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Doing business and investing in Estonia 2015 Contents 5 Office location in Estonia 1 Country profile and investment climate 12 1.1 Introduction 1.2 Government structure 1.3 Legal system 1.4 People 1.5 Economy 1.6 Foreign 1.7 Further reading 2 Business environment 12 2.1 Business climate 2.2 zones 2.3 International agreements 2.4 Legal environment 2.5 Regulations for business 2.6 Property market 3 Banking, finance and insurance 17 3.1 Banking system 3.2 Specialised financial institutions 3.3 Investment institutions 3.4 Capital markets 4 Importing and exporting 20 4.1 Trends in 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- 5 Business entities 22 5.1 Legal framework 5.2 Choice of entity and business forms 5.3 Private limited company (OÜ) and public limited company (AS) 5.4 Partnerships 5.5 Branches 5.6 Representative offices 5.7 Sole proprietorship 6 Labour relations and social security 25 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 30 7.1 Accounting 7.2 Chart of accounts 7.3 Audit requirements

2 PwC 8 system and administration 33 8.1 Tax system 8.2 Direct and burden 8.3 Principal 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 37 9.1 system 9.2 Incentives 9.3 9.4 Deductibility of expenses 9.5 Related party transactions 9.6 Foreign exchange 9.7 Tax computations 9.8 Other taxes 9.9 Branch versus subsidiary 9.10 Holding companies 10 Taxation of individuals 42 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 11 Value added tax (VAT) 44 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 48 12.1 Assurance services 12.2 Tax services 12.3 PwC Legal 12.4 Advisory services 51 Appendices

Guide to doing business and investing in Estonia 3 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 8th out of 175 countries and No 1 from EU countries by 2015 Index of Economic Freedom as well as 17th in Ease of Doing Business by World Bank.

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

4 PwC 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 Viljandi 10141 Tallinn Pärnu Tartu

Tel. +372 614 1800 Kuressaare Põlva Fax. +372 614 1900 www.pwc.ee Valga Võru [email protected]

Guide to doing business and investing in Estonia 5 1 Country profile and investment climate

1.1 Introduction Investor considerations: and a considerable part of the territory A small Nordic country, having close The Republic of Estonia is situated covered with wetlands. economic ties with Scandinavia and in Northern Europe along the Baltic Western Europe Sea. Finland lies to the north of The highest point, Suur Munamägi, Estonia, across the Gulf of Finland. is only 318m (1,043 feet) above sea A favourable geographic location on the Sweden is the western neighbour level. More than 1,500 offshore islands Baltic Sea, a region of intense economic across the Baltic Sea. Estonia borders make up 9 percent of the country’s total activities and growth potential with good Russia in the east, with St. Petersburg territory. The largest of the islands are access to Russia, the CEE countries and approximately 200 kilometres across Saaremaa and Hiiumaa. Estonia is a the EU region the north-eastern border. In the south country of numerous lakes, the largest of Member of both the EU and NATO Estonia borders Latvia. Estonia has which are Lake Peipsi and Lake Võrtsjärv. starting from spring 2004 approximately 1.3 million inhabitants. Member of OECD Estonia has a temperate maritime Part of the Euro zone since 2011 Tallinn, the capital of Estonia, lies climate. on the Baltic Sea coast, only about 60 kilometres (40 miles) south of The Baltic Sea has a strong influence Helsinki, across the Gulf of Finland. The on local weather, especially in the population of Tallinn is approximately coastal regions. Temperature ranges 400 thousand. Other bigger cities are from -7ºC (19ºF) average daily in Tartu, Narva and Pärnu. January to 17ºC (63ºF) average daily in July. Total rainfall is between 500 The territory of Estonia covers 45 and 700 millimetres (20 to 28 inches) thousand square kilometres (17 a year. There may be permanent snow thousand square miles). Estonia cover from December to March and is a lowland country with average the sea may be iced over during these elevation of about 50 meters (160 feet) months.

6 PwC History Estonians have been living in this territory since approximately 2500 B.C., making them among the longest settled of the European peoples. Due to Estonia’s strategic location as a link between East and West, it has been conquered numerous times, and under foreign rule for several centuries.

At the beginning of the 13th century, Estonia was conquered by the Teutonic knights whose castles still dot the countryside. By 1285, Tallinn was a member of the Hanseatic League. During the Middle Ages, the Hanseatic League, which combined 70 Baltic Sea cities, formed one of the most powerful Any other legislative acts must be in international treaties and decide on trading blocs in the world. The German conformity with the Constitution as government loans. merchant families, which settled well as with the generally recognised here, dominated trading activities and principles and rules of international law Pursuant to the Constitution the successive generations of Germans built which are an inseparable part of the Republic of Estonia is not to enter into their manor houses across the country. Estonian legal system. international treaties which are in conflict with the Constitution. The Parliament Germans were only the first among successive waves of conquerors. Danes, According to the Constitution, Estonia If laws or other legislation in Estonia Swedes, Poles and Russians all swept is an independent and sovereign are in conflict with international across Estonia, setting up successive democratic republic wherein the treaties ratified by the Parliament, the regimes, fortifying their towns and supreme power of state is vested in provisions of the international treaty castles, and shipping their goods the people. The people exercise their shall apply. through Estonian ports. supreme power of state through the The President election of the Estonian parliament In the late 19th century a powerful (Riigikogu). The President of Estonia is elected Estonian nationalist movement arose for a five-year term by the Parliament and on 24 February 1918, Estonia Ordinary elections of the 101 members or electoral body consisting of the declared its independence from Russia. of the unicameral Parliament are held members of the Parliament and The period of independence was brief every four years. All citizens over 18 representatives of local governments. and Estonia was forcibly annexed by the years of age have the right to vote, The President is the formal head of Soviet Union in 1940. In 1991, Estonia although some restrictions apply for state and the supreme commander of regained its independence, having the convicted persons. national defence. managed to break free from the Soviet Union without any acts of violence. The Parliament is Estonia’s highest The laws passed by the Parliament Estonia became a member of NATO on legislative authority and it is vested are presented to the President for 29 March 2004 and joined the European with the right to adopt laws. proclamation. The President has a Union on 1 May 2004. Since 1 January right to veto the laws passed by the 2011, Estonia is part of the Euro zone. A distinction is made between ordinary Parliament pursuant to which he/she laws which are passed by a simple may return the act to the Parliament. 1.2 Government structure majority of votes in the Parliament, The highest authority of national and constitutional laws, the adoption If the Parliament does not thereafter legislation in Estonia is the and amendment of which requires a amend the law, the President can Constitution of the Republic of vote by the majority of all members of proclaim the law or has the right Estonia (Eesti Vabariigi põhiseadus). the Parliament. to propose that the Supreme Court The constitution was adopted by a declare the law unconstitutional. If the referendum and came into effect on 29 In addition, the Parliament has the Supreme Court finds that the law is in June 1992, after Estonia had regained right to ratify and withdraw from conformity with the Constitution, then its independence. the President proclaims the law.

Guide to doing business and investing in Estonia 7 The Government (i) county courts and administrative The decisions of county and Under certain conditions other courts adjudicate matters in the first administrative courts are reviewed by state institutions may also exercise instance; courts of appeal in the second instance legislative power. The Government of (ii) appeals against decisions of courts by way of appeal proceedings on the the Republic (Vabariigi Valitsus) and of first instance are heard by courts of basis of an appeal, an appeal against a the ministers carry out the legislative second instance and; ruling, or a protest. function by using the right to pass (iii) the Supreme Court is the court of regulations on the basis of and for the the highest instance. The Supreme Court is the court of implementation of laws (so called intra the highest instance, which reviews legem regulations). County courts as courts of first decisions by way of cassation instance hear all civil, criminal and proceedings, i.e. the parties to If the Parliament is unable to convene misdemeanor matters. The decisions the proceedings have the right in a situation of emergency, the of county courts can be appealed to to appeal to the Supreme Court President of the Republic may, in the courts of appeal (also called circuit against the decisions of the courts matters of urgent state need, issue courts), being the courts of second of appeal. A matter is accepted for decrees which have the force of law. instance. Administrative courts hear proceedings in the Supreme Court administrative matters as courts of first if the statements presented in the As a member of EU since 1 May 2004, instance. appeal show an opinion that the Estonia is bound by EU law. The Ministry of Justice is responsible for the coordination of the harmonisation of Estonian law and EU law, making suggestions about harmonising Estonian legal acts with EU legal acts and giving the ministries and other institutions advice about the EU legal system and the principles of legislation. Local government councils Local Government Councils are regional representative and legislative bodies, elected by the residents of a rural municipality or city for the period of three years. All permanent residents (including citizens and non-citizens) of at least 18 years of age are eligible to vote. Local executive power is vested in local governments that resolve local issues and have local budgets to fulfil their duties. 1.3 Legal system Like all continental European legal systems, the Estonian legal system is founded upon the principle of the priority of legislative acts as a source of law and their precedence over any other sources, such as judicial practice, doctrine or custom.

Courts Estonia has a three-level court system, where:

8 PwC appeals court applied incorrectly, the population is urban, and one- and Spanish), while Hungarian is a or materially violated a procedural third rural. 69% of the population more distant relative. Estonia uses rule that may involve an incorrect is of Estonian ethnicity. The second the Latin alphabet. As a majority of judicial decision. The Supreme largest ethnic group is Russian, the Estonian business community is Court is also the constitutional forming approximately 25% of the internationally oriented, English is review court. population. 1.7% of the population understood and spoken fluently by has Ukrainian roots, and Belarusians a large number of businesspeople. 1.4 People and Finns make up approximately Furthermore, many Estonians speak The total population of Estonia is 1% and 0.6% of the population Russian and, especially in Northern around 1.3 million people. As in respectively. Estonia, Finnish, among other foreign other countries in the region, the languages. population growth rate has been The official language is Estonian. very modest recently. Average life More than one million people speak Estonia is one of the least religious expectancy was 77 years in 2013; Estonian, which belongs to the countries in the world. There is 73 years for men and 81 years for Finno-Baltic group of the Finno-Ugric a tolerance toward all religions women. The population density is language family. Estonian is closely and in general religious beliefs approximately 31 inhabitants per related to Finnish (the similarity is do not affect business activities in square km. Around two-thirds of comparable to that between Italian Estonia. Historically, Estonians are predominantly Lutherans, but religion does not have any significant impact on daily life. There is a considerable Russian Orthodox community in Estonia.

The Estonian education system consists of compulsory basic education, followed by upper-secondary education, at either a general high school or a vocational school. The general education process then offers higher education at university or at professional higher education institution, and the vocational process offers post-secondary education at a technical school. The reformed educational system does, however, provide for movement between the general and vocational processes. Education is mostly provided in Estonian. State and municipal education establishments are mostly free of charge.

Estonia belongs to the European Higher Education Area, created as a result of Bologna process. There are 7 universities and 16 professional higher education institutions in Estonia, including the renowned University of Tartu, Tallinn University of Technology, and other universities. The study programs of the bigger universities tend to be internationally accredited. Several programmes are available in English.

Guide to doing business and investing in Estonia 9 After regaining independence from the products, shipbuilding, electronics, 1.5 Economy Soviet Union, Estonia has been among transportation and various services Transport and telecommunications the most advanced emerging markets remain key sectors of the Estonian are well developed in Estonia. An in Central and Eastern Europe, mostly economy. Estonia produces nearly all efficient road network covers the owing to the success of its socio- of the energy needed for the country, whole of Estonia, though the quality economic reforms over the last 25 supplying large part of its electricity of some secondary roads remains years. Estonia has a liberal market- needs with locally mined oil shale. below western standards. There is based economy. The government has Alternative energy sources such as a well-developed rail connection pursued nearly balanced budgets and wood, peat, and biomass contribute between Estonia and Russia. In low public debt. approximately 15% of primary energy combination with the well-located production. ice-free ports in the northern part Oil shale-based energy production, of the country (the Port of Muuga telecommunications and IT products, Key economic indicators over the near Tallinn being the largest), textiles, chemical products, banking, period 2006-2014 are summarised in Estonia has served as a major transit food and fishing, timber and wood the table below. corridor between the West and

Key economic indicators 2006-2014

2006 2007 2008 2009 2010 2011 2012 2013 2014 GDP In current prices (EUR billion) 13.5 16.2 16.5 14.1 14.7 16.4 17.6 18.7 19.5 Real growth (%) 10.4 7.9 -5.3 -14.7 2.5 8.3 4.7 1.6 2.1 Prices Consumer price index (%) 4.4 6.6 10.4 -0.1 3.0 5.0 3.9 2.8 -0.1 Labour market and wages Unemployment rate (%) 5.9 4.6 5.5 13.5 16.7 12.3 10.0 8.6 7.4 Average monthly gross wages and salaries (EUR) 601 725 825 784 792 839 887 949 - General government budget Revenue (EUR billion) 4.9 5.9 6.1 6.2 6.0 6.4 7.0 7.2 - Expenditure (EUR billion) 4.6 5.6 6.6 6.5 5.9 6.2 7.0 7.3 - Balance (+/-) (EUR billion) 0.3 0.4 -0.5 -0.3 0.03 0.2 -0.05 -0.09 - Foreign trade (special trade system) Exports (EUR billion) 7.7 8.0 8.5 6.5 8.7 12.0 12.5 12.3 12.1 Imports (EUR billion) 10.7 11.4 10.9 7.3 9.3 12.7 14.1 13.9 13.7 Balance of payments Current account balance (EUR billion) -2.0 -2.4 -1.4 0.4 0.3 0.2 -0.4 -0.2 0.0 Current account balance/GDP (%) -15.0 -15.0 -8.7 2.5 1.8 1.4 -2.5 -1.1 -0.1 Direct investments assets’ transaction (EUR billion) 1.1 1.7 0.9 1.0 0.9 -1.0 1.0 0.5 0.6 Direct investment liabilities’ transaction (EUR billion) 1.4 2.2 1.3 1.3 1.9 0.8 1.4 0.7 1.2 International investment position (at end of year) International investment position (EUR billion) -9.9 -11.6 -12.5 -11.3 -10.5 -9.1 -9.2 -8.9 -8.0 Direct investment assets’ positions at the end of 3.6 5.8 6.3 5.9 6.5 6.1 7.1 7.5 8.4 period (EUR billion) Gross external debt (EUR billion) 12.9 17.4 19.0 17.3 16.5 16.7 18.0 17.5 19.0

Source: Bank of Estonia

10 PwC East. Estonia is connected to the 1.7 Further reading Background on the investment climate international flight network via Some general tips for business in Estonia: its international airport in Tallinn, visitors on visas, currency and public http://www.investinestonia.com/ serving direct flights to numerous holidays can be found in Appendix European cities. B. For further background reading Information about foreign trade: on Estonia, the web pages referred http://www.estoniantrade.ee 1.6 Foreign trade to below contain some very reliable In 2014, the of goods totalled material. Information about the Estonian EUR 12.1 billion and total imports language: amounted to EUR 13.7 billion. General information about Estonia: http://www.einst.ee/publications/ Estonian foreign trade is mainly based http://www.visitestonia.com/ language/ on strong economic ties with Finland, Sweden, Russia, Latvia, Lithuania Statistical information about Estonia: Information about the capital city and Germany, as well as with other http://www.stat.ee/en Tallinn: countries. http://www.tourism.tallinn.ee/eng

