Business Guide Estonia
Danske Bank
Mazanti-Andersen, Korsø Jensen & Partnere in cooperation with Sorainen
PricewaterhouseCoopers
2nd Edition Preface
“Business Guide Estonia” is intended as a preliminary exploration of the questions that typically arise when a company wishes to enter the Estonian market.
This guide has been edited in cooperation between Mazanti-Andersen, Korsø Jensen & Partnere/Sorainen, PricewaterhouseCoopers and Danske Bank/CaRisMa Consulting.
The guide is not intended to cover all issues arising in relation to activities in Estonia. However, we hope that it will provide an overview of typical issues.
Independent professional advisory services of a legal, fiscal, financial or marketing nature are indispensable and usually a good investment.
PricewaterhouseCoopers and Mazanti-Andersen, Korsø Jensen & Partnere/Sorainen and Danske Bank/CaRisMa Consulting cannot be held liable for any misinterpretation of the information presented in this guide.
The guide will be featured on the following Web sites, which will be updated regularly: www.danskebank.com, www.mazanti.dk, www.pwc.com.
September 2008 Danske Bank
Danske Bank is the largest bank in Denmark and a leading player in the Scandinavian financial markets. The Danske Bank Group – which includes Danske Bank, Realkredit Danmark, Danica Pension and a number of subsidiaries – offers a wide range of financial services, including insurance, mortgage finance, asset management, brokerage, real estate and leasing services.
In Denmark, Norway, Sweden, Finland, Northern Ireland, the Republic of Ireland, Estonia, Latvia and Lithuania, the Group serves 5 million retail customers and a significant part of the corporate, public and institutional sectors. It also has a large number of international corporate clients, particularly in the northern European markets. Some 2.3 million customers use the Bank's online services.
Sampo Bank serves customers of 123 branches in Finland and 46 branches in the Baltic states.
Danske Bank also has branches in London, Hamburg and Warsaw. Moreover, a subsidiary in Luxembourg with representative offices in France and Spain specialises in private banking services. For more information go to www..danskebank.com.
Mazanti-Andersen, Korsø Jensen & Partnere
Mazanti-Andersen, Korsø Jensen & Partnere, established in 1853, is a modern business law firm rendering services to Danish and international companies within all areas of business law. All the lawyers of the firm are highly qualified and specialised in the various areas in which the firm operates. It is the object of the firm to provide professional services of the quality which the business community expects from an efficient law firm operating internationally.
It is a tradition that the lawyers of the firm teach various subjects of corporate and commercial law at universities and other institutions of higher education in Denmark and abroad.
To meet the requirement for updated and adequate legal expertise at all times, the firm pays special attention to ensuring that all its lawyers participate, on a current basis, in an extensive legal training programme within specific areas of law.
The firm co-operates closely with leading law firms in all jurisdictions relevant to Nordic businesses. For more information, go to www.mazanti.dk.
Sorainen
Sorainen was established in 1995 in Tallinn, and today, it is one of the largest business law firms in the Baltic countries as it has grown into a law firm consisting of more than 95 lawyers specialising in many areas of business law. The firm’s offices in Estonia, Latvia and Lithuania form a fully integrated pan-Baltic law firm, which has been ISO 9001 certified since 2006.
Sorainen provides high-quality legal services to the world’s leading companies, financial institutions and private investors in connection with their most demanding transactions and assignments.
More detailed information about the firm’s legal practice and professionals is available on the firm’s new Web site: www.sorainen.com.
PricewaterhouseCoopers
Multinational businesses are increasingly affected by tax, legislative and regulatory changes throughout the world. Understanding the impact of such changes on business operations and transactions between countries is vital for a company's survival.
The network of PricewaterhouseCoopers’ international tax-structuring professionals is experienced in addressing such issues and issues of international taxation. Our teams are able to help you structure your business in a tax- efficient manner, both locally and globally.
