a more closed business forms circle of contributors. Accordingly, safeguards enabling respective The Commercial Code provides for control are provided by law, including rights five types of business entities: general of pre-emption in case of the sale of shares partnership (täisühing), limited partnership to non-shareholders, and even the possibility (usaldusühing), private limited company of prescribing (in the articles of association) (osaühing), public limited company that a resolution of the partners is required (aktsiaselts) and commercial association to transfer a share or a part thereof to a (tulundusühistu). third party. Of the five types of entities regulated under The shares of a public limited company are the Commercial Code, the private limited freely transferable, but shareholders may company and public limited company are establish pre-emptive rights in the articles of the most commonly used forms of entities association. for doing business. This is due to their most essential characteristic – the limitation of The minimum share capital for a public the shareholders’ liability. limited company is EUR 25,000 and EUR 2,500 in the case of a private limited Consequently the main emphasis of the company. In certain fields of activity (e.g. following chapter is on these two forms banking, insurance companies, etc.) the

28 Guide to doing business and investing in Estonia PwC Business entities

laws may provide for higher share capital of the private limited company usually lacks requirements. the layer of the supervisory board. From 1 January 2011, a private limited However, a private limited company must company may also be established without have a supervisory board if it is prescribed making contributions, provided that the by the articles of association of the private founders are private individuals only limited company. and the planned minimum capital does The management board is a directing body not exceed EUR 25,000. In this case the of the limited company which represents capital will consist of claims against the and directs the company. The supervisory shareholders, who are liable with all of their board plans the activities and organises assets up to the capital amount (EUR 2,500 the management of the company as well as to EUR 25,000). supervises the activities of the management In a public limited company each share board. The members of a management grants one vote at the shareholders’ general board are appointed by the supervisory meeting. In a private limited company each board (public limited companies and private shareholder holds one share and each EUR 1 limited companies that have a supervisory of the share generally gives one vote at the board) or the shareholders (private limited meeting of shareholders unless articles of company without a supervisory board). association states otherwise. For the management board, consent of the The shares of a public limited company supervisory board is required for conclusion must be registered with the Estonian Central of transactions which are beyond the scope Registry of Securities (CRS). The shares of a of everyday economic activities. Where the private limited company may be registered company lacks a supervisory board, these with the CRS if desired. If the shares of the rights and obligations are exercised by the private limited company are not registered meeting of the shareholders. in the CRS, the list of shareholders is kept by The shareholders’ general meeting is the the company’s management board. highest management body of a public Transactions for transferring and pledging limited company whereas the respective the shares of private limited companies body of a private limited company is called must be notarised, unless the shares are the meeting of shareholders. registered in the CRS. These management bodies are vested with Thus registration of the shares of a private powers to take the most crucial decisions limited company in the CRS is advisable from the perspective of the company’s if numerous transactions with the shares development – distribution of dividends, are anticipated. There are no similar approval of financial statements, election requirements as to the form of transactions and recalling of the members of the with shares of public limited companies. supervisory board, approving changes in the Transfers as well as pledges of public limited corporate structure (mergers, divisions and company shares are registered in the CRS. transformations etc.). Corporate governance Liability The management structure of the public A member of the management board is limited company consists of three layers, expected to perform his or her duties with the shareholders’ general meeting, the due diligence. Management board members supervisory board and the management shall be jointly and severally liable for board, whereas the management structure damage wrongfully caused to the company,

PwC Guide to doing business and investing in Estonia 29 unless they prove that they have acted with 5.5 Branches due diligence. The same applies with respect Another way for a foreign company to to the supervisory board members. permanently offer goods or services on Generally, the liability of shareholders for behalf of its own name in Estonia is to the limited company’s obligations is limited establish a branch (filiaal). The business to their payments into the company’s share name of the branch of a foreign company capital. consists of the business name of the However, shareholders are held liable for company and the words Eesti filiaal any damage wrongfully caused to a public (Estonian branch). The branch must be limited company, another shareholder or registered in the Commercial Register third persons. through submission of an application and certain required documentation. Certain entities such as foreign banks or 5.4 Partnerships insurance companies located in non-EU states must also obtain a required license. General partnership – a company in which Banks and insurance companies from EU two or more partners operate under a member states must notify the Estonian common business name and are jointly and Financial Supervision Authority that they severally liable for the obligations of the intend to commence activities in Estonia. general partnership with all of their assets. It should be considered that a branch is not Limited partnership – a company in which a legal person and the foreign enterprise two or more persons operate under a is liable for obligations arising from the common business name, and at least one of activities of the branch. The foreign the persons (general partner) is liable for enterprise is also liable to appoint one or the obligations of the limited partnership more directors that are accountable to the with all of his, hers or its assets, and at least foreign enterprise. one of the persons (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution. 5.6 Representative offices Commercial association – a company As a general rule, Estonian legislation for which the purpose is to support and does not recognise a representative office. promote the economic interests of its However there are exceptions to credit members through joint economic activity in institutions for example. which the members participate as consumers or users of other benefits, suppliers, through work contribution, through the use of 5.7 Sole proprietorship services or in any other similar manner. In addition to the possibility of establishing A commercial association is liable for its a business entity, it is possible for any obligations with all of its assets. Members of natural person to conduct business as a a commercial association are not personally sole proprietor who must be entered in the liable for the obligations of the association. Commercial Register before commencing However, the articles of association may with permanent business activities. prescribe that the members are solely liable for the obligations of the association with all of their assets, or liable to a certain extent.

30 Guide to doing business and investing in Estonia PwC 6 Labour relations and social security

6.1 Labour market Investor considerations: The economically active population is Trade unions and employers generally have a cooperative relationship; it is unusual in Estonia to strike. approximately 600 thousand. About one Social security contributions (34%) calculated from the gross employment third of them have higher education and income are payable by the employer. 86% of adults speak at least one foreign Employees do not make any personal social tax contributions. Employee’s language. For older generation the main part of unemployment insurance contributions and compulsory foreign language is Russian and for younger accumulative pension contributions are withheld from the gross income by adults English. Estonian students are the employer. Foreigners, residing in Estonia on the basis of residence permit, are, amongst the best in Europe on their English in general, permitted to work in Estonia. Separate work permits are not language skills. issued. The unemployment rate has been decreasing The employment of non-residents must be registered with the Police and Border Guard Board. in last years. According to the Estonian Non-resident may act as a member of the management or supervisory Unemployment Insurance Fund there were board of Estonian legal entity without the registration. officially 35 thousand people registered as unemployed as at April 2014. At the same time there are over 5,000 jobs available. Structural unemployment continues to be

PwC Guide to doing business and investing in Estonia 31 an issue and there’s a continuous need for labour laws of „old Europe“, Estonian talent in sectors relying on skilled labour.. employment law is more liberal and offers more flexibility in agreeing on terms and conditions of employment. However the 6.2 Labour relations principle of protection of employees as the economically weaker party is applied Employer/employee relations – therefore the agreement between Regulations regarding employment employee and employer on terms that are and labour issues are regulated by the disadvantageous to employee, compared to Employment Contracts Act (Töölepingu what is set forth in legislation may be void. seadus). Also the principles of equal treatment and Work relations are also dealt with in the non-discrimination of employees need to be Law of Obligations Act, the Individual followed. Labour Dispute Resolution Act (Individuaalse Trade unions and collective töövaidluse lahendamise seadus), and agreements the Occupational Health and Safety Act (Töötervishoiu ja tööohutuse seadus). Trade unions are visible generally in transportation, health services and the Compared to rather strict and protective

32 Guide to doing business and investing in Estonia PwC Labour relations and social security

processing industry. However, the level of concluded in writing. An oral employment activity is significantly lower than in western contract may be entered into only for European countries. Membership in a union employment for a term of less than two is not compulsory. weeks. Employment contracts must contain certain mandatory terms. Employers bear A collective agreement as a voluntary administrative liability for formalising agreement between employees or a employment contracts. union or federation of employees, and an employer or an association or federation of An employment contract is entered into employers can be concluded. Currently there for an unspecified term or a fixed term, are slightly over 750 effective collective whether the term of a contract is fixed by a agreements registered. specific date or by completion of the work, but for no longer than five years. A natural person of eighteen years or over who has 6.3 Working conditions an active legal capacity or restricted active legal capacity may be an employee. As for Salaries and wages the employment of minors, there are legal All rules regarding remuneration for restrictions towards the conclusion of an employees working under an employment employment contract with them as well as contract are set forth in the Employment towards the nature of the work that may Contracts Act. Employment contracts must be performed by minors and their working specify the employee`s wage rate, additional conditions. payments, if any, method for calculation of Working hours the remuneration and procedures for paying remuneration. The legally established The Employment Contract Act presumes minimum wage has doubled in last nine that a full-time employee works 40 hours years and is EUR 355 from 1 January 2014. during a 7-days period, 8 hours per day. For last years the average gross salary has The hours of part-time employees are increased at the pace of 5-10% per year agreed between the employer and and equalled EUR 986 in the 4th quarter employee; overtime is normally permitted of 2013. Estonians are recognised for upon an agreement between the employer their skills and hardworking attitude also and employee. in the Scandinavian job market (e.g in construction, healthcare and transportation Certain limits must be observed when sector), thus the pressure on wages is working overtime; total working time may expected to continue. generally not exceed an average of 48 hours per week over a four-month period. It is the employer’s obligation to calculate and withhold all payroll taxes, thus the Details regarding the work regime, such as average labour cost in the 4th quarter of the start and end of the work day, time for 2013 was EUR 1,336. meals and other breaks, may be determined by internal work procedures, collective Employment contracts agreement or work contract. Citizens of foreign states and stateless An employee is entitled to annual paid leave persons who reside in Estonia permanently in the amount of 28 calendar days. have rights pertaining to employment equal to those of Estonian citizens unless Paid holidays otherwise prescribed by law. There are ten legally-imposed holidays in The employment contract must be Estonia. These are: 1 January – New Year’s