Estonian exports and imports by commodity groups, 2014

Exports % of total Imports % of total Machinery and transport equipment 4.1 34% 5.0 37% Manufactured goods classified chiefly by material 1.8 15% 2.1 15% Mineral fuels, lubricants and related materials 1.3 11% 1.7 13% Crude materials, inedible, except fuels 1.0 8% 0.5 4% Food and live animals 0.9 8% 1.0 8% Chemicals and related products 0.7 6% 1.5 11% Other 2.3 19% 1.9 14%

Source: Statistical Office of Estonia

Guide to doing business and investing in Estonia 11 2 Business environment

2.1 Business climate Investor considerations: of the Government has Member of the Eurozone, NATO and Estonia is the leading country mostly been aimed at achieving OECD, one of the most politically stable in Central and Eastern Europe long-term economic growth. The countries in CEE region in terms of attracting foreign overall Government attitude is very direct investments. Estonia is welcoming toward foreign capital, No corporate on reinvested within 3 hours flight from most especially into sectors that are export profits, the lowest public debts in the EU major European cities. Overall, oriented, innovative and support Highly educated and motivated workforce the business climate in Estonia regional development. 0% corporate Frontrunner in applying modern IT solutions: is characterised as free business income tax is imposed on all reinvested wide range of state e-services, e-banking, and trade in alignment with EU earnings in Estonia. nation-wide ID-card, digital signature legally practices. Many companies are equal to handwritten signature. subsidiaries of European, particularly Estonia is one of the leading Most transparent and the least Scandinavian, firms. Estonia has countries in the world in creating and corrupt country in CEE (Transparency some of the highest credit ratings implementing e-government solutions International Corruption Perception Index in the region (Standard & Poor: and cyber security. 99% of peole use 2014, 26th out of 174 countries) AA-; Moody’s: A1; Fitch IBCA: A+). internet banking services and more Estonia is a member of euro area than 95% complete their income tax Economic freedom regarded as one of from 2011, but the country’s cost return over the internet. the highest in the World and the best in level is still significantly lower than EU (Economic Freedom World Ranking that of neighbouring Scandinavian In the 2015 parliamentary elections 2015, 8th out of 178 countries) countries. 30.5% of all participants, voted over the Regulatory environment is conducive internet. for starting and operating a company Throughout the period of regained (WorldBank Ease of Doing Business independence, the economic and Since 2015 non-residents may apply 2014, 17th out of 189 countries) for e-Residency which is a state- issued secure digital identity that allows digital authentication and the digital signing of documents. The purpose of e-residency is to make life easier by using secure e-services that have been accessible to Estonians for years already. By providing e-residency, we are moving towards the idea of a country without borders.

Estonia hosts both the cyber security centre of NATO and the IT-agency of the European Union.

2.2 Free trade zones

There are four free trade zones established under separate orders of the Estonian Government: at the ports of Muuga; Paldiski and Sillamäe in the northern coast of Estonia as well as in Valga in the south-east Estonia (see also chapter 4.6).

12 PwC 2.3 International anti-competitive agreements, so-called contracts, public services, product agreements cartels, are processed in criminal labelling, etc. Estonia is a member of the WTO from proceedings. Investor and depositor protection 1999 and the European Union and Price controls NATO from 2004. In 2010, Estonia Estonia has adopted the EU directives became 34th member of OECD, the The Estonian Competition Act provides for protection of bank deposits organisation that includes most of the a general rule under which agreements and funds invested by investors via world’s wealthiest and most developed between concerted practices and investment institutions. The respective countries. Currently Estonia has 56 decisions by associations of undertakings schemes are established with the treaties in force. which directly or indirectly fix prices or Guarantee Fund Act. any other trading conditions, including 2.4 Legal environment prices of goods, tariffs, fees, mark-ups, Bank deposits (including the interest) Estonia has systematically reformed its discounts, rebates, basic fees, premiums, are guaranteed and compensated for legal system since the 1990s with the additional fees, interest rates, rent or in the event of a credit institution’s top policy priority being facilitating lease payments applicable to third insolvency to the full extent up to entrepreneurship. Legislators and parties are prohibited. This principle is EUR 100,000 per depositor in any one governments have always displayed applied in conformity with the European credit institution registered in Estonia, the clear will to make the business Commission Notice on Vertical including the deposits of a foreign environment attractive in order to Restraints (2000/C 291/01) which bank’s Estonian branch. benefit from tax revenues and the jobs prohibits the establishment of a fixed created by attracting foreign investors. resale price. However, the provision of a Investments of clients of investment list of recommended prices or maximum institutions registered in Estonia are The Estonian legal environment prices by the supplier to the buyer is not guaranteed and compensated to the favours entrepreneurship and the considered in itself a violation of price full extent up to EUR 20,000 in the entrepreneurial mindset. Foreign controls regulation. event of investment fund’s insolvency. investors have equal rights and Investor protection does not cover Consumer protection obligations with local entrepreneurs. investment risk, i.e. losses caused All foreign investors may establish The principal legal acts regulating by decreases in the market value of a company and conduct business consumer protection are the Consumer investments or bankruptcy of an issuer in Estonia in the same way as local Protection Act, the Trading Act, of securities. Also the investments of investors; no restrictions apply. the Advertising Act and the Law of professional investors are not subject Obligations Act. The protection of the to compensation by the Guarantee In the process of streamlining the legitimate rights of consumers and Fund. Estonian judicial system the average development and the implementation length of civil proceedings has of consumer policy in accordance with Intellectual Property decreased over 25% in last two years, the provisions of UN Guidelines, the being 145 days in the courts of first Consumer Protection Act and of EU The principal Estonian laws governing instance on the average in 2014. consumer policy is vested mainly in the intellectual property are the Copyright Estonian Consumer Protection Board Act, the Patents Act, the Trademark 2.5 Regulations for (CPB). Act, the Utility Models Act, the business Industrial Design Protection Act and Competition policy The three most important functions of the Geographical Indication Protection the CPB are to supervise the consumer Act. Business names and trade secrets Estonian competition policy is market, settle consumer complaints and are protected under the Commercial generally in line with EU competition inform and advise consumers. The CPB Code and the Competition Act. Estonia principles. constitutes an inexpensive alternative has been a member of the WIPO (World to the civil courts, and the decisions of Intellectual Property Organization) since The Estonian Competition Authority is the Board serve as guidelines for trade 1994, and also a signatory to several the responsible body for supervisory enterprises. The Board is entitled to international treaties, including the Paris and regulatory activities in this impose fines and prescriptive orders and Berne Conventions, the Geneva Act area. The Authority consists of the in case of violation of the Consumer of the Hague Agreement and the Madrid Competition Division, Energy and Protection Act and other regulations. Protocol. Water Regulatory Division and Together with other state and local Patents Communications Regulatory Division. government institutions the Board also Estonia is one of the few countries monitors the following fields: product Inventions in any field of technology in the European Union, where the safety misleading advertising, consumer are entitled to patent protection

Guide to doing business and investing in Estonia 13 Acquisitions provided they meet the criteria set The term of protection for registered forth in the Patent Act. An invention trademarks lasts for ten years and is The two main types of acquisitions are may be in the form of a device, process renewable for further ten-year periods. acquisition by way of business (asset) or material, including biological purchase, and acquisition by way of Copyrights material, or their combination. An share purchase. The actual type of invention is patentable if it is new, Copyright protection extends to acquisition depends on the intentions involves an inventive step and is any original works in the realms of of the parties, e.g. whether the capable of industrial application. literature, art or science that are investor is interested in whole or part The creator of a patented invention expressed in an objective form and are of the business of the target company, has a moral right of authorship. This perceived and reproduced in this form and what are the outstanding right is inalienable and extends for an either directly or by means of technical liabilities of the target company, indefinite term. Creators also have the devices. A copyright to a work arises etc. It is always recommended to economic right to receive fair proceeds automatically upon the creation of conduct the due diligence before the from profits made on the invention. the work; neither publication of the acquisition, regardless of the type of Economic rights are transferable and work nor registration of a copyright is acquisition. inheritable. necessary. Transfer of business An invention is granted patent Estonian copyright law provides for The Estonian Commercial Code protection upon its registration in the both moral and economic rights. defines business as an economic State Registry of Patents. The owner Protection of moral rights is perpetual entity through which the company of the patent has exclusive rights to while economic rights are subject is operating. One company can have the patented inventions throughout to protection for 70 years from the several enterprises, e.g. structural the validity of the patent term (20 author’s death. entities like production plants, retail years). The right to apply for and hold stores, etc. Anti-dumping a patent is, as a general rule, vested in the author of the invention and Estonia applies EU trade policy such A transfer of business enterprise the author’s legal successors. Patent as anti-dumping or anti-subsidy (assets) is usually undertaken when applications are filed with the Patent measures. The EU import regime the buyer is not interested in some Office and an applicable state fee applies to Estonia. parts or liabilities of the company. is paid. The Patent Office will then conduct an investigation to determine As stated in the law, dumping is the In practice, the investor is mostly whether the invention meets the export of goods by a foreign exporter interested in certain assets, rights and criteria and either issues a patent or to Estonian customs territory for free goodwill of the target company and rejects the application. circulation of those goods, below their negotiates the price accordingly. normal value according to the Customs Trademarks Code. The anti-dumping measures are Nevertheless, under the Law of The Trademark Act defined trademarks customs taxes applicable with the rate Obligations Act, upon transfer of and service marks as signs used to ascertained by investigative procedure assets that form a business enterprise, distinguish the goods and services of for reducing damage to Estonian obligations related to the assets sold a particular person from similar types industry resulting from the import of are also transferred to the buyer. of goods and services offered by other goods at dumping prices. persons. Trademarks are entitled to As a result, the buyer of the assets will protection if they are registered in the While the EU has a rather liberal be jointly and severally liable for the Estonian Registry of Trade and Service foreign trade policy, some products enterprise-related obligations of the Marks, with the WIPO or the EU Office need import licenses. There are seller which are created before the for Harmonisation in the Internal some restrictions, especially on transfer of the enterprise and the due Market. farm products, following the date of which falls within five years implementation of the CAP (Common after the transfer of assets. To register a trademark with the Agricultural Policy): the application Estonian Registry of Trade and Service of compensations on import and A similar regulation is included in Marks, an application has to be filed export of farm products, aimed Estonian labour law for the protection with the Estonian Patent Office and at favouring the development of of employees in case of a business the applicant has to pay a state fee. agriculture within the EU, implies transfer. The Patent Office will review the a certain number of control and application and issue a decision regulation systems for goods entering There is no statutory requirement granting or denying the application. the EU territory. regarding the form of the asset

14 PwC purchase. However, if particular The assets and liabilities of the entry of the transfer into the list of assets involved require a particular company will not be modified, i.e. no shareholders. form of contract (e.g. transfer of real “pick and choose” like in the transfer estate must be notarised), the entire of business. If the buyer is not an existing purchase agreement needs to be in shareholder of the target company and the same form, unless the particular In the case of a private limited does not acquire a 100% shareholding assets (such as real estate) are company (OÜ), the acquisition of in the target company, the other transferred separately from the rest of shares generally requires a notarised shareholders of the private limited assets. share transfer agreement, unless company (OÜ) have a pre-emptive the shares of an OÜ are registered right to purchase the shares, unless Alternatively, the acquisition may be with the Estonian Central Registry the articles of association of the target performed by different transactions in of Securities. In the latter case the company say otherwise. different forms. transfer of shares may be made on the basis of a simple written contract. In In the case of a public limited company It should also be noted that public the case of a public limited company (AS), the shareholders have the pre- permits and licenses cannot be (AS), a written share transfer emptive right only if it is prescribed in transferred upon sale of the business agreement is sufficient. the articles of association. enterprise and must be obtained by the acquiring company separately. The parties are free to determine It should also be noted that transfer of the date when the title to the shares majority shareholding, or acquisition Transfer of shares is transferred, but for the purposes of control over the company by some If the shares in a company are of the target company (i.e. with other means, may be (if the sales in acquired, the buyer acquires all rights regard to the right to vote, right Estonia of the target company and the and obligations as a shareholder of the to dividends, etc.), the shares are sales in Estonia of the buyer exceed company. deemed to be transferred as of the a certain threshold) considered as a

Guide to doing business and investing in Estonia 15 merger for the purposes of Estonian In 2013, the Estonian real estate market in 2013 was 840 euros. Without Tallinn, Competition Act. continued to rise and the number of the average was 525 euros per square transactions was the highest since the meter. Both indicators were 10% higher Thus, acquisition by way of share recession. The rise has mainly been than in 2012. purchase may be subject to merger based on the positive developments control but the acquisition by way of of the Estonian economy, the growing The number of transactions has business (asset) purchase is not. confidence of people, low interest rates increased considerably due to the low and the gradual addition of new real interest rates, which has kept the real The legal aspects of acquisitions in estate developments. Compared to 2012, estate market accessible to many buyers. Estonia are not very different from the number of transactions increased by In recent years the monthly average countries in the EU and there are no 15% and the total value of transactions interest rate of housing loan has steadily special restrictions on foreign capital. increased by 18%. In 2013, over 41 been around 3% (including margin and thousand purchase-sale transactions of EURIBOR), but during the real estate 2.6 Real estate market real estate with the total value of about boom it was 4% and in 2001 it was 9%. The Estonian real estate market was 2 million euros were notarized. About the most active in the period of 2004- half of the purchase-sale transactions In 2014, the trends of 2013 largely 2006, but in 2007 the number and concerned apartments. The real estate continued. The supply and prices value of real-estate transactions began market was the most active in Harju and increased considerably in the first to fall gradually. From 2007 to 2011, Tartu Counties which accounted for 40% half of the year, but the growth then the real estate market went through a and 10% of all transactions, respectively. slowed down as the real estate was severe recession. To cope with the new becoming too expensive for the situation, market participants had to The most active part of the real estate average buyer. In December 2014, the face a number of difficult decisions and market in Estonia is the market of index of the prices of apartments in reorganize their way of doing business. apartments. However, the high number Estonia decreased by 1.6% compared In the second half of 2011 and in 2012, of transactions and limited offering in to November, but was still 8.9% higher the real estate market recovered and some market segments has increased than in the end of 2013 and 14.1% both the transaction volumes and values the prices considerably. The average lower compared to the peak of the real started to increase again. price per square meter of an apartment estate boom in mid-2007.