PricewaterhouseCoopers can help you prepare efficient cross-border strategies and manage your global structural tax rate. They will also keep you up to date on changes in the international arena that affect your business. For more information, go to www.pwc.com. Contents 2.5.5 Encumbrances...... 16 2.5.5.1 Mortgage ...... 16 1 Facts about Estonia ...... 5 2.5.6 Property Management ...... 16 1.1 Estonian economy and politics...... 5 2.5.7 Lease Agreements...... 16 1.1.1 Prospects for the Estonian economy...... 5 2.5.7.1 General...... 16 1.1.2 Facts...... 5 2.5.7.2 Duration and Expiry of Lease Agreement . 17 1.1.2.1 Politics ...... 5 2.5.7.3 Lease Payment and Accessory Expenses. 17 1.1.2.2 Economic indicators and demographics. . . . 5 2.5.8 Planning Requirements and Construction of Buildings ...... 17 2 Legal aspects of doing business in Estonia . 6 2.5.8.1 Planning ...... 17 2.1 Legal Environment ...... 6 2.5.8.2 Construction ...... 17 2.1.1 State Structure ...... 6 2.6 Visa and Work Permit ...... 18 2.1.2 Courts. Arbitration Courts...... 6 2.6.1 Visas ...... 18 2.2 Company Law ...... 6 2.6.1.1 General Requirements regarding visa . . . . 18 2.2.1 Forms of Companies ...... 6 2.6.1.2 Types of visas ...... 18 2.2.2 Public and Private Limited Liability 2.6.1.3 Employment ...... 18 Companies ...... 7 2.6.2 Residence and work permits ...... 18 2.2.3 Foundation of a Limited Liability Company . 7 2.6.2.1 General requirements regarding 2.2.4 Share Capital and Shares ...... 7 residence permits ...... 18 2.2.5 Management of the company ...... 7 2.6.2.2 Types of residence permits ...... 18 2.2.5.1 Management Board ...... 7 2.6.2.3 Work permits...... 18 2.2.5.2 Supervisory Board ...... 8 2.2.5.3 Meeting of Shareholders. 3. Taxation in Estonia ...... 19 General Meeting ...... 8 3.1 Corporate taxes ...... 19 2.2.6 Public and Private Limited Liability 3.1.1 Significant developments ...... 19 Companies – A Short Comparison ...... 9 3.1.2 Taxes on corporate income...... 19 2.2.7 Branch Office of Foreign Company...... 9 3.1.3 Corporate residence ...... 19 2.2.8 The Commercial Register. Notaries 3.1.4 Branch income ...... 19 Public. Licensed Areas of Business ...... 9 3.1.5 Group taxation...... 19 2.3 Mergers and Acquisitions ...... 10 3.1.6 Tax returns ...... 19 2.3.1 Introduction ...... 10 3.1.7 Payment of tax...... 20 2.3.2 Types of Acquisitions ...... 10 3.1.8 Withholding taxes ...... 20 2.3.3 Acquisition of Shares ...... 10 3.2 Individual Taxes...... 20 2.3.3.1 General...... 10 3.2.1 Territoriality and residence ...... 20 2.3.3.2 Form ...... 10 3.2.2 Gross income...... 21 2.3.3.3 Transfer of Title...... 11 3.2.2.1 Gross income and exclusions ...... 21 2.3.3.4 Pre-emptive Rights ...... 11 3.2.2.2 Employment income ...... 21 2.3.4 Acquisition of Asset ...... 11 3.2.2.3 Capital gains and investment income . . . . . 21 2.3.4.1 General...... 11 3.2.3 Tax rates ...... 21 2.3.4.2 Form ...... 11 3.3 Value Added Tax ...... 21 2.3.4.3 Transfer of Title...... 12 3.3.1 VAT...... 21 2.3.4.4 Transfer of Liabilities ...... 12 3.4 Duties ...... 22 2.3.5 Comparison of Share and 3.4.1. Customs duties...... 22 Asset Acquisition...... 13 2.4 Competition Law...... 13 4 Banking Environment ...... 23 2.4.1 General Principles of Competition Law . . . 13 4.1 Overview ...... 23 2.4.2 Applicability of EC Competition Rules . . . . 13 4.1.1 Central Bank...... 23 2.4.3 Prohibited Agreements ...... 13 4.2 Sampo Pank ...... 23 2.4.3.1 Exemptions ...... 14 4.3 Legal & Regulatory Issues...... 23 2.4.3.2 De Minimis Rule ...... 14 4.3.1 Introduction ...... 23 2.4.3.3 Hardcore Restrictions ...... 14 4.3.2 Resident and Non-Resident Status ...... 23 2.4.4 Concentration Control ...... 14 4.3.3 Account Ownership ...... 23 2.4.4.1 Threshold ...... 14 4.3.4 Cash Pooling Regulations ...... 23 2.4.4.2 Notification...... 14 4.3.5 FX Controls...... 24 2.4.4.3 Joint Ventures ...... 15 4.3.6 Central Bank Reporting Requirements . . . 24 2.5 Real Estate ...... 15 4.3.7 Money Laundering ...... 24 2.5.1 Introduction ...... 15 4.3.8 Regulations Applicable for 2.5.2 Title to Real Estate, Land Registe...... 15 Electronic Transactions ...... 24 2.5.3 Acquisition of Real Estate...... 