PwC Guide to doing business and investing in Estonia 33 Day; 24 February – Independence Day; In the Estonian context, no distinction Good Friday; Easter Sunday; 1 May – May is made between social insurance and Day; Pentecost; 23 June – Victory Day; 24 social security, which are covered by the June – Midsummer Day; 20 August - Day of same term in the Estonian language. The Restoration of Independence; 24 December pension and health insurance schemes are – Christmas Eve; 25 December – Christmas contributory social security schemes that Day; 26 December – Boxing Day. Employers are financed principally by the social tax. are required to grant employees paid leave The Estonian social tax of 33% (comprising in the amount of three hours on a work 20% social security contributions and 13% day directly preceding the New Year`s health insurance contributions) must be Day, Independence Day, Victory Day and paid by employers on top of the gross salary. Christmas Eve. Work on public holidays has Currently, employees are not required to to be compensated at a double rate. make any personal social tax contributions. Equal opportunities The Estonian pension system is divided into three different pillars: According to prohibition on discrimination • First pillar: state pensions. The state against employees an employer cannot pension insurance guarantees an income discriminate against a potential or existing for people when they retire or in the event employee on any of the following grounds: of their becoming incapacitated or losing sex, race, religion, age, disability and sexual their provider. State pensions are paid out orientation. from the social tax calculated on salaries. Termination of employment • Second pillar: the compulsory Bases for the termination of an employment accumulative pension scheme. Resident contract are provided in the Employment employees born after 31 December 1982 Contracts Act. were obliged to join the compulsory accumulative pension scheme and make An employer may not cancel an employment contributions at 2% of their gross salary. contract ordinarily, but it may be terminated To this amount the state then added 4% upon agreement between the parties at of the 33% social tax calculated on the any time. The extraordinary termination of employee’s salary. For resident employees the employment contract on the initiative born before 1983 joining the compulsory of the employer is allowed on economic accumulative pension scheme was reasons (decrease in the work volume or voluntary, but after joining, it became reorganisation of work or other cessation compulsory and employees were not of work) or on reasons related to employee subsequently allowed to leave the scheme. (inability to perform his/her duties, breach • Third pillar: supplementary funded of trust etc). pensions. Supplementary funded pensions are additional voluntary pensions which enable an individual to save more than 6.4 Social security system provided for by the state and maintain The social protection system is made up their standard of living during retirement. of two pillars: the social security system The government sets specific rules for the that comprises pension insurance, health three-pillar system: administering the 1st insurance, child benefits, unemployment pillar, guaranteeing the 2nd pillar and benefits and funeral grants; and the providing a supervision and regulation social welfare pillar that consists of social system for both the 2nd and 3rd pillars. assistance cash benefits and social services. Employers make contributions (through

34 Guide to doing business and investing in Estonia PwC Labour relations and social security

the national social tax) to the 1st pillar. The rates of unemployment insurance Employees make mandatory payments contributions are 0.5 - 2.8 % for employees into the 2nd pillar and are free to choose and 0.25 - 1.4 % for employers. whether or not to contribute to the 3rd From 2013 the applicable contributions are pillar. respectively 2% and 1%. Although during the financial crisis the For income tax purposes, the employee’s Estonian Parliament adopted some interim unemployment contribution is deductible changes to the system, the standard system from the resident individual’s taxable of contributions (2%+4%) is was fully income. Unemployment insurance restored from 2012. contribution does not apply to the Under Estonian unemployment insurance remuneration paid to the members of legislation the unemployment insurance the Management Board, members of the contributions must be paid both by the Supervisory Board and to the procurators. employer and the employee (again by EC regulation 1408/71 may make it possible withholding). for employees assigned to Estonia from

PwC Guide to doing business and investing in Estonia 35 another EU Member State, EEA country - whose permanent legal income ensures or Switzerland to remain covered by their his/her subsistence in Estonia; home country social security system. In - whose application for residence permit is order to remain covered by the social based on an international agreement. security system of his/her home country, The annual immigration quota can not the employee has to apply for a certificate exceed 0.1 per cent of the permanent of social security coverage (e.g. A1) to be population of Estonia annually (about 1,000 issued by the social security authorities of persons). his/her home country before moving to Estonia. For additional information, see also: https:// www.politsei.ee/en/teenused/residence- Besides the EC regulation, Estonia has permit/ concluded social security treaties with the Finland, Canada, Ukraine and Moldova Employment permit which include similar provisions of social Foreigners, residing in Estonia on the security coverage for assigned employees. basis of residence permit, are, in general, 6.5 Foreign personnel permitted to work in Estonia. Separate work permits are not issued in Estonia from Residence permit September 2013. The Citizen of European Union Act In addition to the employment in Estonia prescribes the terms for settling in Estonia on the basis of a residence permit, a person of citizens of member states of the European may work in Estonia temporarily for up to Union and the European Economic Area 6 months during a year if (a) he/she stays and the Swiss Confederation (hereinafter legally in Estonia on the basis of visa or on “EU citizens”) and their family members the basis of visa-free stay and (b) whose who are citizens of third countries and the employment has been registered prior to the procedures necessary for it. commencement of work. Generally, an EU citizen who has resided Registration of short-term employment in Estonia permanently for five successive in Estonia must be done by employer. years on the basis of the right of temporary Expedited procedure applies for residence will obtain the right of permanent employment of teachers and lecturers in residence. educational institutions, for scientists and The residence permits to the third country top specialists. nationals and persons with undetermined Ordinary procedure of registration of short- citizenship are issued under the Foreigners term employment is for experts, consultants Act. Residence permit may be temporary and skilled workers, as well as for au pairs, (validity period up to five years) or long- seasonal workers in agriculture, artists, term. Temporary residence permit may be sportsmen, coaches and some other limited issued to a foreigner: occasions. For registration of employment - married to a person with permanent see also: https://www.politsei.ee/en/ residence in Estonia; teenused/working-inestonia/registration-of- - for settling down with a close relative short-term-employment permanently residing in Estonia; - for working; EU citizen may reside and work in Estonia - for studies at an Estonian educational without registration of his/her right of institution; temporary residence for a term of up to 3 - for business; months.

36 Guide to doing business and investing in Estonia PwC Labour relations and social security

A foreigner, to whom a temporary residence permit has been issued on the basis of legal income, is not permitted to work in Estonia. A foreigner may carry a managing or supervising role as a member of management body of a legal entity registered in Estonia. Living conditions Real estate In Estonia, the real estate market is well established and there exist no restrictions on buying or renting a flat or a house. Current offers from the Estonian real estate market are available on the following web pages: www.kv.ee, www.city24.ee or www. ekspresskinnisvara.ee. In practice, it may be advisable to get in touch with one of the leading real estate companies in Estonia, which are involved in house-hunting services as their main business. Education The majority of Estonian schools are teaching in Estonian language and there are Russian schools for ethnic minority. The only accredited school for offering general education based on the European Schools curriculum is Tallinn European School (www.est.edu.ee ) where about 100 children from over 30 nationalities currently study. The languages of instruction at the school are mainly English, French and German and there’s both primary and secondary school as well as nursery. Health care An individual insured in another EU member state (i.e. a holder of the European health insurance card or its replacement certificate) will receive all necessary health care while staying temporarily in Estonia. This insurance covers all medical treatment similarly available to locals. However, it is advisable to have an additional private medical insurance in order to extend the security coverage.

PwC Guide to doing business and investing in Estonia 37 Restrictions on employment There are no additional restrictions on the number of foreign employees on payroll or on the time period they may be employed in Estonia. Fiscal registration number When moving to Estonia an individual does not need a separate fiscal registration – the data logging formalities described below in sub-points are sufficient for the fiscal authorities.

38 Guide to doing business and investing in Estonia PwC 7 Accounting and audit requirements

7.1 Accounting Investor considerations: Financial statements should be prepared in accordance with either IFRS Statutory requirements as adopted by the European Union, or accounting principles generally The length of a financial year is twelve accepted in Estonia. The Ministry of Finance has introduced mandatory internet based months. In the event of an accounting entity reporting using the XBRL format starting from 1 January 2010 for all non- being founded or terminated or the date consolidated annual reports prepared in accordance with the Estonian of the commencement of its financial year G A A P. being changed, or in other cases prescribed by law, the financial year of the accounting entity may be shorter or longer than twelve months but shall not exceed 18 months. months of the end of the financial year. Nonconsolidated annual reports prepared At the end of each financial year, an under Estonian GAAP are to be submitted accounting entity (public limited company, electronically in XBRL format through private limited company) is required to Company Registration Portal https:// prepare an annual report consisting of ettevotjaportaal.rik.ee/. Other annual the financial statements, the management reports are to be submitted in pdf format. report, the auditor’s report (if an audit Since 2011, consolidated annual reports is required) and the profit distribution prepared under Estonian GAAP and annual proposal. reports prepared under IFRS can voluntarily Annual report is to be submitted to be submitted in XBRL format. the Commercial Register within six

PwC Guide to doing business and investing in Estonia 39 Entries in the Commercial Register are • accounting principles generally accepted public. Everyone has the right to examine in Estonia; or the card register and the business files, and • IFRS as adopted by the EU. to obtain copies of registry cards and of Listed companies and financial institutions documents in the business files. are required to prepare financial statements Branches of foreign companies need in accordance with IFRS as adopted by the not prepare annual reports. Instead, an EU. unattested copy of the audited and approved Estonian GAAP is written by the Estonian annual report of the company is submitted Accounting Standards Board (EASB). to the Commercial Register of the location of the branch no later than one month after Estonian GAAP effective from 2013 is approval of the annual report or seven based on IFRS for Small and Medium- months after the end of the financial year. sized Entities (IFRS for SMEs) with limited differences from IFRS for SMEs with regard This requirement does not apply to to accounting policies as well as disclosure companies of states which are Contracting requirements. Differences in accounting Parties to the EEA Agreement if the policies arise mainly due to the fact that in legislation of the country of the seat of the some areas Estonian GAAP allows a choice company does not require the annual report of accounting policy, one of the alternatives is to be disclosed. being the only policy accepted under IFRS Obligation to preserve accounting for SMEs. Except for differences from documents: limited reasons, net profit and equity are • accounting source documents – for seven usually the same, regardless whether the years from the end of the financial year accounts are prepared in accordance with during which the source document was IFRS for SMEs or Estonian GAAP. recorded in the accounts; In areas not specifically covered by Estonian • accounting ledgers, journals, contracts, GAAP, the treatment in IFRS for SMEs is financial statements, reports and other recommended, but not mandatory. Each business documents which are necessary Estonian GAAP standard contains a brief for reconstructing business transactions comparison with the respective section during audits – for seven years from the of IFRS for SMEs. Translation of the new end of the corresponding financial year; guidelines is available at http://www.easb. • business documents relating to long-term ee/public/Inglise.zip. rights or obligations – for seven years after the expiry of their term of validity; The previous version of Estonian GAAP • accounting rules and procedures – for (effective since 2003 and until the end of seven years after the amendment or 2012) was basically a simplified summary replacement thereof; of IFRS; the recognition and measurement • accounting registers created electronically rules were based on IFRS, but the disclosure should be preserved electronically. The requirements were less demanding. In areas legibility of the data should be ensured not specifically covered by Estonian GAAP, within the preservation period. the IFRS treatment was recommended, but not mandatory. Unofficial translations of the Accounting principles in Estonia guidelines of previous version of Estonian Financial statements should be prepared in GAAP are available at http://www.easb. accordance with either: ee/?id=1976.