16 PwC 3 Banking, finance and insurance

Investor considerations: 3.1 Banking system The developments in the banking Estonia is part of the Euro zone since The Bank of Estonia (Eesti Pank) is the sector since Estonia regained 1 January 2011 independent central bank. As Estonia independence have been rapid, along is part of the Euro zone, the core tasks with the trend of welcoming foreign The largest banks are subsidiaries and of the Bank are to help to define the capital. The banking sector has gone affiliates of Scandinavian banking groups monetary policy of the European through major restructuring as a A wide range of financial services Community and to implement the result of privatisation, consolidation is available to both local and foreign monetary policy of the European and bankruptcy in late 1990s, customers Central Bank. Eesti Pank is also following a relatively stable period responsible for holding and managing in the 2000s. The banking sector is Estonian official foreign exchange dominated by two major commercial reserves as well as supervising overall banks, Swedbank and SEB, owned financial stability and maintaining by Swedish banking groups. These reliable and well-functioning payment two banks control approximately systems. Eesti Pank is responsible for 62% of the financial services market. the circulation of cash in Estonia. The third largest bank is an affiliate

Guide to doing business and investing in Estonia 17 Market share of banks by total asset s as of 31 December 2014

EUR in billion Total assets Market share Swedbank AS 8.49 39.8% AS SEB Pank 4.84 22.7% Nordea Bank Finland PLC Eesti filiaal 3.01 14.1% Danske Bank A/S Eesti filiaal 2.06 9.7% AS DNB Pank 0.65 3.0% AS LHV Pank 0.54 2.5% AS BIGBANK 0.39 1.8% Pohjola Bank plc Eesti filiaal 0.27 1.3% Versobank AS 0.26 1.2% AS Eesti Krediidipank 0.25 1.2% Svenska Handelsbanken AB Eesti filiaal 0.21 1.0% Tallinna Äripanga AS 0.19 0.9% AS Citadele banka Eesti filiaal 0.13 0.6% Scania Finans AB Eesti filiaal 0.04 0.2% Folkia AS Eesti filiaal 0.002 0.0% Total 21.34 100.0% Source: Financial Supervision Authority

of the Finnish Nordea group and the 3.2 Specialised financial finance VAT returns. For international fourth largest bank is an affiliate of institutions companies, the available factoring the Danish Danske Bank. There are services include the handling of the no state-owned commercial banks or Estonian commercial banks are the entire accounts receivable portfolio of other credit institutions. largest providers of leasing and local companies. factoring services. The services Estonian banks offer a full range of provided are becoming more The Estonian insurance market services. There is no differentiation sophisticated and diverse while the has similarly gone through a major between local and foreign clients are also becoming more aware consolidation over the years since businessmen and entities, which can of the services on offer. The sector has independence and has reached generally access the same range of been growing extensively as a result stability. A wide choice of insurance banking services in Estonia as they do of the decline in interest rates and services is available from Estonian in Western European countries. the increase in customers’ welfare. insurance companies as well as from The range of potential leasing objects international service providers. Estonian banking has achieved has grown to include anything from significant success in the development bikes, home furniture and travelling 3.3 Investment institutions of electronic transaction systems. The arrangements up to real estate, Investment funds provide a wide number of internet clients is growing personal vehicles, trucks and farming range of different investment options. continuously. Active co-operation equipment. There are four types of investment between major banks and mobile funds allowed in Estonia. Contractual operators has also led to innovative The factoring services include investment and investment funds solutions for customers. Debit and domestic factoring, export factoring, founded as a joint-stock company credit cards are widely used in invoice factoring as well as tax are the main types of funds used for everyday transactions. factoring. There are also options to investment purposes. The majority

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

Guide to doing business and investing in Estonia 19 4 Importing and exporting

Investor considerations: All customs clearance procedures are carried out electronically. Common customs duties are applicable to all goods imported into the EU. Importers may apply for deferred taxation. VAT is not imposed on the import of goods subject to immediate tax warehousing on the condition that the recipient of the imported goods is the keeper of the tax warehouse. Exporters and importers must have EORI registration.

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

20 PwC • the importer of the goods is an • the operation of storage facilities for or exit of goods into or from the Estonian taxable person; the temporary storage or customs customs territory of the Community. warehousing of goods, except where • immediately after the goods have the storage facility operator is the Community goods may be placed been imported, they are transported, customs authority itself. under the customs warehousing or in the same condition, to another free-zone procedure in accordance member state where such goods will The conditions under which the use of with the customs legislation or be received by a taxable person or a one or more of the procedures referred Community legislation governing taxable person with limited liability to above or of the operation of storage specific fields, or in order to benefit of the other member state; facilities is permitted is set out in the from a decision granting repayment or authorisation. remission of import duties. Generally • intra-Community supply is created there is no limit to the length of time as a result of the transport of the The authorisation will be effective goods may remain under a storage goods to another member state; from the date of issue and is usually procedure. at a fixed date. No special charges are • upon importation of the goods, the applied. 4.7 Re-exports importer confirms the intention Non-Community goods destined to transport the goods to another Except where otherwise provided to leave the customs territory of member state where such goods will for in the customs legislation, the the Community are subject to a be received by a taxable person or a authorisation mentioned above is re-export notification to be lodged taxable person with limited liability granted only to the following persons: at the relevant customs office registered by the other member and with the exit formalities. The state and, after the goods have been • persons who are established in the re-export notification should meet the transported, provides the customs customs territory of the Community; requirements for customs clearance authority with documentation of documentation. proof of the intra-Community supply • persons who provide the necessary of the goods; assurance of the proper conduct The re-export procedure is not applied of operations and, in cases where for: • a security is provided in order to a customs debt or other charges • goods placed under the external guarantee the performance of the may be incurred for goods placed transit procedure which only pass tax liability which may arise as under a special procedure, provide through the customs territory of the a result of the failure to perform a guarantee required in the case of Community; the tax obligation provided in this the temporary admission or inward • goods trans-shipped within, or subsection. The security is given, processing procedure, the person directly re-exported from, a free released, used and calculated who uses the goods or arranges zone; pursuant to the procedure provided for their use or who carries out • goods under the temporary storage by the customs rules. processing operations on the goods procedure which are directly or arranges for them to be carried re-exported from an authorised 4.5 Documentation and out, respectively. temporary storage facility. procedures Any economic operator established in All customs clearance is carried the EU needs to have an EORI number. through electronically. Economic operators established outside the EU have to be assigned an 4.6 Warehousing and EORI number if they lodge a customs storage declaration, an Entry or an Exit Under a storage procedure, non- Summary Declaration. Community goods may be stored in the customs territory of the Community A special authorisation from the without being subject to any of the customs authorities is required for the following: following: • import duties; • the use of the inward- or outward- • other charges as provided for under processing procedure, the temporary other relevant provisions in force; admission procedure or the end-use • commercial policy measures, insofar procedure. as they do not prohibit the entry

Guide to doing business and investing in Estonia 21 5 Business entities

5.1 Legal framework Investor considerations: by law. In the cases provided by law, The legal environment for business the permission of a competent agency A foreign investor may operate through entities in Estonia is mostly is required for merger, division or the following corporate forms that should regulated by the Commercial Code transformation. be registered within the commercial (Äriseadustik). register: a public limited company, a 5.2 Choice of entity and private limited company, a general The passive legal capacity of an entity business forms partnership, a limited partnership, a commences as of its entry in the The Commercial Code provides commercial association or a branch. commercial register and terminates as for five types of business entities: The private limited company and public of its deletion from the Commercial general partnership (täisühing), limited company are the most commonly Register. limited partnership (usaldusühing), used forms of entities for doing business private limited company (osaühing), in Estonia due to their most essential Every entity must have a business public limited company (aktsiaselts) characteristic – the limitation of the name which is entered in the and commercial association shareholders’ liability. Commercial Register and under which (tulundusühistu). Business units like permanent the undertaking operates. establishments or representative offices Of the five types of entities regulated are not registered with the Commercial The business name always contains the under the Commercial Code, the Register. A appendage referring to the legal form private limited company and public should be registered in the registry of of the entity. A business name may not limited company are the most Estonian Tax and Customs Authorities. be misleading with regard to the legal commonly used forms of entity for As a general rule, Estonian legislation form, area or scope of activity of the doing business. This is due to their does not recognise the concept of undertaking nor contrary to good morals. most essential characteristic – the a representative office. However, limitation of the shareholders’ liability. the branch must be registered in the When starting operations in Estonia, Commercial Register. it should be kept in mind that there Consequently the main emphasis of The estimated minimum cost of setting are certain areas of activity for which this chapter is on these two forms of up a branch or subsidiary in Estonia may a license is required or in which only a business, and the central aspects of range between EUR 1,000 to EUR 3,000 particular type of entity may operate, their operation are presented in the (excluding a minimum compulsory share as well as areas of activity in which form of a comparison. capital). operation is prohibited by law. 5.3 Private limited Establishing a company in Estonia may company (OÜ) and public take from few days up to a couple of There may also be special weeks. Foreign investors may also buy requirements deriving from the law limited company (AS) ready-made companies (in this way, with respect to the obligations of Private limited companies and public these procedures might take only a few companies which are dependent on limited companies have a share capital days upon receiving all the relevant the area of business of the company divided into private limited company information/documents). (e.g. banking, investment, insurance, shares and public limited company lending, sale of fuel or alcohol, etc.). shares, and the shareholders are not personally liable for the obligations As a general rule, entities are subject of the companies – the companies are to accounting obligations and need liable for the performance of their to submit financial statements to the obligations with all of their assets. Commercial Register. An audit of the financial statements may be required Limited companies are established depending on the legal form and the by concluding notarised certified amount of share capital of the entity. foundation agreements and adopting articles of association. Entities may merge, divide or be transformed only in the cases and Private limited companies may also pursuant to the procedure provided be established with an expedited

22 PwC procedure. In such cases all the As for the minimum share capital, it generally gives one vote at the meeting necessary documents are presented to is EUR 25,000 in the case of a public of shareholders unless company’s the Commercial Register electronically limited company and EUR 2,500 in the articles of association state otherwise. and authenticated with digital case of a private limited company. In signatures. certain fields of activity (e.g. banking, The shares of a public limited company insurance companies, etc.) the laws must be registered with the Estonian Even though the number of may provide for higher share capital Central Registry of Securities (CRS). shareholders is unlimited by law requirements. The registration of the shares of in both cases, the private limited private limited company with the company is suited for a more closed The private limited companies CRS is optional. If the shares are not circle of contributors. may also be established without registered with the CRS, the share contribution of share capital, registry must be kept by the company’s Accordingly, safeguards enabling provided that the founders are private management board. respective control are provided by individuals only and the planned law, including rights of pre-emption minimum capital does not exceed EUR Transactions for transferring and in case of the sale of shares to non- 25,000. The capital of such a company pledging the shares of private limited shareholders, and even the possibility will consist of claims against the companies must be notarised, unless of prescribing (in the articles of shareholders, who are liable with all of the shares are registered in the CRS. association) that a resolution of the their assets up to the amount they have Thus registration of the shares of a partners is required to transfer a share promised to pay to the capital of the private limited company in the CRS or a part thereof to a third party. company. is advisable if numerous transactions with the shares are anticipated. The shares of a public limited In a public limited company each share company are freely transferable, grants one vote at the shareholders’ There are no similar requirements as but shareholders may establish general meeting. In a private limited to the form of transactions with shares pre-emptive rights in the articles of company each shareholder holds one of public limited companies. Transfers association. share and each EUR 1 of the share as well as pledges of public limited

Guide to doing business and investing in Estonia 23 company shares are registered in the or her duties with due diligence. association. However, the articles CRS. Management board members shall be of association may prescribe that jointly and severally liable for damage the members are solely liable for Corporate governance wrongfully caused to the company, the obligations of the association The management structure of the unless they prove that they have acted with all of their assets, or liable to a public limited company consists of with due diligence. The same applies certain extent. three layers, the shareholders’ general with respect to the supervisory board meeting, the supervisory board and members. 5.5 Branches the management board, whereas Another way for a foreign company to the management structure of the Generally, the liability of shareholders permanently offer goods or services in private limited company usually lacks for the limited company’s obligations its own name in Estonia is to establish the layer of the supervisory board, is limited to their payments into the a branch (filiaal). The business name unless it is prescribed by the articles company’s share capital. of the branch of a foreign company of association of the private limited consists of the business name of the company. However, shareholders can be held company and the words Eesti filiaal liable for damages wrongfully caused (Estonian branch). The branch must be The management board, the to a public limited company, another registered in the Estonian Commercial members of which are elected by shareholder or third persons. Registry through submission of an the supervisory board, is a directing application and certain required body of the limited company 5.4 Partnerships documentation. which represents and directs the General partnership – a company in company. The supervisory board which two or more partners operate Certain entities such as foreign banks plans the activities and organises the under a common business name and or insurance companies located in management of the company as well are solely liable for the obligations non-EU states must also obtain a as supervising the activities of the of the general partnership with all of required license. Banks and insurance management board. their assets. companies from EU member states must notify the Estonian Financial For the management board, consent Limited partnership – a company in Supervision Authority that they of the supervisory board is required which two or more persons operate intend to commence activities in for conclusion of transactions which under a common business name, and Estonia. are beyond the scope of everyday at least one of the persons (general economic activities. Where the partner) is liable for the obligations It should be considered that a branch company lacks a supervisory board, of the limited partnership with all is not a legal person and the foreign these rights and obligations are of the general partner’s assets, and enterprise is liable for obligations exercised by the meeting of the at least one of the persons (limited arising from the activities of the shareholders. partner) is liable for the obligations branch. The foreign enterprise is also of the limited partnership to the liable to appoint one or more directors The shareholders’ general meeting extent of the limited partner’s that are accountable to the foreign is the highest management body of a contribution. enterprise. At least one director public limited company whereas the must be resident in an EU state or respective body of a private limited Commercial association – a company Switzerland. company is called the meeting of for which the purpose is to support shareholders. and promote the economic interests of 5.6 Representative offices its members through joint economic As a general rule, Estonian legislation These management bodies are vested activity in which the members does not recognise a representative with powers to take the most crucial participate as consumers or users of office. decisions from the perspective of the other benefits, suppliers, through company’s development – division work contribution, through the use 5.7 Sole proprietorship of dividends, approval of financial of services or in any other similar In addition to the possibility of statements, election and recalling of manner. establishing a business entity, it the members of the supervisory board, is possible for any natural person etc. A commercial association is liable to conduct business as a sole for its obligations with all of its proprietor who must be entered Liability assets. Members of a commercial in the commercial register before A member of the management association are not personally commencing with permanent business board is expected to perform his liable for the obligations of the activity.

24 PwC 6 Labour relations and social security

Investor considerations: 6.1 Labour market Employment Contracts Act (Töölepingu Trade unions and employers generally The Estonia’s economically active seadus). have a cooperative relationship; strikes population is approximately 600 are rather unusual in Estonia. thousand. About one third of them Work relations are also dealt with Social security contributions (33.8%) have higher education and 86% speak in the Law of Obligations Act, the calculated from the gross employment at least one foreign language, mostly Individual Labour Dispute Resolution income are payable by the employer. English, but for the middle-age and Act (Individuaalse töövaidluse Employees do not make any personal older generations, also Russian. Estonian lahendamise seadus), and the social tax contributions. Employee’s part students are amongst the best in Europe Occupational Health and Safety Act of unemployment insurance contributions on their English language skills. (Töötervishoiu ja tööohutuse seadus). and compulsory accumulative pension contributions are withheld from the gross Structural unemployment continues Compared to rather strict and income by the employer. to be an issue and there’s a continuous protective labour laws of „old need for talent in sectors relying on Europe“, Estonian employment Foreigners, residing in Estonia on the skilled labour. At the same time there law is more liberal and offers more basis of residence permit, are, in general, are 30 thousand people registered flexibility in agreeing on terms permitted to work in Estonia. Separate as unemployed and over 3,000 jobs and conditions of employment. work permits are not issued. available. The unemployment rate has However the principle of protection The employment of non-residents must been around 5% of total population in of employees as the economically be registered with the Police and Border last few years. weaker party is applied – therefore Guard Board. the agreement between employee Non-resident may act as a member of 6.2 Labour relations and employer on terms that are Employer/employee relations the management or supervisory board disadvantageous to employee, of Estonian legal entity without the Regulations regarding employment compared to what is set forth in registration. and labour issues are regulated by the legislation may be void.