15 4.4 Payments & Collections Methods 2.5.3.1 General...... 15 & Instruments ...... 24 2.5.3.2 Change of ownership...... 15 4.4.1 Introduction ...... 24 2.5.3.3 Form of Agreements ...... 15 4.4.2 Card Payments ...... 24 2.5.3.4 Language Requirements ...... 15 4.4.3 Credit Transfers ...... 24 2.5.3.5 Due Diligence...... 15 4.4.4 Direct Debits ...... 25 2.5.3.6 Pre-emption Rights ...... 15 4.4.5 Cheques ...... 25 2.5.3.7 Typical Purchase Price Arrangements . . . 16 4.5 Electronic Banking ...... 25 2.5.3.8 Related Costs...... 16 4.5.1 Introduction ...... 25 2.5.4 Restrictions ...... 16 4.5.2 General Functionality of EBS Offerings . . . 25 2.5.4.1 Restrictions on Acquiring Real Estate . . . . 16 4.5.3 EDIFACT / Host-to-Host Solutions...... 25 2.5.4.2 Public Restrictions on the Use of 4.5.4 E-payments and E-invoice / EBPP ...... 25 Real Estate ...... 16 4.6 Cash Pooling Solutions ...... 25 4.6.1 Introduction ...... 25 4.6.2 Notional Pooling ...... 25 4.6.3 Cash Concentration...... 25 4.6.4 Multicurrency and Cross Border Pooling . 25
5 Usefull links - Estonia ...... 26 1 Facts about Estonia Estonian Centre Party: The former junior-partner in the coalition government and, following the parliamentary 1.1 Estonian economy and politics election in 2007, the largest opposition party. Estonia formally declared independence in August The party is centre-left, claiming its goal is the 1991, and, since then, accelerated growth and formation of a strong middle class in Estonia. economic reforms have followed. Estonia joined the Union of Pro Patria and Res Publica: Constituted by two EU in May 2004 and was included in the ERM II in June conservative parties, Pro Patria Union and Res Publica. 2004. Estonia wants to join the euro zone as well, but The party is a junior-partner of the new government. entry has been postponed due to excessive inflation. Social Democratic Party: Another junior-partner of the new government. A centre-left, pro-European and fairly 1.1.1 Prospects for the Estonian economy reformist party. As in the other Baltic states, the strong growth of the Estonian Greens: Based on green politics, but is fiscally Estonian economy has resulted in severe unbalances. conservative. The country has a large current account deficit and People’s Union of Estonia: Left-wing populist party, relatively high inflation, but its fiscal policy has been representing people in the rural areas of Estonia. more prudent than the fiscal policies of the other two Baltic states, resulting in a positive government budget. Central bank However, the hard landing in Estonia has already The Estonian central bank (Eesti Pank) is an become a reality and there is very little possibility of independent central bank. Its main function is to swift rebound in GDP growth. The recovery may be maintain the stability of the national currency against expected in 2010, when growth rates climb back to the the euro (1 EUR = 15.6466 EEK). long-term trend growth 4% y/y. International relations 1.1.2 Facts A member of the UN, the EU, the BIS and the OSCE, among other organisations. 1.1.2.1 Politics Official name 1.1.2.2 Economic indicators and demographics Republic of Estonia/Eesti Vabariik Population 1.3 million (July 2007 est.) Form of government Parliamentary democracy Religion Unaffiliated 34%, Evangelical Lutheran 14%, Orthodox Parliament 13 %; Methodist, Roman Catholic and others 39%. Unicameral system: the Riigikogu (state assembly) Languages Election system Estonian (official) 67%, Russian 30%. Universal suffrage for citizens aged 18 or more Currency Head of state 1 kroon (EEK) = 100 senti The president is elected by the parliament for a five-year term. The current president is Toomas Social and economic indicators Hendrik Ilves from the Social Democratic Party (SDP). GDP (purchasing power parity): USD 26.85bn The president is mainly a symbolic figure. (2006 est.) Overall fertility rate: 1.41 children born per woman Primary political parties (2007 est.) Estonian Reform Party (REF): The main governing party. Life expectancy: total population: 72.3 years; males: The party is liberal-conservative and is the most 66.87 years; females 78.07 years (2007 est.) economically liberal party in Estonia.