40 Guide to doing business and investing in Estonia PwC Accounting and audit requirements

7.2 Chart of accounts The Authorised Public Accountants Act provides requirements for public interest Generally the chart of accounts is used in entities (PIEs). Estonia, but is not compulsory under the current legislation. The following entities are considered as PIEs (the list is not exhaustive): • Listed entities; 7.3 Audit requirements • Financial institutions; or • Entities which exceed at least two of the The following entities are subject to audit: following criteria: • Public limited company (AS); - Revenue or income EUR 66 million; • any entity, if the amounts presented in - Total assets at balance sheet date the financial statements of the accounting EUR 33 million; year exceed at least two of the three - Average number of employees following criteria (a consolidating entity during financial year: 1,000. applies the criteria to the consolidated numbers): PIEs must form audit committees, consisting - revenue (or income) of of at least two members, including at least EUR 2,000,000; two members having expertise in the field of - total assets of EUR 1,000,000; accounting, finance or law. - average number of employees: 30 Auditors • any entity, if the amounts described above exceed at least one of the following All certified auditors are members of the criteria: Board of Auditors (www.audiitorkogu.ee), - revenue (or income) of a self-governing professional association EUR 6,000,000; of Estonian auditors, which organises - total assets of EUR 3,000,000; the professional activities of auditors and - average number of employees: 90. protects their rights. At present there are ca 330 auditors in Estonia. The requirement for a review applies to companies that are not subject to the audit The Auditing rules include requirements requirement, but exceed either: for auditing and professional ethics to be • the limits in two or more of the following based on the standards of the International criteria: Federation of Accountants. - revenue (or income) of The Board of Auditors is responsible for the EUR 1,000,000); supervision of the professional activities of - total assets of EUR 500,000; auditors and compliance with the Auditing - average number of employees: 15. rules. • or the limit at least in one of the following criteria: revenue (or income) EUR 3,000,000; total assets EUR 1,500,000; average number of employees 45. An entity subject to a review may instead opt for an audit.

PwC Guide to doing business and investing in Estonia 41 42 Guide to doing business and investing in Estonia PwC 8 Tax system and administration

8.1 Tax system Investor considerations Main principles of Estonian tax policy: simple tax system, broad tax base Administration of the tax system and low rates. Taxes are levied on the basis of tax laws The aim of the Estonian Government is to shift the tax burden from labor to consumption. enacted by Parliament. Both state and local Flat income tax rate since 1994 (flat income tax rate at 21% applies to both taxes are imposed under the taxation laws. individuals and companies). The structure and basis of the tax system Unique corporate tax system since 2000: all undistributed corporate profits is regulated by the Law on Taxation. Local are tax-exempt. taxes are introduced by local municipal Local taxes play an insignificant role in the Estonian tax system. councils according to the Law on Local Estonia operates a self-assessment system. The Government’s intention is to improve tax administration (electronic tax Taxes. Local taxes play an insignificant role administration is well established). in the Estonian tax system. The tax administrator is the Estonian Tax and Customs Board. Local taxes are administrated by the local municipal if the person has a permanent place of councils and local offices of the Tax Board. residence in Estonia, is present in the country for 183 days or more during any The allocation of state taxes between 12-month period, or if a person is employed national and local governments is set out in the public state service of Estonia, by the tax legislation. The Income Tax Law dispatched abroad. states that 11.6% of resident individuals` income tax before deductions is allocated to Non-resident taxpayers include foreign local municipalities, but the rest, including entities and individuals, or their permanent all taxes levied from pensions and capital establishments in Estonia. gains, is allocated to the state budget. Registration requirements Classes of taxpayers Taxpayers that are based in Estonia and Estonian taxpayers are resident and non- are registered in the Estonian Commercial resident legal entities and individuals. Register (subsidiaries, branches etc.) will be The term legal entity includes companies, automatically recorded into the taxpayers partnerships, legal entities established under registry that is held by Estonian Tax and public law and non-profit organisations and Customs Authorities. A separate registration foundations. is required for VAT purposes. A legal entity is treated as resident in Foreign companies can only register with Estonia if it is founded under Estonian the Tax and Customs Authorities in certain laws. An Estonian branch of a foreign circumstances (e.g. acting as a foreign company is generally treated as a permanent employer, having a permanent establishment establishment of a non-resident entity. An and as a VAT liable person). individual is treated as resident in Estonia

PwC Guide to doing business and investing in Estonia 43 8.2 Direct and indirect tax 8.4 Legislative framework burden Estonian tax law is harmonised with EU Direct taxation in Estonia takes the form of legislation and based on the continental corporate and individual income taxes, as well European law model. As of 1May 2004 EU as a gambling tax. Indirect taxes include VAT, legislation applies in Estonia like in any excise taxes and customs duty. other EU member state. The rest of the national revenue consists of The Parliament has the authority to impose state fees, sale of state property, sale of goods taxes. Local government has a limited right and services and different subsidies. to establish local taxes. Tax collections have been stable within the Tax administrators have no discretion last few years and this also applies to the to make alterations to legislation or to apportionment of direct/indirect taxes. conclude contracts with taxable persons concerning their tax liabilities. After accession to the EU, the case decisions 8.3 Principal taxes of the European Court of Justice are The structure and basis of the tax system are legally binding for Estonian courts and tax set out in the Law on Taxation. authorities. The existing state taxes are: Estonian law recognises the direct effect of EU • Income tax (corporate and personal); legislation. The courts interpret the tax law. • Social tax; • Land tax; • Gambling tax; 8.5 Tax treaties • VAT; Estonia has tax treaties in force with Albania, • Customs duty; Armenia, Austria, Azerbaijan, Bahrein, Belarus, • Excise duties (alcohol, tobacco, fuel, some Belgium, Bulgaria, Canada, China, Croatia, the packaging materials and electricity); Czech Republic, Cyprus, Denmark, Finland, • Heavy load vehicles tax. France, Georgia, Germany, Greece, Hungary, Currently, Estonia does not impose any gift Iceland, India, Ireland, Isle of Man, Israel, or estate taxes. Various transactions subject Italy, Jersery, Kazakhstan, Latvia, Lithuania, to registration with the authorities are liable Luxembourg, Macedonia, Malta, Mexico, to payment of a state fee (stamp duty). Moldova, the Netherlands, Norway, Poland, Portugal, Republic of Korea, Romania, Serbia, Employers and employees must also make Singapore, the Slovak Republic, Slovenia, mandatory unemployment contributions Spain, Sweden, Switzerland, Thailand, Turkey, and compulsory accumulative pension Ukraine, the United Arab Emirates, the United contributions to the state budget. Kingdom, the United States of America and As permitted by the Law on Local Taxes, Uzbekistan. a few municipalities have introduced the Treaties have also been concluded with Russia following local taxes: and Morocco but these are not yet in force. • advertisement tax; • road and street closure tax; • motor vehicle tax: 8.6 Tax returns and payments • animal tax; • entertainment tax; Legal entities • parking charges. The period of taxation is a calendar month.

44 Guide to doing business and investing in Estonia PwC Tax system and administration

The combined corporate income tax resident is generally not obliged to submit a and payroll tax return (form “TSD” with tax return to the Estonian tax authorities for appendices) must be submitted to the local income so taxed. tax authorities and taxes must be remitted However, for certain types of Estonian by the 10th day of the month following a source income, non-residents are liable taxable distribution or payment. Tax returns under Estonian domestic law to self assess can be lodged through an electronic form Estonian tax and submit a tax return to the over the Internet. Estonian tax system does Estonian tax authorities by the following not recognise any advance corporate income deadlines: tax payments. • Capital gains realised from certain types of The VAT taxation period is a calendar assets should generally be reported by 31 month, and the VAT should be declared March of the year following the realisation and paid on or before the 20th day of the of the gain. Capital gains from the sale or following month. disposal of immovable property located in Estonia should be reported within one If the statistical threshold (in 2013 per month of realising the gain. calendar year for dispatches this is EUR • Profits derived from business activities 130,000 and arrivals this is EUR 200,000) (without a registered permanent has been exceeded, Intrastat declarations establishment) conducted in Estonia are required to be submitted to the Statistics should generally be reported by 30 June Estonia. The due date for submission of an of the following year (or within two Intrastat declaration is the 10th working day months if business activities in Estonia are following the calendar month to which the terminated). declaration relates. The declaration liability • Other items of Estonian-source income is valid until the end of the calendar year. A from which income tax was not withheld business may file its Intrastat declarations but should have been must be reported by electronically. 31 March of the year following the year in EC sales listing is due on a monthly basis by which the income was received. the 20th day of the following month. A resident individual will receive an income Individuals tax assessment based on his/her filed return For individuals the period of taxation at least 30 days before the tax payment is is a calendar year. In general, resident due and based on that, must pay the final individuals must file an individual income amount of income tax due by 1 July of the tax return by 31 March following the year year following the period of taxation. in which the income arises. Electronic Resident taxpayers who reported business filing of tax returns becomes available from income or capital gains in their tax return 15 February. must pay the final amount of income tax Certain items of foreign sourced, tax exempt due by 1 October of the year following the income must be reported for information period of taxation. purposes. Married resident taxpayers may elect to lodge their tax returns jointly or separately. 8.7 Assessments For non-residents, the tax withheld at Estonia operates a self-assessment system. source at domestic or treaty rates generally Tax returns show the tax due and taxpayers constitutes final tax as regards their must pay this amount without waiting for a Estonian source income and the non- formal assessment notice.

PwC Guide to doing business and investing in Estonia 45 administrator within seven days, which must make a decision within 30 calendar days of receiving the appeal. An appeal does not mean that the taxpayer does not have to pay the tax due. However, until the decision is made, the tax administrator cannot freeze or extract funds from the taxpayer’s bank account. The taxpayer or the withholding agent has the right to appeal in court at any stage of the tax dispute. However, again, this does not mean that the taxpayer does not have to pay the tax due until the courts say otherwise.

8.9 Withholding taxes The tax administrator has the right to recalculate the tax due in the tax return Withholding agents must withhold income according to the terms and order fixed in tax from certain payments. the Law of Taxation. The taxpayer will be Withholding agents include resident legal informed in writing about the recalculated entities, resident individuals registered as tax to be paid and the reasons for the sole proprietorships or acting as employers, recalculation. and non-residents having a permanent Resident individual taxpayers will receive an establishment or acting as employers in assessment notice upon the submission of Estonia. individual income tax returns 30 days before The tax must be reported and paid by the tax due payment deadline. the 10th day of the month following the payment. Income tax is not withheld from payments to resident companies, registered 8.8 Appeals sole proprietorships and registered Where there is a dispute regarding permanent establishments of foreign the amount of tax assessed by the tax companies. administrator, the burden of proof that the The following payments are subject to assessment was incorrect rests with the withholding tax: taxpayer. • There is no withholding tax on interest The taxpayer has the right to appeal to the payments to non-residents. local office of the tax administrator who • Royalties (including payments for the use calculated the amount of the tax due and of industrial, commercial, or scientific dispute the assessment in question within 30 equipment) paid to non-residents are days after receiving obligatory notice of the generally subject to 10% withholding tax amount due. under domestic law, but reduced rates may apply under double tax treaties. Certain If the local tax administrator does not accept royalty payments to associated EU and Swiss the appeal, the taxpayer must forward the companies meeting certain conditions are appeal to the central institution of the tax exempt from withholding tax.