Guide to doing business and investing in Estonia 25 Also the principles of equal treatment 6.3 Working conditions The employer’s obligation is to and non-discrimination of employees calculate and withhold all payroll Salaries and wages need to be followed. taxes. All rules regarding remuneration Employment contracts Trade unions and collective for employees working under an agreements employment contract are set forth Citizens of foreign states and stateless in the Employment Contracts Act. persons who reside in Estonia Trade unions are visible generally in Employment contracts must specify permanently have rights pertaining to transportation, health services and the employee`s wage rate, additional employment equal to those of Estonian the processing industry. However, payments, if any, method for citizens unless otherwise prescribed the level of activity is significantly calculation of the remuneration and by law. lower than in western European procedures for paying remuneration. countries. Membership in a union is The employment contract must not compulsory. Due to free movement of workforce be concluded in writing. An oral and competitiveness of Estonians at employment contract may be entered A collective agreement as a Scandinavian (and other) job markets into only for employment for a term voluntary agreement between the pressure on wages is expected to of less than two weeks. Employment employees or a union or federation continue. For last years the average contracts must contain certain of employees, and an employer gross salary has increased at the pace mandatory terms. Employers bear or an association or federation of 5-9% per year and equalled EUR administrative liability for formalising of employers can be concluded. 1,039 in the 4th quarter of 2014. Also employment contracts. Currently there are slightly over the legally established minimum wage 800 effective collective agreements has increased almost every year and is An employment contract is generally registered. EUR 390 for 2015. entered into for unlimited term, unless

26 PwC the limited term if justified by good Certain limits must be observed when 6.4 Social security system reasons arising from the temporary working overtime; total working time fixed-term characteristics of the work. may generally not exceed an average of The social protection system is made Probation period up to 4 months can 48 hours per week over a four-month up of two pillars: the social security be applied period. system that comprises pension insurance, health insurance, child Employment agreement can be Details regarding the work regime, benefits, unemployment benefits amended only with mutual consent, so such as the start and end of the work and funeral grants; and the social it’s advisable to sign off all important day, time for meals and other breaks, welfare pillar that consists of social terms including work responsibilities, may be determined by internal work assistance cash benefits and social internal work rules and all company’s procedures, collective agreement or services. In the Estonian context, no regulations while entering into work contract. distinction is made between social employment contract. insurance and social security, which An employee is entitled to annual paid are covered by the same term in the For the employment of minors, leave in the amount of 28 calendar days. Estonian language. The pension there are legal restrictions towards and health insurance schemes are Paid holidays the conclusion of an employment contributory social security schemes contract with them as well as towards There are ten legally-imposed that are financed principally by the nature of the work that may holidays in Estonia, listed in the social tax. The Estonian social be performed by minors and their Appendix A. Employers are required tax of 33% (comprising 20% social working conditions. to grant employees paid leave in the security contributions and 13% amount of three hours on a work health insurance contributions) For fighting the , all day directly preceding the New must be paid by employers on natural and legal persons providing Year`s Day, Independence Day (24 top of the gross salary. Currently, the work are required to register the February), Victory Day (23 June) employees are not required to persons employed by them with the and Christmas Eve. Work on public make any personal social tax Estonian Tax and Customs Board. holidays has to be compensated at a contributions. The requirement applies to all double rate. workers, including also in addition The Estonian pension system is divided Equal opportunities to employees, the contractors, into three pillars: managers without employment According to prohibition on contract, trainees and volunteers. discrimination against employees an • First pillar: state pensions. The state The registration is required by the employer cannot discriminate against pension insurance guarantees an moment an employee commences a potential or existing employee on any income for people when they retire the work, i.e. directly before starting of the following grounds: sex, race, or in the event of their becoming the work. The tax inspectors perform religion, age, disability and sexual incapacitated or losing their regular compliance inspections, orientation. provider. State pensions are paid mainly in specific sectors such as out from the social tax calculated on Termination of employment construction works, restaurants and salaries. catering etc. Bases for the termination of an • Second pillar: the compulsory employment contract are provided in accumulative pension scheme to Working hours the Employment Contracts Act. which resident employees make It is presumed that a full-time contributions at 2% of their gross employee works 40 hours during An employer may not cancel an salary and the state adds 4% of the a 7-days period, 8 hours per day. employment contract ordinarily, but 33% social tax calculated on the Certain flexible options exist for it may be terminated upon agreement employee’s salary. applying summarised working time between the parties at any time. • Third pillar: supplementary funded calculation within specified period up The extraordinary termination of pensions i.e. additional voluntary to 4 months. the employment contract on the pensions. initiative of the employer is allowed The hours of part-time employees on economic reasons (decrease in The government sets specific rules for are agreed between the employer the work volume or reorganisation of the three-pillar system: administering and employee; overtime is normally work or other cessation of work) or on the 1st pillar, guaranteeing the 2nd permitted upon an agreement reasons related to employee (inability pillar and providing supervision and between the employer and to perform his/her duties, breach of regulation system for both the 2nd and employee. trust etc). 3rd pillars.

Guide to doing business and investing in Estonia 27 Employers make contributions 6.5 Foreign personnel general, permitted to work in Estonia. (through the national social tax) Residence permit Separate work permits are not issued. to the 1st pillar. Employees make mandatory payments into the The Citizen of European Union Act In addition to the employment in 2nd pillar and are free to choose prescribes the terms for settling in Estonia on the basis of a residence whether or not to contribute to the Estonia of citizens of member states permit, a person may work in Estonia 3rd pillar. of the European Union and the temporarily for up to 6 months during European Economic Area and the a year if (a) he/she stays legally in Under Estonian unemployment Swiss Confederation (hereinafter “EU Estonia on the basis of visa or on the insurance legislation the citizens”) and their family members basis of visa-free stay and (b) whose unemployment insurance who are citizens of third countries and employment has been registered prior contributions must be paid both by the the procedures necessary for it. to the commencement of work. employer and the employee (again by withholding). Generally, an EU citizen who has Registration of short-term employment resided in Estonia permanently for in Estonia must be done by employer. The rates of unemployment five successive years on the basis Expedited procedure applies for insurance contributions set by of the right of temporary residence employment of teachers and lecturers law are flexible: 0.5 - 2.8 % for will obtain the right of permanent in educational institutions, for employees and 0.25 - 1.4 % for residence. scientists and top specialists. employers. Currently the applicable contributions are respectively 1.6% The residence permits to the third Ordinary procedure of registration of and 0.8%. country nationals and persons with short-term employment is for experts, undetermined citizenship are issued consultants and skilled workers, as For income tax purposes, the under the Foreigners Act. Residence well as for au pairs, seasonal workers employee’s unemployment permit may be temporary (validity in agriculture, artists, sportsmen, contribution is deductible from period up to five years) or long-term. coaches and some other limited the resident individual’s taxable Temporary residence permit may be occasions. income. Unemployment insurance issued to a foreigner: contribution does not apply to the For registration of employment remuneration paid to the members - married to a person with permanent see also: https://www.politsei.ee/ of the Management Board, members residence in Estonia; en/teenused/working-in-estonia/ of the Supervisory Board and to the - for settling down with a close relative registration-of-short-term-employment procurators. permanently residing in Estonia; - for working; EU citizen may reside and work in Estonia EC regulation 1408/71 may make it - or studies at an Estonian educational without registration of his/her right of possible for employees assigned to institution; temporary residence for a term of up to 3 Estonia from another EU Member - for business; months. State, EEA country or Switzerland - whose permanent legal income to remain covered by their home ensures his/her subsistence in A foreigner, to whom a temporary country social security system. In Estonia; residence permit has been issued order to remain covered by the social - whose application for residence on the basis of legal income, is not security system of his/her home permit is based on an international permitted to work in Estonia. country, the employee has to apply agreement. for a certificate of social security A foreigner may carry a managing coverage (e.g. A1) to be issued by The annual immigration quota can not or supervising role as a member of the social security authorities of his/ exceed 0.1 per cent of the permanent management body of a legal entity her home country before moving to population of Estonia annually (about registered in Estonia. Estonia. 1,000 persons).

Besides the EC regulation, Estonia For additional information, see also: Living conditions has concluded social security treaties https://www.politsei.ee/en/teenused/ Real estate with the Canada, Ukraine and Russia residence-permit/ which include similar provisions of In Estonia, the real estate market is Employment permit social security coverage for assigned well established and there exist no employees. Foreigners, residing in Estonia on restrictions on buying or renting a flat the basis of residence permit, are, in or a house.

28 PwC Current offers from the Estonian on the European Schools curriculum available to locals. However, it is real estate market are available on is Tallinn European School (www.est. advisable to have an additional private the following web pages: www. edu.ee ) where about 120 children medical insurance in order to extend kv.ee, www.city24.ee or www. from over 40 nationalities currently the security coverage. ekspresskinnisvara.ee. study. The languages of instruction at Restrictions on employment the school are mainly English, French In practice, it may be advisable to get and German and there’s both primary There are no additional restrictions on in touch with one of the leading real and secondary school as well as the number of foreign employees on estate companies in Estonia, which are nursery. payroll or on the time period they may involved in house-hunting services as be employed in Estonia. Health care their main business. Fiscal registration number An individual insured in another EU Education member state (i.e. a holder of the When moving to Estonia an individual The majority of Estonian schools are European health insurance card or its does not need a separate fiscal teaching in Estonian language and replacement certificate) will receive registration – the data logging there are Russian schools for ethnic all necessary health care while staying formalities described below in sub- minority. The only accredited school temporarily in Estonia. This insurance points are sufficient for the fiscal for offering general education based covers all medical treatment similarly authorities.

Guide to doing business and investing in Estonia 29 7 Accounting and audit requirements

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

30 PwC under Estonian GAAP, except for years after the expiry of their term of The previous version of Estonian consolidated annual reports, are to validity; GAAP (effective since 2003 and be submitted electronically in XBRL • accounting rules and procedures – until the end of 2012) was basically format through Company Registration for seven years after the amendment a simplified summary of IFRS; Portal https://ettevotjaportaal.rik. or replacement thereof; the recognition and measurement ee/. Other annual reports are to • accounting registers created rules were based on IFRS, but the be submitted in pdf format. Since electronically should be preserved disclosure requirements were less 2011, consolidated annual reports electronically. The legibility of the demanding. In areas not specifically prepared under Estonian GAAP and data should be ensured within the covered by Estonian GAAP, the annual reports prepared under IFRS preservation period. IFRS treatment was recommended, can voluntarily be submitted in XBRL but not mandatory. Unofficial Accounting principles in Estonia format. translations of the guidelines of Financial statements should be previous version of Estonian GAAP Entries in the Commercial Register prepared in accordance with either: are available at http://www.easb. are public. Everyone has the right • accounting principles generally ee/?id=1976. to examine the card register and the accepted in Estonia; or business files, and to obtain copies of • IFRS as adopted by the EU. 7.2 Chart of accounts registry cards and of documents in the Generally the chart of accounts is used business files. Listed companies and financial in Estonia, but is not compulsory under institutions are required to prepare the current legislation. Branches of foreign companies financial statements in accordance need not prepare annual reports. with IFRS as adopted by the EU. 7.3 Audit requirements Instead, an unattested copy of the The following entities are subject to audited and approved annual report Estonian GAAP is written by the audit: of the company is submitted to the Estonian Accounting Standards Board • public limited company (AS); Commercial Register of the location (EASB). • any entity, if the amounts presented of the branch no later than one month in the financial statements of the after approval of the annual report Estonian GAAP effective from 2013 is accounting year exceed at least or seven months after the end of the based on IFRS for Small and Medium- two of the three following criteria financial year. sized Entities (IFRS for SMEs) with (a consolidating entity applies limited differences from IFRS for the criteria to the consolidated This requirement does not apply SMEs with regard to accounting numbers): to companies of states which are policies as well as disclosure - revenue (or income) of EUR Contracting Parties to the EEA requirements. Differences in 2,000,000; Agreement if the legislation of the accounting policies arise mainly due - total assets of EUR 1,000,000; country of the registered office of the to the fact that in some areas Estonian - average number of employees: 30 company does not require the annual GAAP allows a choice of accounting • any entity, if the amounts described report is to be disclosed. policy, one of the alternatives being above exceed at least one of the the only policy accepted under IFRS following criteria: Obligation to preserve accounting for SMEs. Except for differences from - revenue (or income) of EUR documents: limited reasons, net profit and equity 6,000,000; • accounting source documents – for are usually the same, regardless - total assets of EUR 3,000,000; seven years from the end of the whether the accounts are prepared - average number of employees: 90. financial year during which the in accordance with IFRS for SMEs or source document was recorded in Estonian GAAP. The requirement for a review applies the accounts; to companies that are not subject to • accounting ledgers, journals, In areas not specifically covered the audit requirement, but exceed contracts, financial statements, by Estonian GAAP, the treatment either: reports and other business in IFRS for SMEs is recommended, • the limits in two or more of the documents which are necessary for but not mandatory. Each Estonian following criteria: reconstructing business transactions GAAP standard contains a brief - revenue (or income) of EUR during audits – for seven years comparison with the respective 1,000,000); from the end of the corresponding section of IFRS for SMEs. - total assets of EUR 500,000; financial year; Translation of the new guidelines is - average number of employees: 15. • business documents relating to long- available at http://www.easb.ee/ • or the limit at least in one of the term rights or obligations – for seven public/Inglise.zip. following criteria: revenue (or

Guide to doing business and investing in Estonia 31 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.

The Authorised Public Accountants Act provides requirements for public interest entities (PIEs).

The following entities are considered as PIEs (the list is not exhaustive): • listed entities; • financial institutions; or • entities which exceed at least two of the following criteria: - revenue or income EUR 66 million; - total assets at balance sheet date EUR 33 million; - average number of employees during financial year: 1,000.

PIEs must form audit committees, consisting of at least two members, including at least two members having expertise in the field of accounting, finance or law. Auditors All certified auditors are members of the Board of Auditors (www. audiitorkogu.ee), a self-governing professional association of Estonian auditors, which organises the professional activities of auditors and protects their rights. At present there are ca 360 auditors in Estonia.

The Auditing rules include requirements for auditing and professional ethics to be based on the standards of the International Federation of Accountants.

The Board of Auditors is responsible for the supervision of the professional activities of auditors and compliance with the Auditing rules.