5 2 Legal aspects of hearing during which a case is actually settled does not doing business in Estonia take place until about twelve months after the receipt of the application by the court. To receive a final decision 2.1 Legal Environment upon appeals may take up to three years or more. After regaining its independence, Estonia has thrived as one of the most stable and yet fastest growing Foreign civil court judgments are subject to a economies in Europe. The legal system was rebuilt on procedure of prior recognition by an Estonian court, and its former foundation of civil law. Learning from the then they are executed in Estonia. The regulation Western European experience, the current legal regime 44/2001/EC applies to member states of the EU and draws much of its know-how from the well-established no separate recognition is necessary. German and Scandinavian civil law systems. The statutory legal tradition in Estonia follows the In order to avoid lengthy proceedings in state courts, principles of a completely codified civil law system. the parties may decide to settle disputes in the court of The functioning legal practice is based on such arbitration, e.g. the institutional arbitration, established theoretical elements as the principle of good faith, with the Estonian Chamber of Commerce and Industry freedom of contract, permanence of analogy, etc. or through ad hoc arbitration.
The legal framework for business law supports the 2.2 Company Law rather liberal economic system. Moreover, a predom - inant part of the European Union legislation has been 2.2.1 Forms of Companies implemented. The next challenge for the Baltic States is The Estonian legal framework offers a range of efficient enforcement of the European Union legislation, undertakings similar to those in Latvia and Lithuania. which will make domestic legal systems even more Pursuant to the Commercial Code, undertakings are predictable and reliable for foreign investors. divided as follows:
2.1.1 State Structure 1. Sole proprietor – a natural person in business who is The system of government in Estonia is that of a liable for his obligations with all of his assets; parliamentary democracy. The constitution of Estonia 2. General partnership – a company in which two or provides for the competencies of the parliament, the more partners operate under a common business president, the government and the courts to be name and are jointly liable for the obligations of the organised independently on the basis of the principle of general partnership with all of their assets; separate and balanced powers. 3. Limited partnership – a company in which two or more persons operate under a common business Legislative power rests with the unicameral parliament, name and at least one of the persons (a general which consists of 101 members elected for a four-year partner) is liable for the obligations of the limited term. The next parliamentary election is scheduled for partnership with all of the general partner’s assets, 6 March 2011. The President, who is elected for a and at least one of the persons (a limited partner) is five-year term, serves as a representative head of state liable for the obligations of the limited partnership to with limited powers set out in the constitution. the extent of the limited partner’s contribution; Most state competencies and responsibilities rest with 4. Public limited liability company and a private limited the government, which currently consists of fourteen liability company (limited liability companies) are ministers headed by the Prime Minister. companies which have a share capital divided into shares. A shareholder is not personally liable for the Estonia is divided into 15 counties which consist of obligations of the limited liability company, whereas rural and urban municipalities. Municipal governments a limited liability company is liable for the are governed by representative bodies – municipality performance of its obligations with all of its assets. councils, which are elected for a four-year period. The Commercial Code also recognises an undertaking 2.1.2 Courts. Arbitration Courts referred to as the commercial association. Estonia has a three-level court system. The first level is A commercial association is a company that may be divided into administrative courts and trial courts with founded by at least five persons, the purpose of which is a general jurisdiction. The second level in the court to support and promote the financial interests of its system is a court of appeal with general jurisdiction, members through joint financial activity in which the whereas the third-level Supreme Court serves as the members participate. final court of appeal. The Supreme Court is also the court of constitutional review. The sole proprietorship and the general and limited partnerships bear a considerable disadvantage with At first instance, civil cases are heard by a single judge, regard to the liability of those operating such under - whereas a panel of one judge and two laymen is formed takings. Partnerships are therefore not very popular to hear criminal cases. A single specialised among entrepreneurs and their number remains small. administrative judge or a panel of three judges in a Partnerships also bear no substantial tax advantages separate administrative court hears administrative compared with limited liability companies. At the same cases. time, partnerships are less complex in structure, there Court proceedings take a considerable amount of time. is no required amount of contribution for the partners, As most cases involve more than one court hearing, the and they can freely design and decide on the manage-