46 Guide to doing business and investing in Estonia PwC Tax system and administration

• Rental payments to non-residents for the facts already known by a tax the use of immovable property located administrator. in Estonia and movable property subject Tax audits are used for the purpose of to registration in Estonia (excluding a comprehensive investigation of the payments for the use of industrial, taxpayer’s overall economic activity, and commercial or scientific equipment) are to identify unknown facts. The related subject to 21% withholding tax under taxes and time ranges will be stated on the domestic law, but double tax treaties may notification issued by the tax administrator exempt payments for the use of movable seven days before the beginning of the property from withholding tax. revision. • Interest, royalties and rental payments to resident individuals are subject to 21% withholding tax. 8.11 Penalties • Payments to non-resident companies for services provided in Estonia, including In practice, in case of voluntary adjustments management and consultancy fees, are to tax returns the taxpayers will only pay subject to 10% withholding tax under unpaid tax and interest on the late payment. domestic law, but exemptions may apply Currently the interest rate is 0.06% of the under double tax treaties. Service fee tax due for each day of delay. payments to “tax haven” entities are always subject to 21% withholding tax. Under the Estonian Law on Taxation, if a • Salaries, directors’ fees and service fees legal person fails to submit a tax return, paid to individuals are subject to 21% documents or other information by the due withholding tax under domestic law, but date prescribed by tax laws, or submits double tax treaties may exempt service fee false information or knowingly submits payments to non-resident individuals from incorrect documents to the Tax and Customs withholding tax. Authority, the latter may assess a fine of up • Payments for the activities of non-resident to EUR 32,000. artists or sportsmen carried out in Estonia Failure to submit information or submitting are subject to 10% withholding tax. incorrect information to the tax authority, • Certain pensions, insurance benefits, to reduce tax or withholding obligations, scholarships, prizes, lottery winnings, or to increase or create a claim for refund, alimony, etc. paid to non-residents and or to violate a withholding obligation if the resident individuals are subject to 21% act results in a tax underpayment, refund, withholding tax. set off or compensation without basis of an amount corresponding to or exceeding major damage, is subject to provisions of the 8.10 Tax audits Penal Code. The Law on Taxation provides the tax The limitation period for making an administrator with a right to investigate assessment is three years from the due date taxpayers by commencing two different of the tax return for a simple failure to pay. types of tax investigation: In the event of intentional tax avoidance (or • Audit of individual cases; willful tax evasion), the limitation period for • Tax audit. making a tax assessment is five years from An audit of individual cases is generally the due date of the tax return. commenced for the purpose of investigating

PwC Guide to doing business and investing in Estonia 47 8.12 Advance clarifications A binding advance ruling will include the tax authorities’ opinion on the consequences of a transaction or series of transactions to be undertaken by a taxpayer. The ruling will be binding on the tax authorities, provided that the transactions are concluded within the time and under the circumstances described in the ruling request, and also provided that the relevant tax legislation had not been changed substantially before the taxpayer entered into the transaction. Rulings will not be issued on transfer pricing matters and may be denied for hypothetical transactions and transactions with the sole purpose of tax avoidance. Binding rulings will be issued within 60 days of the submission of the request, or within 90 days if the tax authorities have a valid reason to request an extension of the response deadline. Summaries of tax rulings that have general significance or deal with frequently asked questions may be published on the tax authorities’ website, with due regard for the protection of tax privacy and personal data of the persons involved. Upon the taxpayer’s request the Estonian Tax and Customs Authorities may also issue an advance clearance within 30 days, but this is not formally binding to them; in practice the authorities follow the clearance issued if all facts and circumstances have been properly described.

48 Guide to doing business and investing in Estonia PwC 9 Taxation of corporations

9.1 Corporate tax system Investor considerations All undistributed corporate profits are tax-exempt. All undistributed corporate profits are Estonia has no thin capitalisation or CFC rules for corporate taxpayers. tax-exempt. This exemption covers both The period of taxation is a calendar month. active (e.g. trading) and passive (e.g. Corporate income returns are due by the 10th day of the month following dividends, interest, royalties) types of the taxation period. income, as well as capital gains from sales of all types of assets, including shares, securities and immovable property. This tax regime is available to Estonian companies 9.2 Incentives and permanent establishments of foreign There are no special tax incentives in companies that are registered in Estonia. Estonia but the whole Estonian corporate Corporate profits are not taxed until the tax system, which provides for an indefinite profits are distributed as dividends, share deferral for taxing corporate profits, can buy-backs, capital reductions, liquidation be viewed as a tax incentive that promotes proceeds or deemed profit distributions, re-investment of profits and thus stimulates such as transfer pricing adjustments, economic growth. expenses and payments that do not have Mergers, divisions and re-organisations of a business purpose, fringe benefits, gifts, companies are generally tax-neutral. donations and business entertainment expenses. There is no form of consolidation or group

PwC Guide to doing business and investing in Estonia 49 taxation for corporate income tax purposes. have been subject to tax in the country of Dividends distributed by Estonian the PE; or companies are exempt from corporate • liquidation proceedings, share buy-backs income tax (‘participation exemption’) if or capital reductions, which have been these are paid out of: subject to taxation by the distributor of • dividends received from Estonian, EU, EEA such income. and Swiss tax resident companies in which Estonia has no thin capitalisation or CFC the Estonian company has at least 10% rules for corporate taxpayers. shareholding; There are specific anti-tax haven rules for • profits derived through a permanent certain dealings with tax haven companies, establishment (“PE”) in the EU, EEA or treating these as deemed profit distributions. Switzerland; • dividends received from all other foreign There is a general anti-avoidance rule, companies in which the Estonian company which allows tax authorities to ignore the has at least a 10% shareholding, provided legal form of a transaction and reclassify that either the underlying profits have it for tax purposes according to its “real” been subject to foreign tax or foreign economic substance, if there are grounds to income tax was withheld from dividends believe that the transaction was undertaken received; for the purpose of avoiding tax. • profits derived through a foreign PE in all other countries, provided that such profits

50 Guide to doing business and investing in Estonia PwC Taxation of corporations

9.3 Taxable income Net operating losses As noted above, Estonia levies a corporate There is no use for the losses carried income tax only on profits that are forward, as distributable profits are distributed as dividends, share buybacks, determined by financial statements drawn capital reductions, liquidation proceeds or up in accordance with Estonian GAAP or deemed profit distributions. IAS/IFRS and there is no adjustment of accounting profits for tax purposes (tax loss Distributed profits are generally subject to a carry-forward or carry-back). 21% corporate income tax (21/79 on the net amount of profit distribution). For example, Payments to foreign affiliates a company that has profits of 100 available Payments to foreign affiliates are for distribution can distribute dividends of “deductible”, i.e. not subject to 21/79 79, on which it has to pay corporate income corporate income tax, as they are deemed tax of 21. The rate is set to fall to 20% from profit distributions, provided that the 2015. payment serves a business purpose and From the Estonian perspective, this tax is provides a benefit to the payer, is at arm’s regarded as a corporate income tax and length, and is substantiated by sufficient not a withholding tax, so the tax rate is documentation (see also section 10.5). not affected by double tax treaties. Certain Payments to foreign affiliates may also be domestic and foreign taxes can be credited subject to various withholding taxes. Certain against the corporate income tax charge payments to affiliates located in “tax havens” under domestic law or double tax treaties. are always subject to 21/79 corporate income Certain distributions are exempt from such tax or 21% withholding tax. tax (“participation exemption”). Taxes Dividends paid to non-resident legal entities (including “tax haven” entities) are not All taxes paid are “deductible” for income subject to additional withholding tax under tax purposes. In certain circumstances domestic law. domestic or foreign taxes may be creditable against the 21/79 corporate income tax Distributable profits are determined by charge under domestic law or an applicable financial statements drawn up in accordance tax treaty. with Estonian GAAP or IAS/IFRS and there is no adjustment of accounting profits for Fringe benefits tax purposes (e.g. there is no separate tax Employers operating in Estonia (including depreciation, or tax loss carry forward or foreign companies that have a permanent carry-back). establishment or employees in Estonia) are liable to Estonian taxation on any fringe benefits granted to their employees 9.4 Deductibility of expenses (including directors). Depreciation and depletion Fringe benefits are subject to special tax Distributable profits are determined by treatment in Estonia, as it is only the financial statements drawn up in accordance employer who has the obligation to pay with Estonian GAAP or IAS/IFRS, and there taxes on the fringe benefits furnished to the is no adjustment of accounting profits for employee. Taxable fringe benefits received tax purposes. Corporate entities are not by a resident employee are in general subject to tax depreciation rules. not included in the taxable income of the employee for Estonian tax purposes.

PwC Guide to doing business and investing in Estonia 51 Fringe benefits are subject to 21/79 • acquisition of securities issued by a tax corporate income tax and 33% social tax. haven entity (exception for certain listed securities); For example, where the amount of the • acquisition of an ownership interest in a benefit is 100, the income tax due by the tax haven entity: employer would be 26.58 (21/79 x 100) • payment of fines or penalties to a tax and the social tax due 41.77 (0.33 x 127), haven entity, unless settled by court or making up a combined total fringe benefit arbitrage; tax charge of approximately 68. • granting loans or making prepayments to Gifts, donations and representation a tax haven entity or otherwise acquiring a expenses claim against a tax haven entity. Corporate income tax of 21/79 is generally due on gifts and donations. Gifts and donations made to certain qualifying 9.5 Related party transactions recipients are only subject to 21/79 corporate Transactions between related parties income tax if such expenses exceed one or (both resident and non-resident) and both of the following two limitations: between a head office and its permanent • 3% of the calculated social tax base for the establishment(s) should be conducted at existing calendar year, or arm’s length terms. • 10% of the profit of the last financial Transfer pricing adjustments are treated as year according to statutory financial deemed profit distributions, which should be statements. declared on a monthly basis and which are Representation expenses are generally subject to 21/79 corporate income tax. subject to 21/79 corporate income tax only Five transfer pricing methods listed in the if they exceed the threshold of EUR 32 per regulation are also accepted in the OECD month plus 2% of the calculated social tax guidelines: comparable uncontrolled price, base of the calendar month in which the resale price, cost-plus, profit-split and the expenses are paid. transactional net margin method. Estonia Other significant items has also introduced special transfer pricing Corporate income tax of 21/79 is generally documentation requirements for certain due on expenses and payments which do taxpayers in line with the EU Transfer not have a business purpose and which Pricing Documentation Code of Conduct. are therefore regarded as being profit distributions. These may include, for example, late payment interest on tax 9.6 Foreign exchange arrears, penalties imposed by law, bribes, Foreign exchange gains and losses are tax purchases of services or settlements of neutral, as in the absence of annual taxation obligations not related to the taxpayer’s of net profits all undistributed corporate business, and acquisitions of assets not profits are tax-exempt. related to the taxpayer’s business. Furthermore, there are specific anti-tax haven rules treating certain transactions 9.7 Tax computations and dealings with “tax haven” companies See section 9.3 above. There is no form as deemed profit distributions, which are of consolidation or group taxation for therefore subject to 21/79 corporate income corporate income tax purposes. tax. These include:

52 Guide to doing business and investing in Estonia PwC Taxation of corporations

9.8 Other taxes Environmental taxes Real estate and land tax Estonia does not impose any environmental taxes. However, there are certain pollution Land is subject to annual land tax that is charges, charges for the use of natural calculated on the assessed value of land at resources and environmental insurances rates between 0.1% and 2.5%, depending (insurance against pollution risk). on the municipality. The tax is paid by the land owners, or sometimes by the users of the land, generally in two instalments, 9.9 Branch versus subsidiary by 31 March and by 1 October. There is no property tax, i.e. tax on the value of As a general rule, branches and subsidiary buildings. companies are subject to similar tax rules in Estonia. In both cases, the retained Property transfers are generally subject to earnings remain exempt from corporate tax state and notary fees. until the distribution of profits to the head Heavy goods vehicle tax office or parent company, respectively. Upon distribution, a 21% monthly corporate tax Heavy goods vehicle tax is paid for the will be due. There is no branch profits tax following classes of vehicles that are registered with the Estonian National (on top of the corporate tax payable upon Motor Vehicle Register and intended for distribution) in Estonia. the carriage of goods: (1) lorries with Compared with a branch, in the case of a maximum authorised weight or gross a subsidiary which is a private or public laden weight of over 12 tons; (2) ‘road- limited company, there may be more tax trains’ made up of trucks and trailers with a planning opportunities for the tax efficient maximum authorised weight or gross laden repatriation of profits from Estonia. weight of over 12 tons. The tax is paid by the owners or users of the vehicles. The Estonian branch of a foreign company is not subject to statutory audit requirement, Gambling tax but it must submit an annual report from A gambling tax is imposed on amounts the head office to the Commercial Register, received from operating games of skill, and its own annual report to the local tax totalisators, betting and lotteries. Tax is authorities within six months from the also charged on gambling tables and slot end of the financial year. The subsidiary machines used for games of chance located company must submit its annual report only in licensed premises. The tax is paid by the to the Commercial Register. authorised operators. Local taxes 9.10 Holding companies Local taxes can be imposed by local Estonia has a favourable corporate tax regime municipality or city councils in their whereby all undistributed corporate profits administrative area in accordance with are exempted from taxation and this provides the Local Taxes Act. However, the fiscal for numerous opportunities to use Estonia as significance of local taxes is extremely low, as a location for holding, financing or trading very few local municipalities have introduced activities by multinational companies. local taxes. Local taxes include advertisement tax, road and street closure tax, motor vehicle tax, a tax on keeping animals, entertainment tax and parking charges.

PwC Guide to doing business and investing in Estonia 53 10 Taxation of Individuals

Investor considerations If the tie-breaker article in an applicable A flat 21% income tax applies to taxable income of individuals. It is double tax treaty allocates the residence expected that the income tax rate will be reduced one percent (to 20%) of a dual-resident individual to a foreign starting from 1 January 2015. country (most often if the home and family Estonian resident individuals are subject to taxation on their worldwide of the individual remain abroad during an income. Non-resident individuals are subject to taxation on the listed Estonian source income. assignment to Estonia), then generally the Tax on employment income is collected by employers individual will be taxed as a non-resident in In 2014, 95,4 % of individual income tax returns were submitted via the Estonia regardless of the Estonian domestic internet. rule.

10.2 Taxable income 10.1 Territoriality and Estonia has a proportional (i.e. flat) tax rate residence of 21% which applies to all items of income Individuals are considered residents of derived by a resident taxpayer. Certain pension Estonia if they have a permanent residence payments are subject to 10% income tax. in Estonia, or if their stay in Estonia during The gross income of resident individuals any 12-month period exceeds 182 days. An includes their worldwide income from all individual may be deemed to have become sources, irrespective of the origin of the a tax resident from the date of his arrival to income. Estonia.

54 Guide to doing business and investing in Estonia PwC Taxation of individuals

Taxable income includes both active income 10.3 Non-taxable income such as employment and business income, For resident individuals, there are numerous as well as passive income, such as capital items of tax exempt income (excluded from gains, rents and royalties, interest, dividends, gross income). Some of the more important certain insurance proceeds, alimony, pensions, items of tax-exempt income include domestic scholarships, grants, prizes, lottery winnings, dividends, qualifying foreign dividends, etc. qualifying foreign employment income, This list is not exhaustive and therefore any current account interest received from EEA income derived by a resident individual not banks (including Estonian banks), alimonies falling within the above categories is taxable, and certain qualifying capital gains. unless a tax exemption is available. As an exception from the general rule, In general, individual taxpayers are taxed on foreign employment income is exempted a cash basis. Exceptionally, the Estonian CFC from Estonian income tax for a resident (anti-deferral) rules attribute undistributed employee (including withholding profits of foreign “tax haven” companies requirement), provided that: to resident individual taxpayers if such • an employee has spent at least 183 days in companies are controlled by Estonian a 12-month period in a foreign country for residents. the purpose of employment; and Most items of personal income are taxed on • the foreign employment income is treated a gross basis, mainly through withholding at as taxable income in the foreign country source, whereas business income and capital (which must be proven by documentary gains are taxed on a net basis subject to evidence) and the employee can produce certain conditions. a certificate stating the amount of income tax paid on the employment income (even Individuals are allowed to defer their income if the tax amount is nil). tax liability on the income earned from the transactions with certain financial assets when Tax exempt foreign employment income using a specific investment account system. must be declared in the annual income tax In order to enter the system, an individual return of the resident individual. has to have an ’investment account’ which is an ordinary current account in a bank operating in a country that is a member of 10.4 Deductions European Economic Area or OECD. The Business deduction number of investment accounts per individual If an individual is carrying out business is not limited. Payment of income tax can activities through the form of sole be deferred if qualifying financial assets are proprietorship, he/she is allowed to deduct purchased for the money in the investment business expenses from the business income. account and income from the transactions is immediately transferred to the investment Non-business deductions (including account. All transfers in and out of the personal allowance) investment account(s) must be reported in an Resident individuals and certain qualifying individual annual income tax return. Income EU resident individuals are allowed to make tax at 21% is paid only when the payments certain deductions from their gross income. out of the investment account exceed the amount paid in. These include the annual basic personal allowance of € 1,728 and certain additional personal allowances, as well as certain

PwC Guide to doing business and investing in Estonia 55 deductible documented expenses, which has not been withheld in Estonia; fall into two categories. It is expected that • certain capital gains; the annual basic personal allowance will • profits derived from business conducted be increased up to € 1,848 starting from 1 in Estonia without a registered permanent January 2015. establishment; The first category includes certain mandatory • other items of income from which tax payments which can be deducted without should have been withheld but was not. any limitations, including unemployment insurance contributions, contributions to compulsory accumulative pension schemes 10.6 Tax compliance and certain obligatory contributions to The period of taxation is a calendar year. foreign social security schemes. In general, individuals must file a personal The second category includes deductions income tax return by 31 March following which are allowed for tax policy reasons the year in which income was received. As and which have various limitations on an exception, were gains were derived from deductibility. The second category includes a transaction with real estate, non-residents certain bank and leasing interest paid in must submit a tax return within one month relation to acquiring personal residence, from the receipt of such gains. certain educational expenses, certain gifts Electronic filing of tax returns becomes and donations and certain payments to available from 15 February each year. personal pension schemes. Married resident taxpayers may select filing Tax credits their tax returns jointly or separately.

Estonian resident taxpayers who have A resident individual will receive an income received foreign-source taxable income tax assessment based on his return as filed at are generally allowed to credit foreign least 30 days before the tax payment is due. income tax against their Estonian income Non-residents are liable to self-assess their tax liability. The tax credit is limited to 21% Estonian tax and submit a tax return to of foreign taxable income and is calculated the Estonian tax authorities regarding the separately for each foreign country. income which is taxable but has not been subject to withholding. Non-residents will 10.5 Taxation of non-residents generally not receive a tax assessment from the tax authorities. Non-residents are only taxed on their Estonian- source income. For non-residents, income tax Based on the tax assessment received from withheld at source at domestic or treaty rates the tax authorities, resident individuals must generally constitutes final tax. Non-residents pay the final amount of income tax due are generally not obliged to submit a tax return by 1 July of the year following the period in Estonia for income so taxed. of taxation. The resident taxpayer who reported business income or capital gains in However, for certain types of Estonian- his/her tax return must pay the final amount source income, non-residents are liable of income tax due by 1 October of the year under Estonian domestic law to selfassess following the period of taxation. their Estonian tax and submit a tax return to the Estonian tax authorities. Such types of In general, non-residents must pay income income include: tax due within three months from the • employment income on which income tax deadline of submitting the tax return.

56 Guide to doing business and investing in Estonia PwC 11 Value added tax (VAT)

11.1 Introduction Investor considerations Estonian VAT legislation is based on the EC VAT Directive (2006/112/EEC). The current VAT Act was introduced The standard VAT rate is 20% from 1 July 2009 and the reduced rate is 9%. effective from 1 May 2004 when Estonia Estonia applies extended reverse charge mechanism. joined the EU. An option to tax is available in respect of certain domestic exempt supplies. VAT as such was introduced in Estonia effective from 1992 and is known in rate applies to accommodation, books, Estonian as “käibemaks”. certain periodicals, listed pharmaceutical VAT applies to the supply of goods and products and medical devices. The VAT rate services performed by a taxable person in the on the export of goods, intra- Community course of its business activities in Estonia. supply of goods and certain services is 0% (i.e. exemption with credit). A taxable person is a person who is engaged in business, which is independent economic VAT and all other taxes are administered by activity in the course of which goods or the Estonian Tax and Customs Board (www. services are supplied, and is registered or emta.ee). required to register for VAT. The information covered in this chapter The standard 20% rate applies to all supplies can also be found on www.globalvatonline. of goods and services not qualifying for a com, PwC global website that provides a reduced 9% rate or exemption. A reduced comprehensive guide to global VAT information from over 70 countries worldwide.

PwC Guide to doing business and investing in Estonia 57 11.2 Scope of VAT • listed financial services; • transactions in securities. The following transactions are subject to Estonian VAT: Of the above exempt supplies, an option to • the supply of goods and provision of tax is available in respect to the following: services with a place of supply in Estonia; • disposal of immovable property, except • the import of goods into Estonia; residential housing; • intra-Community acquisition of goods in • lease of or establishment of a usufruct on Estonia; immovable property or its parts, except • the supply of goods or services specified in residential housing; the Estonian VAT Act, if the taxable person • listed financial services and transactions has opted for taxation of those. in securities, unless such a service is provided to the taxable person (or taxable person with a limited liability) of another 11.3 Zero-rating EU member state. Certain supplies are subject to a 0% rate (i.e. exemption with credit or zero-rating), 11.5 Taxable amount including but not limited to: • export of goods; The general rule is that the taxable value • intra-Community supply of goods; of a supply, or of the intra-Community • the products listed in the Annex V of the acquisition of goods or services, is the sales VAT Directive, which can be placed into a price of the goods or services and other licensed VAT warehouse; amounts which the purchaser of the goods, • supply of services which are not deemed the recipient of the services or a third to be supplied in Estonia. party is to pay to the seller of the goods or the provider of the services for the goods acquired or services received. 11.4 Exempt supplies The taxable value of imported goods is Supplies that are exempt without credit comprised of the customs value of the goods include but are not limited to the following and all duties payable upon import, as well activities of a social nature: as other costs related to the carriage of the • certain universal postal services; goods to the destination, such as commission, • listed health services; packing, transportation and insurance costs • listed social welfare services; which have not been included in the customs • general education services, including value, up to the first place of destination in learning materials, except for business the territory of Estonia. purposes. The taxable value may be subject to The following supplies are also treated as adjustment only when the transaction is exempt without credit: carried out between related parties, and the • insurance services, including reinsurance resulting price “distortion“ would give rise and insurance mediation; to a reduction of VAT revenues to the state • leasing or letting of immovable property budget. As a general rule, the open market or parts thereof; value will represent the taxable value.When • immovable property, except for the supply there are no comparable sales of goods before the first occupation of buildings or or services, then the tax base will be the their parts as well as renovated buildings purchase price or the cost price for goods or their parts; and the full cost for services.