32 PwC 8 Tax system and administration

Investor considerations municipalities, but the rest, including Main principles of Estonian : all taxes levied from pensions and simple tax system, broad tax base and capital gains, is allocated to the state low rates. budget. The aim of the Estonian Government Classes of taxpayers is to shift the tax burden from labor to Estonian taxpayers are resident consumption. and non-resident legal entities and Flat income since 1994 (flat individuals. The term legal entity income tax rate at 20% applies to both includes companies, partnerships, individuals and companies). legal entities established under public Unique corporate tax system since 2000: law and non-profit organisations and all undistributed corporate profits are tax- foundations. exempt. Local taxes play an insignificant role in A legal entity is treated as resident the Estonian tax system. in Estonia if it is founded under Estonia operates a self-assessment Estonian laws. An Estonian branch of system. a foreign company is generally treated as a permanent establishment of a The Government’s intention is to improve non-resident entity. An individual tax administration (electronic tax is treated as resident in Estonia if administration is well established). the person has a permanent place of residence in Estonia, is present in the 8.1 Tax system country for 183 days or more during any 12-month period, or if a person is Administration of the tax system employed in the public state service of Taxes are levied on the basis of tax Estonia, dispatched abroad. laws enacted by Parliament. Both state and local taxes are imposed under Non-resident taxpayers include foreign the taxation laws. The structure and entities and individuals, or their basis of the tax system is regulated by permanent establishments in Estonia. the Law on Taxation. Local taxes are Registration requirements introduced by local municipal councils according to the Law on Local Taxes. Taxpayers that are based in Estonia Local taxes play an insignificant role in and are registered in the Estonian the Estonian tax system. Commercial Register (subsidiaries, branches etc.) will be automatically The tax administrator is the Estonian recorded into the taxpayers registry Tax and Customs Board. Local that is held by Estonian Tax and taxes are administrated by the local Customs Authorities. A separate municipal councils and local offices of registration is required for VAT the Tax Board. purposes.

The allocation of state taxes between Foreign companies can only register national and local governments is with the Tax and Customs Authorities set out by the tax legislation. The in certain circumstances (e.g. acting Income states that 11.6% as a foreign employer, having a of resident individuals` income tax permanent establishment and as a VAT before deductions is allocated to local liable person).

Guide to doing business and investing in Estonia 33 8.2 Direct and indirect tax 8.4 Legislative framework burden Estonian tax law is harmonised with EU Direct taxation in Estonia takes the legislation and based on the continental form of corporate and individual European law model. As of 1 May 2004 income taxes, as well as a gambling EU legislation applies in Estonia like in tax. Indirect taxes include VAT, any other EU member state. taxes and customs duty. The Parliament has the authority to The rest of the national revenue impose taxes. Local government has a consists of state fees, sale of state limited right to establish local taxes. property, sale of goods and services and different subsidies. Tax administrators have no discretion to make alterations to legislation or Tax collections have been stable within to conclude contracts with taxable the last few years and this also applies persons concerning their tax liabilities. to the apportionment of direct/indirect taxes. After accession to the EU, the case decisions of the European Court of 8.3 Principal taxes Justice are legally binding for Estonian The structure and basis of the tax system courts and tax authorities. are set out in the Law on Taxation. Estonian law recognises the direct effect income tax and payroll The existing state taxes are: of EU legislation. The courts interpret (form “TSD” with appendices) must be • income tax (corporate and the tax law. submitted to the local tax authorities personal); and taxes must be remitted by the 10th • social tax; 8.5 Tax treaties day of the month following a taxable • land tax; Estonia has tax treaties in force with distribution or payment. Tax returns • gambling tax; Albania, Armenia, Austria, Azerbaijan, can be lodged through an electronic • VAT; Bahrein, Belarus, Belgium, Bulgaria, form over the Internet. Estonian tax • customs duty; Canada, China, Croatia, the Czech system does not recognise any advance • excise duties (alcohol, tobacco, Republic, Cyprus, Denmark, Finland, corporate income tax payments. fuel, some packaging materials and France, Georgia, Germany, Greece, electricity); Hungary, Iceland, India, Ireland, The VAT taxation period is a calendar • heavy load vehicles tax. Isle of Man, Israel, Italy, Jersery, month, and the VAT should be Kazakhstan, Latvia, Lithuania, declared and paid on or before the Currently, Estonia does not impose Luxembourg, Macedonia, Malta, 20th day of the following month. any gift or estate taxes. Various Mexico, Moldova, the Netherlands, transactions subject to registration Norway, Poland, Portugal, Republic If the statistical threshold (in 2015 with the authorities are liable to of Korea, Romania, Serbia, Singapore, per calendar year for dispatches this payment of a state fee (). the Slovak Republic, Slovenia, Spain, is EUR 130,000 and arrivals this Sweden, Switzerland, Thailand, is EUR 200,000; same threshold Employers and employees must also Turkey, Turkmenistan, Ukraine, the was applied in 2013 as well as in make mandatory unemployment United Arab Emirates, the United 2014) has been exceeded, Intrastat contributions and compulsory Kingdom, the of America declarations are required to be accumulative pension contributions to and Uzbekistan. submitted to the Statistics Estonia. the state budget. The due date for submission of an Treaties have also been concluded with Intrastat declaration is the 10th As permitted by the Law on Local Russia and Morocco but these are not working day following the calendar Taxes, a few municipalities have yet in force. month to which the declaration introduced the following local taxes: relates. The declaration liability is • advertisement tax; 8.6 Tax returns and valid until the end of the calendar • road and street closure tax; payments year. A business may file its Intrastat • motor vehicle tax: Legal entities declarations electronically. • animal tax; • entertainment tax; The period of taxation is a calendar EC sales listing is due on a monthly basis • parking charges. month. The combined corporate by the 20th day of the following month.

34 PwC Individuals that, must pay the final amount of due. However, until the decision is For individuals the period of taxation income tax due by 1 July of the year made, the tax administrator cannot is a calendar year. In general, resident following the period of taxation. freeze or extract funds from the individuals must file an individual taxpayer’s bank account. income tax return by 31 March Resident taxpayers who reported following the year in which the income business income,capital gains or The taxpayer or the withholding agent arises. Electronic filing of tax returns foreign income in their tax return must has the right to appeal in court at any becomes available from 15 February. pay the final amount of income tax due stage of the tax dispute. However, by 1 October of the year following the again, this does not mean that the Certain items of foreign sourced, tax period of taxation. taxpayer does not have to pay the tax exempt income must be reported due until the courts say otherwise. for information purposes. Married 8.7 Assessments resident taxpayers may elect to lodge Estonia operates a self-assessment 8.9 Withholding taxes their tax returns jointly or separately. system. Tax returns show the agents must withhold due and taxpayers must pay this income tax from certain payments. For non-residents, the tax withheld amount without waiting for a formal at source at domestic or treaty rates assessment notice. Withholding agents include resident generally constitutes final tax as regards legal entities, resident individuals their Estonian source income and the The tax administrator has the right registered as sole proprietorships or non-resident is generally not obliged to to recalculate the tax due in the tax acting as employers, and non-residents submit a tax return to the Estonian tax return according to the terms and having a permanent establishment or authorities for income so taxed. order fixed in the Law of Taxation. The acting as employers in Estonia. taxpayer will be informed in writing However, for certain types of Estonian about the recalculated tax to be paid The tax must be reported and source income, non-residents are liable and the reasons for the recalculation. paid by the 10th day of the month under Estonian domestic law to self following the payment. Income assess Estonian tax and submit a tax Resident individual taxpayers will tax is not withheld from payments return to the Estonian tax authorities receive an assessment notice upon to resident companies, registered by the following deadlines: the submission of individual income sole proprietorships and registered • Capital gains realised from certain tax returns 30 days before the tax due permanent establishments of foreign types of assets should generally be payment deadline. companies. reported by 31 March of the year following the realisation of the gain. 8.8 Appeals The following payments are subject to Capital gains from the sale or disposal Where there is a dispute regarding withholding tax: of immovable property located in the amount of tax assessed by the tax Estonia should be reported within administrator, the burden of proof that • There is no withholding tax on one month of realising the gain. the assessment was incorrect rests with interest payments to non-residents. • Profits derived from business the taxpayer. • Royalties (including payments for activities (without a registered the use of industrial, commercial, or permanent establishment) The taxpayer has the right to appeal to scientific equipment) paid to non- conducted in Estonia should the local office of the tax administrator residents are generally subject to 10% generally be reported by 30 June who calculated the amount of the tax withholding tax under domestic law, of the following year (or within due and dispute the assessment in but reduced rates may apply under two months if business activities in question within 30 days after receiving double tax treaties. Certain royalty Estonia are terminated). obligatory notice of the amount due. payments to associated EU and Swiss • Other items of Estonian-source companies meeting certain conditions income from which income tax was If the local tax administrator does not are exempt from withholding tax. not withheld but should have been accept the appeal, the taxpayer must • Rental payments to non-residents for must be reported by 31 March of the forward the appeal to the central the use of immovable property located year following the year in which the institution of the tax administrator in Estonia and movable property income was received. within seven days, which must make subject to registration in Estonia a decision within 30 calendar days of (excluding payments for the use of A resident individual will receive an receiving the appeal. industrial, commercial or scientific income based on his/ equipment) are subject to 20% her filed return at least 30 days before An appeal does not mean that the withholding tax under domestic law, the tax payment is due and based on taxpayer does not have to pay the tax but double tax treaties may exempt

Guide to doing business and investing in Estonia 35 payments for the use of movable 8.10 Tax audits The limitation period for making property from withholding tax. The Law on Taxation provides the an assessment is three years from • Interest, royalties and rental tax administrator with a right to the due date of the tax return for a payments to resident individuals are investigate taxpayers by commencing simple failure to pay. In the event of subject to 20% withholding tax. two different types of tax investigation: intentional (or willful • Payments to non-resident companies tax evasion), the limitation period for services provided in Estonia, • Audit of individual cases; for making a tax assessment is five including management and • Tax audit. years from the due date of the tax consultancy fees, are subject to 10% return. withholding tax under domestic law, An audit of individual cases is but exemptions may apply under generally commenced for the purpose 8.12 Advance clarifications double tax treaties. Service fee of investigating the facts already A binding advance ruling will include payments to “” entities are known by a tax administrator. the tax authorities’ opinion on the always subject to 20% withholding consequences of a transaction or series tax. Tax audits are used for the purpose of transactions to be undertaken by a • Salaries, directors’ fees and service of a comprehensive investigation taxpayer. fees paid to individuals are subject of the taxpayer’s overall economic to 20% withholding tax under activity, and to identify unknown The ruling will be binding on the domestic law, but double tax treaties facts. The related taxes and time tax authorities, provided that the may exempt service fee payments ranges will be stated on the transactions are concluded within to non-resident individuals from notification issued by the tax the time and under the circumstances withholding tax. administrator seven days before the described in the ruling request, and • Payments for the activities of non- beginning of the revision. also provided that the relevant tax resident artists or sportsmen carried legislation had not been changed out in Estonia are subject to 10% 8.11 Penalties substantially before the taxpayer withholding tax. In practice, in case of voluntary entered into the transaction. • Certain pensions, insurance adjustments to tax returns the benefits, scholarships, prizes, taxpayers will only pay unpaid tax and Rulings will not be issued on transfer lottery winnings, alimony, etc. interest on the late payment. pricing matters and may be denied paid to non-residents and resident for hypothetical transactions and individuals are subject to 20% Currently the interest rate is 0.06% of transactions with the sole purpose of withholding tax. the tax due for each day of delay. tax avoidance.

For non-residents who do not have a Under the Estonian Law on Binding rulings will be issued within permanent establishment in Estonia, Taxation, if a legal person fails to 60 days of the submission of the the tax withheld from the above submit a tax return, documents or request, or within 90 days if the tax payments at domestic or treaty other information by the due date authorities have a valid reason to rates constitutes final tax as regards prescribed by tax laws, or submits request an extension of the response their Estonian source income and false information or knowingly deadline. they do not have any tax reporting submits incorrect documents to the requirements in Estonia. Tax and Customs Authority, the Summaries of tax rulings that have latter may assess a fine of up to EUR general significance or deal with For certain types of Estonian source 32,000. frequently asked questions may be income, non-residents are liable under published on the tax authorities’ Estonian domestic law to self-assess Failure to submit information or website, with due regard for the Estonian tax and submit a tax return submitting incorrect information to protection of tax privacy and personal to the Estonian tax authorities. Such the tax authority, to reduce tax or data of the persons involved. types of income include: withholding obligations, or to increase or create a claim for refund, or to Upon the taxpayer’s request the • taxable capital gains; violate a withholding obligation if the Estonian Tax and Customs Authorities • profits derived from business act results in a tax underpayment, may also issue an advance clearance conducted in Estonia without a refund, set off or compensation within 30 days, but this is not formally registered permanent establishment; without basis of an amount binding to them; in practice the • other items of income from which corresponding to or exceeding major authorities follow the clearance issued tax was not withheld but should damage, is subject to provisions of the if all facts and circumstances have have been withheld. Penal Code. been properly described.

36 PwC 9 Taxation of corporations

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

Guide to doing business and investing in Estonia 37 Mergers, divisions and 9.3 Taxable income subject to a 20% corporate income tax re-organisations of companies are As noted above, Estonia levies a (20/80 on the net amount of profit generally tax-neutral. corporate income tax only on profits distribution). For example, a company that are distributed as dividends, that has profits of 100 available for There is no form of consolidation or share buy-backs, capital reductions, distribution can distribute dividends group taxation for corporate income liquidation proceeds or deemed profit of 80, on which it has to pay corporate tax purposes. distributions. income tax of 20. From the Estonian perspective, this tax is regarded as Dividends distributed by Estonian Starting from January 2015 a corporate income tax and not a companies are exempt from corporate distributed profits are generally withholding tax, so the tax rate is income tax (‘participation exemption’) if these are paid out of: • dividends received from Estonian, EU, EEA and Swiss tax resident companies in which the Estonian company has at least 10% shareholding; • profits derived through a permanent establishment (“PE”) in the EU, EEA or Switzerland; • dividends received from all other foreign companies in which the Estonian company has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or foreign income tax was withheld from dividends received; • profits derived through a foreign PE in all other countries, provided that such profits have been subject to tax in the country of the PE; or • liquidation proceedings, share buy-backs or capital reductions, which have been subject to taxation by the distributor of such income.

Estonia has no thin capitalisation or CFC rules for corporate taxpayers.

There are specific anti-tax haven rules for certain dealings with tax haven companies, treating these as deemed profit distributions.

There is a general anti-avoidance rule, which allows tax authorities to ignore the legal form of a transaction and reclassify it for tax purposes according to its “real” economic substance, if there are grounds to believe that the transaction was undertaken for the purpose of avoiding tax.