6 ment structure in the partnership agreement, rights The share capital is divided into shares, which may be and obligations of the partners, procedure for division of different classes. The minimum nominal value of a of profit, etc. The process of organising and managing share is EEK 102, and the number of shares per the activities of partnerships is less complicated than shareholder is unlimited. In order to facilitate capital the process of organising and managing the activities of raising from the public, a public limited liability company limited liability companies. Partnerships can success- may list its shares on the stock exchange. Public limited fully be used as investment undertakings, which usually liability companies may also issue preferred shares and do not take on risks that would exceed their assets. convertible bonds.
Shareholders of limited liability companies are generally The shares of all public limited liability companies are free from any personal liability. Resulting from this and required to be registered in the Estonian Central the fact that the private limited liability company and Securities Register in which share registers of the public limited liability company are far more popular companies are maintained and all share transactions compared with other undertakings, this publication will are recorded. In order to register the shares, concentrate on limited liability companies. shareholders have to open custody accounts with an Estonian commercial bank to which the shares can be 2.2.2 Public and Private Limited Liability Companies transferred. Much like everywhere else in the world, a public limited liability company is an undertaking designed for the The minimum required share capital of a private limited purpose of accommodating a large number of liability company is EEK 40,0003. The value of non- shareholders. Persons become shareholders through monetary contributions does not have to be determined establishment or acquisition of shares, and no further by an auditor unless the value of such a contribution liability for the obligations of the company with their exceeds EEK 40,0004 or the total value of the non- personal assets generally exists. monetary contributions constitutes more than one half of the share capital. Each shareholder of a private Likewise, the shareholders of a private limited liability limited liability company may own one share, while the company are generally not personally liable for the shares may be of different nominal values. With regard obligations of the company. Contrary to a public limited to private limited liability companies, registration of the liability company, where the allowed number of shares shares in the Estonian Central Securities Register is held by one shareholder is not limited, each shareholder voluntary. of a private limited liability company may own one share only. Based on the statutory minimum, the nominal 2.2.5 Management of the company value of the shares may differ from one to another. The management bodies of public limited liability The number of votes at the shareholders’ meeting companies are the management board, the supervisory depends on the nominal value of the share. This form of board and the general meeting. The management bodies legal entity, which is by far the most common in Estonia, of private limited liability companies are the is designed for the formation of small undertakings and management board and the shareholders’ meeting. provides a useful investment vehicle for a limited number of owners. For a public limited liability company, it is mandatory to nominate an auditor who is required to be a natural 2.2.3 Foundation of a Limited Liability Company person holding an auditor’s certificate or an auditing Limited liability companies may be established by any company. Nominating an auditor is mandatory for a number of persons, including a single shareholder. private limited liability company if its share capital During the establishment, the founders conclude an exceeds EEK 400,0005 or if at least two of the following establishment agreement and adopt the articles of three criteria are met: the annual net turnover exceeds association. Companies are under an obligation to EEK 10 million6, the balance sheet total exceeds EEK 5 submit the establishment agreement, the articles of million7, or the number of employees of the company association, the registration application and other exceeds ten. required documents to the Commercial Register. The establishment agreement and the articles of The Commercial Code includes no regulations as to association must be notarised and signed by all founders. managing directors. Both a management board member and an employee may be nominated as the managing 2.2.4 Share Capital and Shares director. Like other employees, the managing director is The minimum share capital required for the establish- subject to the control of the management board. ment of a public limited liability company is EEK 400,0001. Shares may be paid up in cash unless the com- 2.2.5.1 Management Board pany’s articles of association allow payment by The management board is the representative and non-monetary contribution. The company’s auditor must executive body of the company and may be made up of evaluate the non-monetary contributions. The share capi- one or several members. At least half of the members tal of the company has to be transferred in full to the of the management board must be resident in Estonia company before an application for registration can be or another state which is a member of the European submitted to the Commercial Register. Economic Area or in Switzerland.