58 Guide to doing business and investing in Estonia PwC Value added tax (VAT)

11.6 Non-deductible input VAT established foreign taxable person will not have to register for VAT in Estonia. Also, In principle, a credit for VAT incurred in the Estonia has introduced VAT warehousing. course of business, except for VAT on tax The products listed in Annex V of the VAT exempt supplies, is given against the output Directive can be put into a licensed VAT tax due to the authorities. warehouse. No deduction is allowed for input VAT incurred on the purchase of goods and services used for: 11.9 Specific reverse charge • the reception of guests; or For the purposes of prevention of VAT • the provision of meals or accommodation evasion, reverse charge mechanism applies for employees (except input VAT on to the domestic supply of waste metal, real accommodation services used during estate, certain gold material and investment business trips by employees). gold. According to the specific taxation There are no restrictions on deducting regime, the VAT is accounted for by the VAT the input VAT incurred in relation to the liable purchaser and not by the supplier. For purchase and use of company (passenger) real estate and investment gold, the reverse cars and gasoline. However, the private use charge only applies when the seller has of the company (passenger) car is treated opted for taxation of sales. as a self-supply, on which, generally, the company has to pay VAT on a monthly basis in the fixed amount of EUR 43 (in addition 11.10 VAT compliance to fringe benefit taxes), regardless of the age Registration or the model of the car. If the taxable supplies of Estonian businesses or fixed establishments of foreign businesses 11.7 VAT incentives in Estonia exceed EUR 16,000 in a calendar year, VAT registration is required. Under certain conditions, importers registered for VAT purposes in Estonia are Voluntary registration is also possible, even able to account for VAT on imported goods, if the threshold is not reached. including capital goods, in their monthly VAT registration is effected within five VAT returns. working days. The Estonian VAT number starts with a prefix EE which is followed by nine digits: EE123456789. 11.8 Simplification measures Self-billing is allowed in Estonia. Each self- Estonia has elected to extend the reverse bill must be accepted by the supplier. The charge mechanism to all local supplies terms and procedure shall be fixed by the of goods and services (for instance the parties in the written agreement. supply of goods with installation, services relating to real estate, etc.) if the supplier Certain transactions of foreign businesses is a foreign taxable person, who is not require Estonian VAT registration without established (i.e. does not have a fixed any threshold (e.g. intra-Community supply establishment) and is not registered for VAT of goods from Estonia). purposes in Estonia. The liability to pay tax Generally, a VAT representative is only is shifted to the customer (the recipient of required for the registration of non-EU goods or services), who is registered for businesses. VAT in Estonia. In this situation, a non-

PwC Guide to doing business and investing in Estonia 59 Accounting requirements services; • the quantity of the goods or extent of the VAT taxpayers have an obligation to keep services; records on: • the price of the goods or services exclusive • the amounts of input VAT relating to of VAT and any discounts, if these are not taxable and exempt supplies; included in the price; • taxable supplies by rate and tax exempt • the taxable amount divided by different supply; VAT rates together with the applicable VAT • the amount of output VAT by rate; rates or the amount of tax exempt supply; • the amount of deductible input VAT; and • the amount of VAT payable in Euros; • all other particulars necessary to prepare a • the date of dispatch of the goods or VAT return. provision of services and/or an earlier Specific regulations are laid down by the date of receipt of full or partial payment Ministry of Finance regarding the content for the goods or services if the date can be and form of the VAT accounting. determined and differs from the date of The VAT legislation lays down a retention issue of the invoice. obligation for a period of seven years. This In certain cases reference to the relevant retention period applies to the documents clause of the VAT Act or the article of the EC that should be kept according to Estonian VAT Directive shall be added. The invoice VAT Law (i.e. copies of invoices and credit has to be submitted to a recipient within invoices issued by or on behalf of the seven days after the date of the taxable taxable person, original invoices for goods event which is the dispatch of goods or the and services received by taxable persons, provision of services, or receipt of partial and customs declarations certifying the or full payment (except in case of intra- import of goods). Community supply of goods and provision Books, registers and records may be of B2B services). archived in any form provided that the If the liability to account for VAT is shifted chosen data carrier allows printing of the to the recipient of goods or services, i.e. stored information. VAT invoices need to reverse charge VAT applies, a clear reference be archived in the form guaranteeing the on the invoice shall state so. integrity of the content. Invoicing in a foreign language and currency A taxable person may choose the place is allowed. However, the VAT amount must at which invoices are stored on condition be presented in Euros. that the person makes the invoices or Returns and payment information stored therein immediately available to the tax authority upon request. The VAT accounting period is generally a calendar month, and VAT should be declared Information in a VAT invoice and paid by the 20th day of the following The following information is required to be month. stated on the VAT invoice: VAT refund to foreign businesses • the name, address and the VAT registration number of the supplier; The EU business is entitled to a refund of • the serial number and the date of issue of Estonian VAT, if: the invoice; • it is registered for VAT purposes in its • the name and address of the recipient of home country; goods and services; • the VAT to be refunded would be • the name or a description of the goods or recoverable to the EU business also in its

60 Guide to doing business and investing in Estonia PwC Value added tax (VAT)

home country; • the VAT to be refunded would be recoverable by Estonian VAT liable persons under the same conditions; and • the VAT refund application is submitted via the electronic portal set up by home country at the latest on 30 September of the calendar year following the refund period. Input VAT paid on representation costs and provision of meals to and accommodation of employees of the applicant, except the accommodation during the business trips by employees, is not refunded. The non-EU business is entitled to a refund of VAT paid in Estonia if: • it is registered for VAT purposes in its home country; • the VAT to be refunded would be recoverable by Estonian VAT liable persons under the same conditions; and • the respective non-EU country grants reciprocal rights for VAT refunds to Estonian residents. At present, reciprocity is accepted for Switzerland, Norway, Iceland, Israel and Croatia. VAT refund applications can be submitted by EU businesses for a period of not less than three months within a calendar year and the minimum VAT amount to be refunded must be at least EUR 400. In cases of annual submissions of refund applications, the minimum VAT amount must be at least EUR 50 and for non- EU business, the minimum VAT amount must be at least EUR 320. Generally, the VAT refund for EU businesses is granted within four months of the date of submitting electronically the official refund application and VAT invoices. For non-EU businesses, the VAT refund is granted within six months and the VAT refund application must be accompanied with the original VAT invoices and the VAT registration certificate (issued by the VAT Authorities of the home country).

PwC Guide to doing business and investing in Estonia 61 12 PwC in Estonia

We are proud to offer services to more than countries connect their thinking, experience, 300 clients in Estonia, including leading industry knowledge and business domestic and multinational companies and understanding to serve our clients and public services institutions. The clients of enhance value. PwC in Estonia range from the largest and Our success in meeting today’s business most complex organisations to innovative challenges rests on the way we approach entrepreneurs. our work. PwC serves significantly more than half Corporate social responsibility of the largest companies in Estonia. Our services are tailored to match the needs and We know that it takes more than just nice requirements of all of our clients depending speeches and good intentions when making on their size and specific needs. the world a better place to live. It requires one to make a contribution and deliver real While we have experience working with all actions. industries represented in Estonia, we have built particularly strong expertise in areas In the world we live and do business such as banking, insurance, wholesale trade, in, it is necessary to make a lasting consumer goods, forestry, real estate, energy, contribution. It may be a monetary telecommunications and infrastructure. support, an environmentally responsible behaviour, advising of those in need or More than 120 specialists provide daily anything else. Therefore, on top of client professional assurance, tax, legal and work, we feel responsibility for the wider business advisory services to clients in business environment – what we do, helps Estonia by making use of their industry- increasing the transparency and reliability focused expertise and international of the Estonian business environment, we competence. conduct our business in an honest and Worldwide, the PwC firms’ headcount is ethical manner, we participate in vocational more than 184,000. All our people in 157 associations and legislative drafting, we

62 Guide to doing business and investing in Estonia PwC PwC in Estonia

share our knowledge in training sessions and seminars. PwC 75% PwC provides audit In Estonia, we support, among others: KPMG 19% services to more • Estonian Children’s Fund, where than a half of the we’ve been three years a main sponsor companies listed at Tallinn Stock for contributing into the orphans’ Exchange opportunities in obtaining higher education. • Narva-Jõesuu orphanage, Deloitte 6% • Students’ and graduates’ organisations, We care about the society – we share our knowledge with students and sponsor students’ events. We care about those we work with – respect and value our colleagues, share work-related knowledge and experience, appreciate healthy ways of living and promote sports. Deloitte 13%

We think green and save nature in the office PwC 53% PwC has the and outside. largest market share in Big 4 in auditing Estonian KPMG 21% leading companies 12.1 Assurance services (business daily PwC is the leading audit and assurance Äripäev TOP 50 Estonian companies services provider in Estonia. Our audit by turnover) clients include 60 of the public interest entities, we audit 75% of the companies E&Y 13% listed at Tallinn Stock Exchange. Our audit approach, at the leading edge of best practice, is tailored to meet the needs of any size organisation as evidenced by our appointment as auditor to hundreds of small and mid-size businesses in addition to large corporations. Deloitte 16 Our audit explores and thinks more widely KPMG 28 about our clients’ businesses as a whole, 50 public interest enabling us to offer new solutions to the entities have appointed PwC as problems, helping the clients to learn from PwC 60 their auditors what has happened to avoid issues in the future. The services that we provide include: • audit of financial statements prepared in E&Y 21 accordance with IFRS; • audit of financial statements prepared in accordance with the generally accepted accounting principles in Estonia;

PwC Guide to doing business and investing in Estonia 63 • review of financial reporting; • Tax compliance: Monthly tax return • agreed-upon procedures; preparation/submission, including indirect • expert opinions on accounting technical tax (VAT return/EC Sales listing/Intrastat) issues; and direct tax (corporate income/payroll • training on accounting and financial taxes compliance). reporting. • Payroll compliance: Monthly payroll administration and general advice on employment matters. 12.2 Tax services • Company administration: Registrations (PE, VAT, foreign employer), The purpose of the Tax Services practice other ongoing administrative activities of PwC in Estonia is to assist clients in (i.e. opening a bank account, set-up of finding tax-efficient business solutions and e-services for tax return filing purposes, managing tax risks. providing mailbox function, assistance in We work closely with our colleagues in other recovery of taxes etc). PwC offices worldwide and use our access • Tax review: Periodic (annual, quarterly) to international knowhow and long-term tax review of the monthly indirect, direct experience to quickly and efficiently solve and/or payroll tax returns submitted to tax issues that arise both locally and in Tax and Customs Authorities etc. foreign jurisdictions. We provide tax services mainly in the following areas: 12.3 PwC Legal • practical implementation of Estonian tax PwC Legal offers a wide range of legal law; services to support the private and public • international taxation and tax structuring; sector in close cooperation with PwC audit, • transfer pricing; tax and business advisory services. • tax due diligence; PwC Legal operates within the global • administration of tax audits and tax network of firms, uniting more than 2,000 disputes; lawyers working in over 80 countries • preparation of requests for advance worldwide. This allows us to provide complex clearances and binding rulings; professional services with wide geographical • individual taxation and preparation of coverage through a single point of contact. personal tax returns. With its unique approach, PwC Legal offers We also provide tax training courses both a seamless service of the highest professional generally and in response to specific client standards across continents both in its requests. legal services and the related tax, advisory, 12.2.1. Tax management and consultancy and audit services. accounting services Our lawyers combine legal expertise with Where a company has decided to expand a practical business approach based on our its business to Estonia through its local international experience. subsidiaries, branches or permanent Practice Areas establishments and there is no finance • Mergers and Acquisitions function support available the following • Banking, Finance and Insurance functions can be assigned to PwC Estonia: • Employment • Accounting: Day-to-day bookkeeping • Corporate and corporate secretarial and preparation of the annual accounts. services

64 Guide to doing business and investing in Estonia PwC • Public procurement • Data Protection • Insolvency and restructuring • Competition law • Energy and environmental law • Dispute settlement.