38 PwC not affected by double tax treaties. haven” entities) are not subject to depreciation, or tax loss carry forward Certain domestic and foreign taxes additional withholding tax under or carry-back). can be credited against the corporate domestic law. income tax charge under domestic 9.4 Deductibility of law or double tax treaties. Certain Distributable profits are determined expenses distributions are exempt from such tax by financial statements drawn up in Depreciation and depletion (“participation exemption”). accordance with Estonian GAAP or IAS/IFRS and there is no adjustment Distributable profits are determined Dividends paid to non-resident of accounting profits for tax purposes by financial statements drawn up in legal entities (including “tax (e.g. there is no separate tax accordance with Estonian GAAP or

Guide to doing business and investing in Estonia 39 IAS/IFRS, and there is no adjustment fringe benefits received by a resident Furthermore, there are specific of accounting profits for tax purposes. employee are in general not included anti-tax haven rules treating certain Corporate entities are not subject to in the taxable income of the employee transactions and dealings with “tax tax depreciation rules. for Estonian tax purposes. haven” companies as deemed profit distributions, which are therefore Net operating losses Fringe benefits are subject to 20/80 subject to 20/80 corporate income tax. There is no use for the losses carried corporate income tax and 33% social These include: forward, as distributable profits are tax. • acquisition of securities issued by determined by financial statements a tax haven entity (exception for drawn up in accordance with Estonian For example, where the amount of certain listed securities); GAAP or IAS/IFRS and there is no the benefit is 100, the income tax due • acquisition of an ownership interest adjustment of accounting profits for by the employer would be 25 (20/80 in a tax haven entity: tax purposes (tax loss carry-forward or x 100) and the social tax due 41.25 • payment of fines or penalties to a tax carry-back). (0.33 x 125), making up a combined haven entity, unless settled by court total fringe benefit tax charge of or arbitrage; Payments to foreign affiliates approximately 66. • granting loans or making Payments to foreign affiliates are prepayments to a tax haven entity or Gifts, donations and “deductible”, i.e. not subject to otherwise acquiring a claim against a representation expenses 20/80 corporate income tax, as they tax haven entity. are deemed profit distributions, Corporate income tax of 20/80 provided that the payment serves is generally due on gifts and 9.5 Related party a business purpose and provides a donations. Gifts and donations transactions benefit to the payer, is at arm’s length, made to certain qualifying recipients Transactions between related parties and is substantiated by sufficient are only subject to 20/80 corporate (both resident and non-resident) documentation (see also section 10.5). income tax if such expenses exceed and between a head office and its one or both of the following two permanent establishment(s) should be Payments to foreign affiliates may limitations: conducted at arm’s length terms. also be subject to various withholding taxes. Certain payments to affiliates • 3% of the calculated social tax base Transfer pricing adjustments are located in “tax havens” are always for the existing calendar year, or treated as deemed profit distributions, subject to 20/80 corporate income tax • 10% of the profit of the last financial which should be declared on a or 20% withholding tax. year according to statutory financial monthly basis and which are subject to statements. 20/80 corporate income tax. Taxes All taxes paid are “deductible” for Representation expenses are generally Five transfer pricing methods listed income tax purposes. In certain subject to 20/80 corporate income in the regulation are also accepted circumstances domestic or foreign tax only if they exceed the threshold in the OECD guidelines: comparable taxes may be creditable against the of EUR 32 per month plus 2% of uncontrolled price, resale price, cost- 20/80 corporate income tax charge the calculated social tax base of the plus, profit-split and the transactional under domestic law or an applicable calendar month in which the expenses net margin method. Estonia has also . are paid. introduced special transfer pricing documentation requirements for Fringe benefits Other significant items certain taxpayers in line with the EU Employers operating in Estonia Corporate income tax of 20/80 Transfer Pricing Documentation Code (including foreign companies that is generally due on expenses and of Conduct. have a permanent establishment payments which do not have a business or employees in Estonia) are liable purpose and which are therefore 9.6 Foreign exchange to Estonian taxation on any fringe regarded as being profit distributions. Foreign exchange gains and losses are benefits granted to their employees These may include, for example, tax neutral, as in the absence of annual (including directors). late payment interest on tax arrears, taxation of net profits all undistributed penalties imposed by law, bribes, corporate profits are tax-exempt. Fringe benefits are subject to special purchases of services or settlements tax treatment in Estonia, as it is only of obligations not related to the 9.7 Tax computations the employer who has the obligation taxpayer’s business, and acquisitions See section 9.3 above. There is no form to pay taxes on the fringe benefits of assets not related to the taxpayer’s of consolidation or group taxation for furnished to the employee. Taxable business. corporate income tax purposes.

40 PwC 9.8 Other taxes or gross laden weight of over 12 tons; low, as very few local municipalities Real estate and land tax (2) ‘road-trains’ made up of trucks and have introduced local taxes. Local taxes trailers with a maximum authorised include advertisement tax, road and Land is subject to annual land tax that weight or gross laden weight of over street closure tax, motor vehicle tax, a is calculated on the assessed value of 12 tons. The tax is paid by the owners tax on keeping animals, entertainment land at rates between 0.1% and 2.5%, or users of the vehicles. tax and parking charges. depending on the municipality. The tax Gambling tax Environmental taxes is paid by the land owners, or sometimes by the users of the land, generally in A gambling tax is imposed on amounts Estonia does not impose any two instalments, by 31 March and by 1 received from operating games of skill, environmental taxes. However, there October. There is no , i.e. tax totalizators, betting and lotteries. Tax are certain pollution charges, charges on the value of buildings. is also charged on gambling tables for the use of natural resources and and slot machines used for games of environmental insurances (insurance Property transfers are generally subject chance located in licensed premises. against pollution risk). to state and notary fees. The tax is paid by the authorised operators. 9.9 Branch versus Heavy goods vehicle tax subsidiary Local taxes Heavy goods vehicle tax is paid for the As a general rule, branches and following classes of vehicles that are Local taxes can be imposed by local subsidiary companies are subject to registered with the Estonian National municipality or city councils in their similar tax rules in Estonia. In both Motor Vehicle Register and intended administrative area in accordance with cases, the retained earnings remain for the carriage of goods: (1) lorries the Local Taxes Act. However, the fiscal exempt from corporate tax until the with a maximum authorised weight significance of local taxes is extremely distribution of profits to the head office or parent company, respectively. Upon distribution, a 20% monthly corporate tax will be due. There is no branch profits tax (on top of the corporate tax payable upon distribution) in Estonia.

Compared with a branch, in the case of a subsidiary which is a private or public limited company, there may be more tax planning opportunities for the tax efficient repatriation of profits from Estonia.

The Estonian branch of a foreign company is not subject to statutory audit requirement, but it must submit an annual report from the head office to the Commercial Register, and its own annual report to the local tax authorities within six months from the end of the financial year. The subsidiary company must submit its annual report only to the Commercial Register. 9.10 Holding companies Estonia has a favourable corporate tax regime whereby all undistributed corporate profits are exempted from taxation and this provides for numerous opportunities to use Estonia as a location for holding, financing or trading activities by multinational companies.

Guide to doing business and investing in Estonia 41 10 Taxation of Individuals

Investor considerations A flat 20% income tax applies to taxable income of individuals starting from 1 January 2015.. Estonian resident individuals are subject to taxation on their worldwide income. Non-resident individuals are subject to taxation on the listed Estonian source income. Tax on employment income is collected by employers In 2014, 95,4 % of individual income tax returns were submitted via the internet.

10.1 Territoriality and residence Individuals are considered residents of Estonia if they have a permanent residence in Estonia, or if their stay in Estonia during any 12-month period business income, as well as passive earned from the transactions with exceeds 182 days. An individual may be income, such as capital gains, rents certain financial assets when using a deemed to have become a tax resident and royalties, interest, dividends, specific investment account system. from the date of his arrival to Estonia. certain insurance proceeds, pensions, In order to enter the system, an scholarships, grants, prizes, lottery individual has to have an ’investment If the tie-breaker article in an winnings, etc. account’ which is an ordinary current applicable double tax treaty allocates account in a bank operating in a the residence of a dual-resident This list is not exhaustive and therefore country that is a member of European individual to a foreign country (most any income derived by a resident Economic Area or OECD. The number often if the home and family of the individual not falling within the above of investment accounts per individual individual remain abroad during an categories is taxable, unless a tax is not limited. Payment of income tax assignment to Estonia), then generally exemption is available. can be deferred if qualifying financial the individual will be taxed as a non- assets are purchased for the money in resident in Estonia regardless of the In general, individual taxpayers are the investment account and income Estonian domestic rule. taxed on a cash basis. Exceptionally, from the transactions is immediately the Estonian CFC (anti-deferral) transferred to the investment 10.2 Taxable income rules attribute undistributed profits account. All transfers in and out of Estonia has a proportional (i.e. flat) of foreign “tax haven” companies to the investment account(s) must be tax rate of 20% which applies to all resident individual taxpayers if such reported in an individual annual items of income derived by a resident companies are controlled by Estonian income tax return. Income tax at 20% taxpayer. Certain pension payments residents. is paid only when the payments out are subject to 10% income tax. of the investment account exceed the Most items of personal income are amount paid in. The gross income of resident taxed on a gross basis, mainly through individuals includes their worldwide withholding at source, whereas business 10.3 Non-taxable income income from all sources, irrespective of income and capital gains are taxed on a For resident individuals, there the origin of the income. net basis subject to certain conditions. are numerous items of tax exempt income (excluded from gross Taxable income includes both active Individuals are allowed to defer their income). Some of the more income such as employment and income tax liability on the income important items of tax-exempt

42 PwC income include domestic dividends, The first category includes certain • profits derived from business qualifying foreign dividends, mandatory payments which can be conducted in Estonia without a qualifying foreign employment deducted without any limitations, registered permanent establishment; income, current account interest including unemployment insurance • other items of income from which received from EEA banks (including contributions, contributions to tax should have been withheld but Estonian banks), alimonies and compulsory accumulative pension was not. certain qualifying capital gains. schemes and certain obligatory contributions to foreign social security 10.6 Tax compliance As an exception from the general schemes. The period of taxation is a calendar rule, foreign employment income is year. In general, individuals must exempted from Estonian income tax The second category includes file a personal income tax return for a resident employee (including deductions which are allowed for by 31 March following the year in withholding requirement), provided tax policy reasons and which have which income was received. As an that: various limitations on deductibility. exception, were gains were derived The second category includes certain from a transaction with real estate, • an employee has spent at least 183 bank and leasing interest paid non-residents must submit a tax return days in a 12-month period in a in relation to acquiring personal within one month from the receipt of foreign country for the purpose of residence, certain educational such gains. employment; and expenses, certain gifts and donations • the foreign employment income and certain payments to personal Electronic filing of tax returns becomes is treated as taxable income in the pension schemes. available from 15 February each foreign country (which must be year. Married resident taxpayers may Tax credits proven by documentary evidence) select filing their tax returns jointly or and the employee can produce a Estonian resident taxpayers who separately. certificate stating the amount of have received foreign-source taxable income tax paid on the employment income are generally allowed to A resident individual will receive an income (even if the tax amount is credit foreign income tax against income tax assessment based on his nil). their Estonian income tax liability. return as filed at least 30 days before The is limited to 20% the tax payment is due. Tax exempt foreign employment of foreign taxable income and is income must be declared in the annual calculated separately for each foreign Non-residents are liable to self- income tax return of the resident country. assess their Estonian tax and submit individual. a tax return to the Estonian tax 10.5 Taxation of non- authorities regarding the income 10.4 Deductions residents which is taxable but has not been Business deduction Non-residents are only taxed on subject to withholding. Non- their Estonian-source income. For residents will generally not receive If an individual is carrying out non-residents, income tax withheld a tax assessment from the tax business activities through the form of at source at domestic or treaty rates authorities. sole proprietorship, he/she is allowed generally constitutes final tax. Non- to deduct business expenses from the residents are generally not obliged Based on the tax assessment received business income. to submit a tax return in Estonia for from the tax authorities, resident income so taxed. individuals must pay the final amount Non-business deductions of income tax due by 1 July of the (including personal allowance) However, for certain types of Estonian- year following the period of taxation. Resident individuals and certain source income, non-residents are The resident taxpayer who reported qualifying EU resident individuals are liable under Estonian domestic law business income, foreign income or allowed to make certain deductions to self-assess their Estonian tax and capital gains in his/her tax return must from their gross income. submit a tax return to the Estonian pay the final amount of income tax due tax authorities. Such types of income by 1 October of the year following the These include the annual basic include: period of taxation. personal allowance of € 1,848 and certain additional personal • employment income on which In general, non-residents must pay allowances, as well as certain income tax has not been withheld in income tax due within three months deductible documented expenses, Estonia; from the deadline of submitting the which fall into two categories. • certain capital gains; tax return.

Guide to doing business and investing in Estonia 43 11 Value added tax (VAT)

Investor considerations 11.1 Introduction A taxable person is a person who Estonian VAT legislation is based on the The current VAT Act was introduced is engaged in business, which is EC VAT Directive (2006/112/EEC). effective from 1 May 2004 when independent economic activity in the The standard VAT rate is 20% from 1 July Estonia joined the EU. VAT as such course of which goods or services are 2009 and the reduced rate is 9%. was introduced in Estonia effective supplied, and is registered or required from 1992 and is known in Estonian as to register for VAT. Estonia applies extended reverse charge “käibemaks”. mechanism. The standard 20% rate applies to all An option to tax is available in respect of VAT applies to the supply of goods and supplies of goods and services not certain domestic exempt supplies. services performed by a taxable person qualifying for a reduced 9% rate or in the course of its business activities exemption. A reduced rate applies in Estonia. to accommodation, books, certain periodicals, listed pharmaceutical

44 PwC products and medical devices. The The following supplies are also treated and the resulting price “distortion“ VAT rate on the export of goods, as exempt without credit: would give rise to a reduction of VAT intra- Community supply of goods and • insurance services, including revenues to the state budget. As a certain services is 0% (i.e. exemption reinsurance and insurance general rule, the open market value with credit). mediation; will represent the taxable value. When • leasing or letting of immovable there are no comparable sales of goods VAT and all other taxes are property or parts thereof; or services, then the tax base will be administered by the Estonian Tax and • immovable property, except for the the purchase price or the cost price for Customs Board (www.emta.ee). supply before the first occupation goods and the full cost for services. of buildings or their parts as well as The information covered in this renovated buildings or their parts; 11.6 Non-deductible input chapter can also be found on www. • listed financial services; VAT globalvatonline.com, PwC global • transactions in securities. In principle, a credit for VAT incurred website that provides a comprehensive in the course of business, except for guide to global VAT information from Of the above exempt supplies, an VAT on tax exempt supplies, is given over 70 countries worldwide. option to tax is available in respect to against the output tax due to the the following: authorities. 11.2 Scope of VAT • disposal of immovable property, The following transactions are subject except residential housing; No deduction is allowed for input VAT to Estonian VAT: • lease of or establishment of a incurred on the purchase of goods and • the supply of goods and provision usufruct on immovable property or services used for: of services with a place of supply in its parts, except residential housing; • the reception of guests; or Estonia; • listed financial services and • the provision of meals or • the import of goods into Estonia; transactions in securities, unless accommodation for employees • intra-Community acquisition of such a service is provided to the (except input VAT on goods in Estonia; taxable person (or taxable person accommodation services used during • the supply of goods or services with a limited liability) of another business trips by employees). specified in the Estonian VAT Act, EU member state. if the taxable person has opted for Up to December 2014 there were no taxation of those. 11.5 Taxable amount restrictions on deducting the input VAT The general rule is that the taxable incurred in relation to the purchase 11.3 Zero-rating value of a supply, or of the intra- and use of company (passenger) cars Certain supplies are subject to a 0% Community acquisition of goods and gasoline. However, the private rate (i.e. exemption with credit or or services, is the sales price of the use of the company (passenger) car zero-rating), including but not limited goods or services and other amounts was treated as a self-supply, on which, to: which the purchaser of the goods, generally, the company had to pay VAT • export of goods; the recipient of the services or a third on a monthly basis in the fixed amount • intra-Community supply of goods; party is to pay to the seller of the goods of EUR 43 (in addition to fringe benefit • the products listed in the Annex or the provider of the services for the taxes), regardless of the age or the V of the VAT Directive, which goods acquired or services received. model of the car. can be placed into a licensed VAT warehouse; The taxable value of imported goods Starting from December 1, 2014 only • supply of services which are not is comprised of the customs value 50% of input VAT on acquisition of deemed to be supplied in Estonia. of the goods and all duties payable company passenger cars or other upon import, as well as other costs related costs, including running and 11.4 Exempt supplies related to the carriage of the goods to maintenance, can be deducted used Supplies that are exempt without the destination, such as commission, both for business and private use. credit include but are not limited to the packing, transportation and insurance following activities of a social nature: costs which have not been included Passenger cars are defined as vehicle • certain universal postal services; in the customs value, up to the first of category M1 (including M1G) used • listed health services; place of destination in the territory of for the carriage of passengers and • listed social welfare services; Estonia. which have eight seats at the most • general education services, including in addition to the driver’s seat and learning materials, except for The taxable value may be subject to whose maximum weight does not business purposes. adjustment only when the transaction exceed 3.5 tons. The vehicles outside is carried out between related parties, this category (including N1 and N1G,

Guide to doing business and investing in Estonia 45 also known as pick-up trucks) are 11.9 Specific reverse charge Self-billing is allowed in Estonia. not considered as passenger cars and For the purposes of prevention Each self-bill must be accepted by the therefore not affected by the change of VAT evasion, reverse charge supplier. The terms and procedure in legislation. mechanism applies to the domestic shall be fixed by the parties in the supply of waste metal, real written agreement. There are some exceptions still estate, certain gold material and allowing deduction of whole input investment gold. According to the Certain transactions of foreign VAT paid in relation to car related specific taxation regime, the VAT businesses require Estonian VAT costs after December 1, 2014. These is accounted for by the VAT liable registration without any threshold exceptions comprise passenger cars purchaser and not by the supplier. (e.g. intra-Community supply of goods purchased for resale or hire, passenger For real estate and investment gold, from Estonia). cars mainly used as a taxi or for driving the reverse charge only applies when lessons and passenger cars exclusively the seller has opted for taxation of Generally, a VAT representative is only used for business purposes. There are sales. required for the registration of non-EU no specific rules in the Estonian VAT businesses. law as to how ‘the exclusive use of a 11.10 VAT compliance Accounting requirements company car for business purposes’ Registration should be proved, but upon a tax VAT taxpayers have an obligation to dispute the taxpayer has to defend If the taxable supplies of Estonian keep records on: its position by presenting relevant businesses or fixed establishments of • the amounts of input VAT relating to evidence. foreign businesses in Estonia exceed taxable and exempt supplies; EUR 16,000 in a calendar year, VAT • taxable supplies by rate and tax Proceed from it the private use of a registration is required. exempt supply; company passenger car free of charge • the amount of output VAT by rate; of for a fee is outside VAT scope. Voluntary registration is also possible, • the amount of deductible input VAT; even if the threshold is not reached. and 11.7 VAT incentives • all other particulars necessary to Under certain conditions, importers VAT registration is effected within prepare a VAT return. registered for VAT purposes in five working days. The Estonian VAT Estonia are able to account for VAT number starts with a prefix EE which is Specific regulations are laid down on imported goods, including capital followed by nine digits: EE123456789. by the Ministry of Finance regarding goods, in their monthly VAT returns. 11.8 Simplification measures Estonia has elected to extend the reverse charge mechanism to all local supplies of goods and services (for instance the supply of goods with installation, services relating to real estate, etc.) if the supplier is a foreign taxable person, who is not established (i.e. does not have a fixed establishment) and is not registered for VAT purposes in Estonia. The liability to pay tax is shifted to the customer (the recipient of goods or services), who is registered for VAT in Estonia. In this situation, a non- established foreign taxable person will not have to register for VAT in Estonia. Also, Estonia has introduced VAT warehousing. The products listed in Annex V of the VAT Directive can be put into a licensed VAT warehouse.

46 PwC the content and form of the VAT determined and differs from the date • the VAT to be refunded would be accounting. of issue of the invoice. recoverable by Estonian VAT liable persons under the same conditions; The VAT legislation lays down a In certain cases reference to the and retention obligation for a period of relevant clause of the VAT Act or the • the VAT refund application is seven years. This retention period article of the EC VAT Directive shall be submitted via the electronic portal applies to the documents that should added. The invoice has to be submitted set up by home country at the latest be kept according to Estonian VAT to a recipient within seven days after on 30 September of the calendar year Law (i.e. copies of invoices and credit the date of the taxable event which is following the refund period. invoices issued by or on behalf of the the dispatch of goods or the provision taxable person, original invoices for of services, or receipt of partial or Input VAT paid on representation goods and services received by taxable full payment (except in case of intra- costs and provision of meals to and persons, and customs declarations Community supply of goods and accommodation of employees of the certifying the import of goods). provision of B2B services). applicant, except the accommodation during the business trips by employees, Books, registers and records may If the liability to account for VAT is not refunded. be archived in any form provided is shifted to the recipient of goods that the chosen data carrier allows or services, i.e. reverse charge VAT The non-EU business is entitled to a printing of the stored information. applies, a clear reference on the refund of VAT paid in Estonia if: VAT invoices need to be archived in the invoice shall state so. • it is registered for VAT purposes in form guaranteeing the integrity of the its home country; content. Invoicing in a foreign language and • the VAT to be refunded would be currency is allowed. However, the VAT recoverable by Estonian VAT liable A taxable person may choose the amount must be presented in Euros. persons under the same conditions; place at which invoices are stored on and Returns and payment condition that the person makes the • the respective non-EU country invoices or information stored therein The VAT accounting period is generally grants reciprocal rights for VAT immediately available to the tax a calendar month, and VAT should be refunds to Estonian residents. At authority upon request. declared and paid by the 20th day of present, reciprocity is accepted for the following month. Switzerland, Norway, Iceland, Israel Information in a VAT invoice and Croatia. The following information is required In November, 2014, an annex to be stated on the VAT invoice: (‘KMD INF’) to the VAT return was VAT refund applications can be • the name, address and the VAT introduced where the information on submitted by EU businesses for a registration number of the supplier; invoices exceeding EUR 1 thousand period of not less than three months • the serial number and the date of per transaction partner must be within a calendar year and the issue of the invoice; reported. The form consists of two minimum VAT amount to be refunded • the name and address of the parts in which the part A is for must be at least EUR 400. recipient of goods and services; invoices issued and the part B for • the name or a description of the invoices received. As the purpose of In cases of annual submissions of goods or services; the form is to compare transactions refund applications, the minimum VAT • the quantity of the goods or extent of conducted in Estonia, it does not amount must be at least EUR 50 and the services; include cross-border transactions. for non- EU business, the minimum • the price of the goods or services KMD INF has to be filed together VAT amount must be at least EUR 320. exclusive of VAT and any discounts, with the VAT return by the 20th day if these are not included in the price; of the month following the taxation Generally, the VAT refund for EU • the taxable amount divided by period. businesses is granted within four months different VAT rates together with the of the date of submitting electronically VAT refund to foreign businesses applicable VAT rates or the amount the official refund application and of tax exempt supply; The EU business is entitled to a refund VAT invoices. For non-EU businesses, • the amount of VAT payable in Euros; of Estonian VAT, if: the VAT refund is granted within six • the date of dispatch of the goods • it is registered for VAT purposes in its months and the VAT refund application or provision of services and/or home country; must be accompanied with the original an earlier date of receipt of full • the VAT to be refunded would be VAT invoices and the VAT registration or partial payment for the goods recoverable to the EU business also certificate (issued by the VAT Authorities or services if the date can be in its home country; of the home country).

Guide to doing business and investing in Estonia 47 12 PwC in Estonia

We are proud to offer services to all of our clients depending on their More than 130 specialists provide more than 300 clients in Estonia, size and specific needs. daily professional assurance, tax, including leading domestic and legal and business advisory services multinational companies and public While we have experience working to clients in Estonia by making use of services institutions. The clients of with all industries represented in their industry-focused expertise and PwC in Estonia range from the largest Estonia, we have built particularly international competence. and most complex organisations to strong expertise in areas such innovative entrepreneurs. as mergers and acquisitions, Worldwide, the PwC firms’ headcount banking, private equity, insurance, is more than 195,000. All our people in PwC serves significantly more than real estate, data protection, 157 countries connect their thinking, half of the largest companies in competition employment, experience, industry knowledge and Estonia. Our services are tailored to energy, telecommunications and business understanding to serve our match the needs and requirements of infrastructure. clients and enhance value.

48 PwC Our success in meeting today’s KPMG 20% PwC provides audit business challenges rests on the way PwC 67% services to more than two thirds of we approach our work. the companies listed Corporate social responsibility E&Y 0% at Tallinn Stock Exchange We know that it takes more than just nice speeches and good intentions Deloitte when making the world a better 13% place to live. It requires one to make a contribution and deliver real actions.

In the world we live and do business in, it is necessary to make a lasting contribution. It may be a monetary support, an environmentally Deloitte 18% responsible behaviour, advising of those PwC 49% in need or anything else. Therefore, on PwC has the top of client work, we feel responsibility largest market for the wider business environment share in Big 4 in – what we do, helps increasing the auditing Estonian leading companies transparency and reliability of the (business daily Estonian business environment, we KPMG 20% Äripäev TOPP 50 conduct our business in an honest Estonian companies and ethical manner, we participate in by turnover) vocational associations and legislative drafting, we share our knowledge in E&Y 13% training sessions and seminars.

In Estonia, we support, among others: 62 public interest • Estonian Children’s Fund, where Deloitte 21 entities have we’ve been three years a main PwC 62 appointed PwC as sponsor for contributing into the their auditors orphans’ opportunities in obtaining higher education. • Narva-Jõesuu orphanage, • Students’ and graduates’ KPMG 29 organisations.

We care about the society – we share our knowledge with students and sponsor students’ events. E&Y 24

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. entities, we audit two thirds of the Our audit explores and thinks more companies listed at Tallinn Stock widely about our clients’ businesses We think green and save nature in the Exchange. Our audit approach, at as a whole, enabling us to offer new office and outside. the leading edge of best practice, solutions to the problems, helping is tailored to meet the needs of any the clients to learn from what has 12.1 Assurance services size organisation as evidenced by our happened to avoid issues in the PwC is the leading audit and assurance appointment as auditor to hundreds future. services provider in Estonia. Our audit of small and mid-size businesses in clients include 62 of the public interest addition to large corporations. The services that we provide include:

Guide to doing business and investing in Estonia 49 • audit of financial statements • Accounting: Practice Areas prepared in accordance with IFRS; Day-to-day bookkeeping and • audit of financial statements preparation of the annual accounts. • Mergers and Acquisitions prepared in accordance with the • Tax compliance: • Banking, Finance and Insurance generally accepted accounting Monthly tax return preparation/ • Employment principles in Estonia; submission, including indirect • Corporate and corporate secretarial • review of financial reporting; tax (VAT return/EC Sales services • agreed-upon procedures; listing/Intrastat) and direct tax • Public procurement • expert opinions on accounting (corporate income/payroll taxes • Data Protection technical issues; compliance). • Insolvency and restructuring • training on accounting and financial • Payroll compliance: • Competition law reporting. Monthly payroll administration • Energy and environmental law and general advice on employment • Dispute settlement. 12.2 Tax services matters. The purpose of the Tax Services • Company administration: 12.4 Advisory services practice of PwC in Estonia is to assist Registrations (PE, VAT, foreign PwC has a unique, dedicated and clients in finding tax-efficient business employer), other ongoing most experienced advisory team solutions and managing tax risks. administrative activities (i.e. in Estonia that offers advice and opening a bank account, set-up support around key client issues. We work closely with our colleagues in of e-services for tax return filing We bring the highest quality other PwC offices worldwide and use purposes, providing mailbox combination of financial, operational our access to international knowhow function, assistance in recovery of and commercial insight into and long-term experience to quickly taxes etc). servicing the needs of our domestic and efficiently solve tax issues that • Tax review: and international clients. arise both locally and in foreign Periodic (annual, quarterly) tax jurisdictions. review of the monthly indirect, Our focus areas include: direct and/or returns • Consulting – helps in improving We provide tax services mainly in the submitted to Tax and Customs the efficiency and effectiveness following areas: Authorities etc. of our clients’ key business operations. Using our excellent • practical implementation of Estonian 12.3 PwC Legal skills in finance, risk management tax law; PwC Legal offers a wide range of legal and compliance, IT systems • and tax services to support the private and and operations, we assist in the structuring; public sector in close cooperation with identification and implementation • transfer pricing; PwC audit, tax and business advisory of cost saving initiatives, • tax due diligence; services. improvement of management • administration of tax audits and tax and control, identification and disputes; PwC Legal operates within the global management of risk and quality • preparation of requests for advance network of firms, uniting more than improvement. clearances and binding rulings; 2,400 lawyers working in over 80 • Deals - focuses on the deal • individual taxation and preparation countries worldwide. This allows continuum from strategy through of personal tax returns. us to provide complex professional execution to post deal integration, services with wide geographical including due diligence and We also provide tax training courses coverage through a single point of valuations, raising finance, helping both generally and in response to contact. With its unique approach, corporates and investors to sell or specific client requests. PwC Legal offers a seamless buy businesses, negotiating and service of the highest professional structuring deals, advising clients in 12.2.1. Tax management and standards across continents both Public Private Partnership and ohter accounting services in its legal services and the related large infrastructure projects. Where a company has decided to tax, advisory, consultancy and audit expand its business to Estonia through services. Our team has a wide range of services its local subsidiaries, branches or tailored to the need of public sector permanent establishments and there is Our lawyers combine legal expertise clients and we extensive experience in no finance function support available with a practical business approach business restructuring, dispute analysis the following functions can be based on our international and investigations and various other assigned to PwC Estonia: experience. specialist areas.

50 PwC Appendices

Appendix A Tips for business visitors A Visas Nationals of the European Economic Area (EEA) and any third-country national holding a residence permit of a Schengen State do not need a visa to enter Estonia. The holders of passports of the following countries and regions do not need a visa to enter Estonia for stays of no more than three months in a six month period: Albania*, Andorra, Antigua and Barbuda, Argentina, Australia, Bahama, Barbados, Bosnia and Herzegovina*, Brazil, Brunei, Canada, Chile, Costa Rica, El Salvador, Guatemala, Holy See, Honduras, Hong Kong, Israel, Japan, Macao, Macedonia*, Malaysia, Mauritius, Mexico, Moldova*, Monaco, Montenegro*, New Zealand, Nicaragua, Panama, Paraguay, Réunion, San Marino, Saint Kitts and Nevis, Serbia*, Seychelles, Singapore, South Korea, USA, Taiwan, Uruguay, Venezuela.