12.4 Advisory services PwC has a unique, dedicated and most experienced advisory team in Estonia that offers advice and support around key client issues. We bring the highest quality combination of financial, operational and commercial insight into servicing the needs of our domestic and international clients. Our focus areas include: • Consulting – helps in improving the efficiency and effectiveness of our clients’ key business operations. Using our excellent skills in finance, risk management and compliance, IT systems and operations, we assist in the identification and implementation of cost saving initiatives, improvement of management and control, identification and management of risk and quality improvement. • Deals - focuses on the deal continuum from strategy through execution to post deal integration, including due diligence and valuations, raising finance, helping corporates and investors to sell or buy businesses, negotiating and structuring deals, advising clients in Public Private Partnership and ohter large infrastructure projects. Our team has a wide range of services tailored to the need of public sector clients and we extensive experience in business restructuring, dispute analysis and investigations and various other specialist areas.

PwC Guide to doing business and investing in Estonia 65 Appendices

Appendix A Andorra, Antigua and Barbuda, Argentina, Tips for business visitors Australia, Bahama, Barbados, Bosnia and Herzegovina*, Brazil, Brunei, Canada, Chile, A Visas Costa Rica, El Salvador, Guatemala, Holy See, Nationals of the European Union, the Honduras, Hong Kong, Israel, Japan, Macao, European Economic Area (EEA) and any Macedonia*, Malaysia, Mauritius, Mexico, third-country national holding a residence Monaco, Montenegro*, New Zealand, permit of a Schengen State (Austria, Belgium, Nicaragua, Panama, Paraguay, Réunion, Bulgaria, Croatia, Cyprus, Czech Republic, San Marino, Saint Kitts and Nevis, Serbia*, Denmark, Germany, Greece, Finland, France, Seychelles, Singapore, South Korea, USA, Hungary, Iceland, Ireland, Italy, Latvia, Taiwan, Uruguay, Venezuela. Liechtenstein, Lithuania, Luxembourg, Malta, *only for the biometrical ordinary passports holders Norway, Poland, Portugal, Romania, Slovakia, Business hours Slovenia, Spain, Sweden, Switzerland ,the Netherlands and United Kingdom) do not The hours between 8 am and 6 pm are need a visa to enter Estonia.. The holders considered to be standard business hours. of passports of the following countries Public holidays and regions do not need a visa to enter • 1 January – New Year’s Day; Estonia for stays of no more than three • 24 February – Independence Day; months in a six month period: Albania*, • March/April – Good Friday and Easter Sunday;

66 Guide to doing business and investing in Estonia PwC Appendices

• 1 May – May Day; for resident (in certain cases also for non- • May/June – Whitsunday/Pentecost; resident) individual taxpayers: • 23 June – Victory Day; 1. The annual tax-exempt basic allowance • 24 June – Midsummer Day; for resident individuals is € 1,728. • 20 August – Day of Restoration of Independence; 2. In 2013, an additional personal allowance • 24 December – Christmas Eve; (€ 1,728 ) is granted to one resident parent • 25 December – Christmas Day; per each child starting from the second child. • 26 December – Boxing Day. 3. An additional tax exempt basic allowance Credit cards (€ 2,304) is available if an individual has received a state pension and/or a compulsory Generally, credit cards (Visa, Mastercard/ accumulative pension and/or a pension Eurocard, American Express etc.) are widely under the effective social tax treaties. accepted in shops, restaurants and hotels. Some taxies also accept credit cards. 4. An additional tax exempt basic allowance (€ 768 ) is available, if a compensation International time payment for an occupational accident or GMT + 2 hours occupational disease has been received. This exemption cannot be used, if such Weights and measures compensation is received as an insurance The International System of Units indemnity. (abbreviated SI) is used in Estonia. The 5. Interest on a loan and/or a finance metric system is used in everyday commerce lease for the purpose of acquiring a and in science. single-residence building or apartment. The deduction is given only for the one Appendix B residential housing per tax period. Tax rates 6. Education expenses paid to a licensed B school or a foreign educational institution Corporate income tax rates of equal status during the tax period are 21/79 deductible for a resident individual if these are paid by the individual for himself,, or for Tax depreciation rates his certain family member who is under 26 There is no adjustment of accounting profits years of age. for tax purposes; distributable profits are 7. A resident individual may deduct determined based on financial statements from taxable income a certain amount drawn up in accordance with Estonian GAAP of charitable contributions made to non- or IAS/IFRS. profit associations and foundations listed Withholding taxes by the Government, as well as to cultural, sport, educational, health or social security 5% / 10% / 15% / 21% institutions belonging to the state or local Individual tax rates authorities and public universities. 21% 8. Premiums to certain pension schemes and the expenses paid to buy shares of Personal allowances (and/or resident pension funds qualifying under the credits) law may be deducted from taxable income. Such a deduction is limited to lesser of the The following deductions are available

PwC Guide to doing business and investing in Estonia 67 two: € 6,000 or 15% of the income derived Estonia are allowed under certain conditions during the tax year from which business to file tax returns as resident individuals in expenses (if any) have been deducted. order to benefit from deductions available to Estonian residents. 9. The 2% employee’s unemployment insurance contributions and 2% (or 3%, if Non-resident individuals of another EU opted so in 2013) compulsory accumulative Member State who have taxable income in pension contributions. Estonia are allowed under certain conditions to file tax returns as resident individuals in 10. Contributions to a foreign national social order to benefit from deductions available to security scheme if such contributions were Estonian residents. mandatory under the laws of the respective country and were paid from the income Tax on foreign nationals taxable in Estonia. working in Estonia According to the restrictions imposed on 21% deductions available to resident individuals from taxable income, the total amount of Wealth tax deductions, which includes the total of items Estonia does not levy a wealth tax. 5 to 7 (see above) for a resident individual in 2014 cannot exceed the lesser of: Estate and/or inheritance and/ • 50% of the taxable income of the or gift tax rates respective tax year, or Estonia does not levy estate, inheritance or • € 1,920. gift taxes. The deductions under item 7 are limited to 5% Capital tax of the total income derived during the tax year from which business expenses (if any) and the Estonia does not levy a capital tax. above items 1 to 6 have been deducted. Indirect taxes Non-resident individuals of another EU 9% and 20% VAT Member State who have taxable income in

Appendix C - Withholding taxes The following WHT rates apply to dividends, interest, and royalties paid to a recipient C or beneficial owner resident in a tax treaty country. The lower of the domestic or the treaty rate is given.

Recipient Dividends Interest Royalties % (1) % (2) % (3) Non-treaty 0 0/21 0/10 Treaty: Albania 0 0 5 Armenia 0 0 10 Austria 0 0 0/5/10 (4) Azerbaijan 0 0 10 Bahrain 0 0 0 Belarus 0 0 10 Belgium 0 0 0/5/10 (4) Bulgaria 0 0 0/5 Canada 0 0 10

68 Guide to doing business and investing in Estonia PwC Appendices

Recipient Dividends Interest Royalties % (1) % (2) % (3) China, People’s Republic of 0 0 10 Croatia 0 0 10 Cyprus 0 0 0 Czech Republic 0 0 0/10 Denmark 0 0 0/5/10 (4) Finland 0 0 0/5/10 (4) France 0 0 0/5/10 (4) Georgia 0 0 10 Germany 0 0 0/5/10 (4) Greece 0 0 0/5/10 (4) Hungary 0 0 0/5/10 (4) Iceland 0 0 5/10 (4) India 0 0 10 Ireland, Republic of 0 0 0/5/10 (4) Isle of Man 0 0 0 Israel 0 0 0 Italy 0 0 0/5/10 (4) Jersey 0 0 0 Kazakhstan 0 0 15 Korea, Republic of 0 0 5/10 (4) Latvia 0 0 0/5/10 (4) Lithuania 0 0 0/10 Luxembourg 0 0 0/5/10 Macedonia 0 0 5 Malta 0 0 0/10 Mexico 0 0 10 Moldova 0 0 10 Netherlands 0 0 0/5/10 (4) Norway 0 0 5/10 (4) Poland 0 0 0/10 Portugal 0 0 0/10 Romania 0 0 0/10 Serbia 0 0 5/10 (5) Singapore 0 0 7.5 Slovakia 0 0 0/10 Slovenia 0 0 0/10 Spain 0 0 0/5/10 (4) Sweden 0 0 0/5/10 (4) Switzerland 0 0 0/5/10 (4) Thailand 0 0 8/10 (6) Turkey 0 0 5/10 (4) Turkmenistan 0 0 10 Ukraine 0 0 10 United Arab Emirates 0 0 0 United Kingdom 0 0 0/5/10 (4) United States 0 0 5/10 (4) Uzbekistan 0 0 10 Notes: 1. Under the domestic law, the rate is nil for all non-resident individual and corporate shareholders. 2. As of 1 January 2014, under the domestic law, the rate is nil for all non-resident individual and corporate shareholders. 3. The rate is nil for arm’s-length royalties paid to an associated EU or Swiss company if certain conditions are met. 4. The lower 5% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment. 5. The lower 5% rate applies to royalties paid for the use of copyright royalties, excluding software royalties. 6. The lower 8% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment.