*only for the biometrical ordinary passports holders

Guide to doing business and investing in Estonia 51 Business hours The hours between 8 am and 6 pm are considered to be standard business hours. Public holidays • 1 January – New Year’s Day; • 24 February – Independence Day; • March/April – Good Friday and Easter Sunday; • 1 May – May Day; • May/June – Whitsunday/Pentecost; • 23 June – Victory Day; • 24 June – Midsummer Day; • 20 August – Day of Restoration of Independence; • 24 December – Christmas Eve; • 25 December – Christmas Day; • 26 December – Boxing Day. Credit cards Major credit cards (Visa, Mastercard/Eurocard, American Express etc.) are widely accepted in shops, restaurants and hotels and most of taxies. International time GMT + 2 hours Weights and measures The International System of Units (abbreviated SI) is used in Estonia. The metric system is used in everyday commerce and in science.

Appendix B Tax rates B Corporate income tax rates 20/80 Tax depreciation rates There is no adjustment of accounting profits for tax purposes; distributable profits are determined based on financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS. Withholding taxes 5% / 10% / 15% / 20% Individual tax rates 20% Personal allowances (and/or credits) The following deductions are available for resident (in certain cases also for non-resident) individual taxpayers:

1. The annual tax-exempt basic allowance for resident individuals is € 1,848

2. In 2015, an additional personal allowance (€ 1,848 ) is granted to one resident parent per each child starting from the second child.

3. An additional tax exempt basic allowance (€ 2,640) is available if an individual has received a state pension and/or a compulsory accumulative pension and/or a pension under the effective social tax treaties.

52 PwC 4. An additional tax exempt basic allowance (€ 768 ) is available, if a compensation payment for an occupational accident or occupational disease has been received. This exemption cannot be used, if such compensation is received as an insurance indemnity.

5. Interest on a loan and/or a finance lease for the purpose of acquiring a single-residence building or apartment. The deduction is given only for the one residential housing per tax period.

6. Education expenses paid to a licensed school or a foreign educational institution of equal status during the tax period are deductible for a resident individual if these are paid by the individual for himself,, or for his certain family member who is under 26 years of age.

7. A resident individual may deduct from taxable income a certain amount of charitable contributions made to non-profit associations and foundations listed by the Government, as well as to cultural, sport, educational, health or social security institutions belonging to the state or local authorities and public universities.

8. Premiums to certain pension schemes and the expenses paid to buy shares of resident pension funds qualifying under the law may be deducted from taxable income. Such a deduction is limited to lesser of the two: € 6,000 or 15% of the income derived during the tax year from which business expenses (if any) have been deducted.

9. The 1.6% employee’s unemployment insurance contributions and 2% (or 3%, if opted so in 2013) compulsory accumulative pension contributions.

10. Contributions to a foreign national social security scheme if such contributions were mandatory under the laws of the respective country and were paid from the income taxable in Estonia.

According to the restrictions imposed on deductions available to resident individuals from taxable income, the total amount of deductions, which includes the total of items 5 to 7 (see above) for a resident individual in 2014 cannot exceed the lesser of: • 50% of the taxable income of the respective tax year, or • € 1,920.

The deductions under item 7 are limited to 5% of the total income derived during the tax year from which business expenses (if any) and the above items 1 to 6 have been deducted.

Non-resident individuals of another EU Member State who have taxable income in Estonia are allowed under certain conditions to file tax returns as resident individuals in order to benefit from deductions available to Estonian residents. Tax on foreign nationals working in Estonia 20% Estonia does not levy a wealth tax. Estate and/or inheritance and/or rates Estonia does not levy estate, inheritance or gift taxes. Capital tax Estonia does not levy a capital tax. Indirect taxes 9% and 20% VAT Appendix C - Withholding taxes

Guide to doing business and investing in Estonia 53 Appendix C - Withholding taxes

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

Recipient Dividends (%) Interest (%) Royalties (%) (1) (2) (3) Non-treaty 0 0 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 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

54 PwC Slovenia 0 0 0/10 Recipient Dividends (%) Interest (%) Royalties (%) (1) (2) (3) 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.

Appendix D- Setting up in Estonia – a checklist D The most common type of legal entity being set up by foreigners in Estonia is the Private Limited Company “Osaühing, OÜ”.

The most common way of setting up a limited company would be to establish one with help from a professional firm. It is also possible to purchase a pre-registered company. Pre- registered companies are sold by numerous accounting and law firms. However, in addition to the stamp taxes, a fee will be charged by an intermediary (generally EUR 1,500-2,000). For registering a new Private Limited company, the steps below should be followed:

1. The following documentation is prepared in Estonian:

1.1. Memorandum of Association, setting out, among other things, the business name, address, area of activity, names and residences of the founders, the amount of share capital, the nominal value of the shares and their division among the founders and the members of the management board.

1.2. Articles of Association, setting out, among other things, the name, address, business activity, share capital, procedure for payment of shares, reserve capital, and other terms and conditions for the company.

2. The founders sign the documentation at the Notary Public.

3. The Notary Public notarises the documentation.

4. The founder(s) visit a bank to open a bank account in the name of the private limited company being founded, and share capital (minimum EUR 2,500) must be paid to a designated bank account. If non-monetary contributions are made, special rules apply. Private limited company may also be established without any minimum capital requirement, provided that all founders are private individuals only and the planned minimum capital does not exceed EUR 25,000. The capital of such a company will consist of claims against the shareholders, who are liable with all of their assets up to the amount they have promised to pay to the capital of the company.

Guide to doing business and investing in Estonia 55 5. The management board submits an application petition to the Commercial Register together with the following documentation: 1) A notarised Memorandum of Association; 2) Notarised Articles of Association; 3) A bank notice concerning the payment of share capital; 4) The names and personal identification codes of the members of the supervisory board, and of auditors, if the company has auditors; 5) Information on the planned principal activity; 6) Contact details of the private limited company (telephone and fax numbers, e-mail and Internet home page address, etc.).

Using the features of the Estonian electronic identification system and digital signature, it is possible to register a company electronically with an expedited procedure in less than hour by founders who are using Estonian ID card or Mobile ID or are the holders of Finnish, Portuguese or Belgian ID cards or users of the Lithuanian bank-link system.

Appendix E - Acquiring a business enterprise – a checklist 1. Business overview Key business information E • Brief description of activities. • Key performance and financial ratios overall and for each main activity. Key historical events • Brief history and significant events; major acquisitions and disposals, etc. Entity organisation • Legal structure, indicating main subsidiary undertakings. • Organisational structure (if different). • Key locations and premises. 2. Sales, products, customers and receivables Market and sales • Analysis of sales; sales by product/activity; sales by region; monthly sales. • Description of main product lines and their characteristics. • Analysis of sales by product in quantity and value; mix changes; seasonal patterns and shifts in patterns. • Profitability by product, gross margin, trend, growth. Customers • Customer base concentration. • Key customers and contractual arrangements. Receivables • General client terms of trade. • Credit control; discounts allowed; factoring of debt; product warranties, provisions for credit notes/returns. • Receivables analysis; ageing, roll forward of receivables reserve, major past due accounts; receivables day sales outstanding. 3. Purchases, vendors/suppliers and inventory Cost of sales components • Main cost of sales components: material, labour, overheads, other; cost of sales trends by product. • Breakdown of manufacturing cost by product. • Breakdown of manufacturing overheads by component. Main vendors/suppliers • Main vendors/suppliers; purchase contracts and commitments; currency of purchases. Terms of trade and payables

56 PwC • Terms of trade, days’ purchases outstanding; ageing analysis; reason for delays in settlement. Inventories • Summary of inventories by category; monthly inventory levels. • Location; method of valuation; treatment of overheads; inventory records and control. • Inventory roll forward. • Analyses of inventory reserve: raw material/finished goods ageing analyses, inventory turn; excess inventory (comparison with consumption/sales), lower of cost and net realisable value analysis. 4. Management and employees Management structure • Functional and line management charts for key functions. Employees • Headcount analyses by age, location and function; workforce age profile. Labour cost analysis • Analysis of all labour related costs; analyses by type of employee / by department / by location, average cost per employee; incentive schemes. Severance plans and costs • Redundancy payments (history and detail of any schemes); severance provisions, roll forward analysis, description of any existing plans. Other labour issues • Retirement schemes and other employees’ benefits and related liabilities. • Benefit schemes. 5. Historical results Summary of results • Sales; cost of sales and margins; gross profits; overheads; EBIT; EBITDA; ratio and trend analysis. • Any significant change in accounting policies or practices or impact of inappropriate policies. Overheads • Main classes of overheads below gross margin by type of cost / by department; significant trends; stand-alone issues. • Sales incentives; licensing; joint ventures. • Promotion, advertising; exhibitions expenditure. • Analysis and review of other overheads. Non-recurring items and quality of earnings • Adjusted EBITDA; reason for adjustments (review of management adjustments and further adjustments): nonrecurring revenue or costs, lost customers, accounting policy changes, reserve movements, other. • Significant impact on results resulting from differences between target and buyer’s accounting policies, if relevant. • Non-operating items. Reconciliation of EBITDA to net results; appropriateness of items recorded as exceptional. 6. Balance sheets Summary of balance sheets • Statement of net assets. • Comment on significant trends; change in accounting policies; any assets with a book value significantly different from market value. • Any non-trading items. • Significant off-balance sheet items. Fixed assets • Summary by type of asset and by location/activity. • Basis of valuation; depreciation rates; profits / losses on disposals. • Fixed assets held under finance leases.

Guide to doing business and investing in Estonia 57 • Fixed assets register; extent of physical verification. • Nature of intangible assets; valuation; amortisation policy; own costs (research, development, other) capitalised. • Goodwill; patents, copyrights; brands; capitalised research and development. Other assets and liabilities • Summary of other assets and liabilities; review unusual items; significant fluctuations. • Adequacy of provision for outstanding liabilities; provision against guarantees and warranties given; after-sales service. • Retirement and post-retirement benefits; severance payments. • Litigation pending; claims not settled. • Dividends payable / receivable; deferred consideration; other significant balances. • Current and deferred taxation liabilities. Net interest bearing debt • Analysis of the net interest bearing debt by component and maturity (including cash and cash equivalents, bank overdrafts, loans, intra-group financing, finance leases, other interest bearing liabilities). Shareholders’ funds • Movement in net assets; share capital; share option schemes; distributable/non- distributable reserves. 7. Cash flows Summary of cash flows • Reconciliation of EBIT, EBITDA and cash flows. Working capital • Analysis of working capital movements. Seasonality • Monthly analyses of cash flows; significant intra-month cash movements. Capital expenditure • Analysis of capital expenditure in value by activity/location and by purpose (for growth, maintenance, compliance / regulatory purposes). 8. Current trading and full year out-turn Current trading • Review of current year-to-date trading per latest management accounts. • Compared to budget, previous year-to-date. • Comment on reliability of management accounts. • Identify and quantify key trends in results. Full year out-turn • Present current year-to-date trading and full year forecast and compare to budget and previous year in the same format. • Comment on reliability of past budgets and forecasts. • Extrapolate key trends and form a view on achievability of management’s full year forecast. 9. Future results and cash flows Projected results • Summarise the projections, key lines in the profit and loss account, and compare to historic results and current year outturn. • Confirmation that accounting policies are consistent with last accounts. • Main assumptions underlying forecast and projections. • Analysis of sales, product mix, volume/price changes assumptions; analysis of projected cost of sales, manufacturing overheads, sales and general administration overheads. • Areas of vulnerability and upside. Projected cash flows • Reconcile projected cash flows with projected results.

58 PwC • Projected working capital requirements compared with past trends; highlight any seasonality. • Projected capital expenditure (for growth, maintenance, compliance/regulatory purposes); committed and planned expenditure. • Compare capital expenditure projections with identified needs. • Vulnerabilities and upsides in projected cash flows. 10. Stand-alone issues Operational changes • Significant changes required for the entity to operate on a stand-alone basis (quantified); nature of the changes required and related timing. Pro forma results • Effect on earnings if the entity had operated on a standalone basis over the past year(s). • Reconciliation between reported results and pro forma stand-alone results. 11. Management information, controls and information technology Management information • Arrangements for management and accounting information; reliability and efficiency; reconciliation with financial accounts; year-end adjustments; quality of internal controls, auditors’ management letters. Accuracy of past budgets and forecasts • Soundness and appropriateness of system; effectiveness of action taken on variances; frequency of updating; accuracy and reliability of past budgets and forecasts. • Comparison of budgeted and actual results for previous years. Information technology • IT strategy; facilities; management of IT; contingency plans; costs of improvements/ changes. • Overview of principal software, systems and applications. 12. Taxation Corporate taxation • Analysis of tax charges; comparison of effective and nominal tax rates. Treatment of deferred tax assets / liabilities. • Extent to which liabilities agree with the tax administration; outstanding issues; tax losses; tax planning; taxable distributable reserves. • Overall assessment of risks. Local taxes • Nature of these taxes; extent to which liabilities are agreed; outstanding issues. Value added tax • VAT schemes (if applicable); inspections; outstanding issues. Employment taxes • Social charges; administration inspections; outstanding issues. 13. Insurance and risk management Key insurance policies • Descriptions of the key insurance policies (plant, property, employer’s liability, loss of profits, key management life insurance), risks covered and associated costs; insurance brokers and any intra-group insurance policy; any uncovered significant risk. Recent claims and losses Analyses of recent claims with reconciliation of their impact on the results, balance sheet and cash flows.

Guide to doing business and investing in Estonia 59 Appendix F - Useful sources of information State portal www.eesti.ee/eng Gateway to Estonia www.estonia.eu F The Parliament of Estonia: http://www.riigikogu.ee/?lang=en Estonian Government: https://valitsus.ee/en Ministry of Education and Research: https://www.hm.ee/en Ministry of Justice: http://www.just.ee/en Ministry of Defence: http://www.kaitseministeerium.ee/en/ Ministry of Environment: http://www.envir.ee/en Ministry of Culture: http://www.kul.ee/en Ministry of Economic Affairs and Communications: http://www.mkm.ee/en Ministry of Agriculture: http://www.agri.ee/en Ministry of Finance: http://www.fin.ee/?lang=en Ministry of Interior: https://www.siseministeerium.ee/en Ministry of Social Affairs: http://www.sm.ee/en Ministry of Foreign Affairs: http://vm.ee/en Tax and Customs Authorities: http://www.emta.ee/?lang=en Estonian Health Insurance Fund: https://www.haigekassa.ee/en Citizenship and Migration Board: http://www.politsei.ee/en Bank of Estonia: http://www.eestipank.ee/en Confederation of Estonian Trade Unions: http://www.eakl.ee/index. php?pid=418&lang=7 Other useful addresses and websites PwC Estonia: http://www.pwc.com/ee/en www.pwclegal.ee Enterprise Estonia: http://www.eas.ee/en http://www.investinestonia.com/en/ Estonian Chamber of Commerce and Industry: www.koda.ee/en

60 PwC Guide to doing business and investing in Estonia 61 © 2015 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.