PwC Guide to doing business and investing in Estonia 69 Appendix D- Setting up in Estonia – a checklist 5. The management board submits an The most common type of legal entity being application petition to the Commercial set up by foreigners in Estonia is the Private Register together with the following D Limited Company “Osaühing, OÜ”. documentation: The most common way of setting up a 1) A notarised Memorandum of limited company would be to establish one Association; with help from a professional firm. It is 2) Notarized Articles of Association; also possible to purchase a pre-registered 3) A bank notice concerning the company. Pre-registered companies are sold payment of share capital ; by numerous accounting and law firms. However, in addition to the stamp taxes, 4) The names and personal a fee will be charged by an intermediary identification codes of the members (generally EUR 1,500-2,000). For registering of the supervisory board, and of a new Private Limited company, the steps auditors, if the company has auditors; below should be followed: 5) Information on the planned 1. The following documentation is prepared principal activity; in Estonian: 6) Contact details of the private 1.1. Memorandum of Association, setting limited company (telephone and fax out, among other things, the business numbers, e-mail and Internet home name, address, area of activity, names and page address, etc.). residences of the founders, the amount From 2007 registration with an expedited of share capital, the nominal value of procedure is also available. Using the the shares and their division among features of the Estonian electronic the founders and the members of the identification system and digital signature, management board. it is possible to register a company 1.2. Articles of Association, setting out, electronically with an expedited procedure among other things, the name, address, (within two hours). However, this procedure business activity, share capital, procedure is limited to founders who are using for payment of shares, reserve capital, and Estonian ID card or Mobile ID or are the the other terms and conditions for the company. holders of Finnish, Portugese or Belgian ID cards or users of the Lithuanian bank-link 2. The founders sign the documentation at system. the Notary Public. From 1 January 2011, private limited 3. The Notary Public notarises the company may also be established without documentation. any minimum capital requirement, provided 4. The founder(s) visit a bank to open a that the founders are private individuals bank account in the name of the private only and the planned minimum capital does limited company being founded, and share not exceed EUR 25,000. The capital of such capital (minimum EUR 2,500) must be a company will consist of claims against the paid to a designated bank account. If non- shareholders, who are liable with all of their monetary contributions are made, special assets up to the amount they have promised rules apply. to pay to the capital of the company.

70 Guide to doing business and investing in Estonia PwC Appendices

Appendix E - Acquiring a business enterprise – • Main cost of sales components: material, a checklist labour, overheads, other; cost of sales 1. Business overview trends by product. E • Breakdown of manufacturing cost by Key business information product. • Brief description of activities. • Breakdown of manufacturing overheads • Key performance and financial ratios by component. overall and for each main activity. Main vendors/suppliers Key historical events • Main vendors/suppliers; purchase • Brief history and significant events; major contracts and commitments; currency of acquisitions and disposals, etc. purchases. Entity organisation Terms of trade and payables • Legal structure, indicating main subsidiary • Terms of trade, days’ purchases undertakings. outstanding; ageing analysis; reason for • Organisational structure (if different). delays in settlement. • Key locations and premises. Inventories 2. Sales, products, customers • Summary of inventories by category; and receivables monthly inventory levels. • Location; method of valuation; treatment Market and sales of overheads; inventory records and • Analysis of sales; sales by product/activity; control. sales by region; monthly sales. • Inventory roll forward. • Description of main product lines and • Analyses of inventory reserve: raw their characteristics. material/finished goods ageing analyses, • Analysis of sales by product in quantity inventory turn; excess inventory and value; mix changes; seasonal patterns (comparison with consumption/sales), and shifts in patterns. lower of cost and net realisable value • Profitability by product, gross margin, analysis. trend, growth. 4. Management and employees Customers • Customer base concentration. Management structure • Key customers and contractual • Functional and line management charts arrangements. for key functions. Receivables Employees • General client terms of trade. • Headcount analyses by age, location and • Credit control; discounts allowed; function; workforce age profile. factoring of debt; product warranties, Labour cost analysis provisions for credit notes/returns. • Analysis of all labour related costs; • Receivables analysis; ageing, roll analyses by type of employee / by forward of receivables reserve, major department / by location, average cost per past due accounts; receivables day sales employee; incentive schemes. outstanding. Severance plans and costs 3. Purchases, vendors/suppliers • Redundancy payments (history and detail and inventory of any schemes); severance provisions, roll forward analysis, description of any Cost of sales components existing plans.

PwC Guide to doing business and investing in Estonia 71 Other labour issues • Basis of valuation; depreciation rates; • Retirement schemes and other employees’ profits / losses on disposals. benefits and related liabilities. • Fixed assets held under finance leases. • Benefit schemes. • Fixed assets register; extent of physical verification. 5. Historical results • Nature of intangible assets; valuation; Summary of results amortisation policy; own costs (research, • Sales; cost of sales and margins; gross development, other) capitalised. profits; overheads; EBIT; EBITDA; ratio • Goodwill; patents, copyrights; brands; and trend analysis. capitalised research and development. • Any significant change in accounting Other assets and liabilities policies or practices or impact of • Summary of other assets and liabilities; inappropriate policies. review unusual items; significant Overheads fluctuations. • Main classes of overheads below gross • Adequacy of provision for outstanding margin by type of cost / by department; liabilities; provision against guarantees significant trends; stand-alone issues. and warranties given; after-sales service. • Sales incentives; licensing; joint ventures. • Retirement and post-retirement benefits; • Promotion, advertising; exhibitions severance payments. expenditure. • Litigation pending; claims not settled. • Analysis and review of other overheads. • Dividends payable / receivable; deferred consideration; other significant balances. Non-recurring items and quality of earnings • Current and deferred taxation liabilities. • Adjusted EBITDA; reason for adjustments (review of management adjustments Net interest bearing debt and further adjustments): nonrecurring • Analysis of the net interest bearing debt by revenue or costs, lost customers, component and maturity (including cash accounting policy changes, reserve and cash equivalents, bank overdrafts, movements, other. loans, intra-group financing, finance • Significant impact on results resulting leases, other interest bearing liabilities). from differences between target and Shareholders’ funds buyer’s accounting policies, if relevant. • Movement in net assets; share capital; • Non-operating items. Reconciliation of share option schemes; distributable/non- EBITDA to net results; appropriateness of distributable reserves. items recorded as exceptional. 7. Cash flows 6. Balance sheets Summary of cash flows Summary of balance sheets • Reconciliation of EBIT, EBIDA and cash • Statement of net assets. flows. • Comment on significant trends; change in accounting policies; any assets with a book Working capital value significantly different from market • Analysis of working capital movements. value. Seasonality • Any non-trading items. • Monthly analyses of cash flows; significant • Significant off-balance sheet items. intra-month cash movements. Fixed assets Capital expenditure • Summary by type of asset and by location/ • Analysis of capital expenditure in value, activity.

72 Guide to doing business and investing in Estonia PwC Appendices

by activity/location and by purpose (for • Projected capital expenditure (for growth, growth, maintenance, compliance / maintenance, compliance/regulatory regulatory purposes). purposes); committed and planned expenditure. 8. Current trading and full • Compare capital expenditure projections year out-turn with identified needs. Current trading • Vulnerabilities and upsides in projected • Review of current year-to-date trading per cash flows. latest management accounts. 10. Stand-alone issues • Compared to budget, previous year-to- date. Operational changes • Comment on reliability of management • Significant changes required for the accounts. entity to operate on a stand-alone basis • Identify and quantify key trends in results. (quantified); nature of the changes required and related timing. Full year out-turn • Present current year-to-date trading and Pro forma results full year forecast and compare to budget • Effect on earnings if the entity had and previous year in the same format. operated on a standalone basis over the • Comment on reliability of past budgets past year(s). and forecasts. • Reconciliation between reported results • Extrapolate key trends and form a view and pro forma stand-alone results. on achievability of management’s full year 11. Management information, forecast. controls and information 9. Future results and cash technology flows Management information Projected results • Arrangements for management and • Summarise the projections, key lines in accounting information; reliability and the profit and loss account, and compare efficiency; reconciliation with financial to historic results and current year accounts; year-end adjustments; quality of outturn. internal controls, auditors’ management • Confirmation that accounting policies are letters. consistent with last accounts. Accuracy of past budgets and forecasts • Main assumptions underlying forecast and • Soundness and appropriateness of system; projections. effectiveness of action taken on variances; • Analysis of sales, product mix, volume/ frequency of updating; accuracy and price changes assumptions; analysis of reliability of past budgets and forecasts. projected cost of sales, manufacturing • Comparison of budgeted and actual results overheads, sales and general for previous years. administration overheads. • Areas of vulnerability and upside. Information technology • IT strategy; facilities; management of IT; Projected cash flows contingency plans; costs of improvements/ • Reconcile projected cash flows with changes. projected results. • Overview of principal software, systems • Projected working capital requirements and applications. compared with past trends; highlight any seasonality.

PwC Guide to doing business and investing in Estonia 73 12. Taxation 13. Insurance and risk Corporate taxation management • Analysis of tax charges; comparison of Key insurance policies effective and nominal tax rates. Treatment • Descriptions of the key insurance policies of deferred tax assets / liabilities. (plant, property, employer’s liability, • Extent to which liabilities agree with the loss of profits, key management life tax administration; outstanding issues; tax insurance), risks covered and associated losses; tax planning; taxable distributable costs; insurance brokers and any intra- reserves. group insurance policy; any uncovered • Overall assessment of risks. significant risk. Local taxes Recent claims and losses • Nature of these taxes; extent to which Analyses of recent claims with reconciliation liabilities are agreed; outstanding issues. of their impact on the results, balance sheet Value added tax and cash flows. • VAT schemes (if applicable); inspections; outstanding issues. Employment taxes • Social charges; administration inspections; outstanding issues.

74 Guide to doing business and investing in Estonia PwC Appendices

Appendix F - Useful sources of information Government websites F The Parliament of Estonia: http://www.riigikogu.ee/ Estonian Government: http://www.valitsus.ee/en/government Ministry of Education and Research: http://www.hm.ee/?1 Ministry of Justice: http://www.just.ee/ Ministry of Defence: http://www.mod.gov.ee/eng Ministry of the Environment: http://www.envir.ee/?set_lang_id=2 Ministry of Culture: http://www.kul.ee/index.php?lang=en Ministry of Economic Affairs and Communications: http://www.mkm.ee/en Ministry of Agriculture: http://www.agri.ee/?lang=en Ministry of Finance: http://www.fin.ee/?lang=en Ministry of the Interior: http://www.siseministeerium.ee/?lang=en Ministry of Social Affairs: http://www.sm.ee/eng.html Ministry of Foreign Affairs: http://www.vm.ee/?q=en Tax and Customs Authorities: http://www.emta.ee/?lang=en Estonian Health Insurance Fund: http://www.haigekassa.ee/eng/ Citizenship and Migration Board: http://www.politsei.ee/en Bank of Estonia: http://www.bankofestonia.info/frontpage/en/ Business groups Confederation of Estonian Trade Unions: http://www.eakl.ee/?lang=7 Other useful addresses and websites PwC Estonia: http://www.pwc.com/ee/en Enterprise Estonia: http://www.eas.ee/index.php?setlang=en-GP http://www.investinestonia.com/index.php Estonian Chamber of Commerce and Industry: www.koda.ee/en

PwC Guide to doing business and investing in Estonia 75 © 2014 AS PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to AS PricewaterhouseCoopers. or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.