1 About EUR 26,000, 2 About EUR 0,6, 3 About EUR 2,600, 4 About EUR 2,600, 5 About EUR 26,000, 6 About EUR 630,000, 7 About EUR 315,000
7 In public limited liability companies, the supervisory and mortgage of real estate as well as establishing board appoints the members of the management board; branch offices abroad. The supervisory board also in private limited companies, however, a resolution of nominates the members of the management board and the meeting of shareholders is required, unless a the procuration holders. However, in the articles of supervisory board has been established. If the association, the powers of the supervisory board may management board consists of more than two be either limited or extended. members, a chairperson must be elected. Unless a shorter term is specified in the articles of association, 2.2.5.3 Meeting of Shareholders. General Meeting the management board is elected for a term of three The management board convenes the annual general years. The management routine (including the obligation meeting within six months following the end of the to hold meetings) of the management board is not company’s financial year. For public limited liability prescribed by law, and, therefore, this may be regulated companies, the agenda of the annual general meeting is in the articles of association. prescribed by the supervisory board, and, for private limited liability companies, the management board The Commercial Code contains a competition prescribes the agenda of the meeting of shareholders. prohibition applying to the members of the management If necessary, it is possible to hold an extraordinary board – they may not be members of a managing body of general meeting. another company in the same field of business unless the companies belong to one group of companies or Quorum for decision-making is attained if more than unless the supervisory board has given its consent. half of all the votes attached to the share capital are represented at the meeting, unless the articles of Each member of the management board has the right to association prescribe that a higher share of the votes represent the company (sign on behalf of the company) must be represented. Agreements on the exercise of separately unless joint representation is specified in voting rights are generally allowed provided that such the company’s articles of association or decided by the agreements do not grant either party particular supervisory board or the general meeting. In order for advantage. the restriction to be effective in relation to third persons, it must be stipulated in the articles of association and entered into the Commercial Register.
2.2.5.2 Supervisory Board The supervisory board plans the activities of the public limited liability company, organises the management of the public limited liability company and supervises the activities of the management board.
The supervisory board is a mandatory institution of a public limited liability company. In private limited liability companies, the establishment of a supervisory board is not mandatory, except if the share capital of the company exceeds EEK 400,0008 and the management board consists of less than three members.
The supervisory board is made up of a least three members. There are no requirements concerning their residence. The general meeting elects and appoints the members of the supervisory board for a period of five years, unless a shorter period is prescribed. Up to half of the members of the supervisory board may be appointed by way of a separate procedure either provided for by law or the articles of association, e.g. one shareholder may have the right to appoint a different number of supervisory board members than another.
The powers of the supervisory board include extraordinary activities such as company acquisitions, contracting loans, conducting securities and investment transactions exceeding the budget, transfer
8 About EUR 26,000
8 2.2.6 Public and Private Limited Liability Companies – A Short Comparison
Public Limited Liability Company/ Private Limited Liability Company/ Aktsiaselts Osaühing
Foundation agreement and the Notarisation required Notarisation required first articles of association
Number of shareholders Not limited Not limited
Minimum share capital EEK 400,0009 EEK 40,00010
Supervisory board Compulsory Compulsory only if the share capital exceeds EEK 400,000 and the management board consists of less than three members.
Management board Compulsory Compulsory
Auditor Compulsory Compulsory only if the share capital exceeds EEK 400 000 or at least two of the following three criteria are met: the annual net turnover ex- ceeds EEK 10 million, the balance sheet total exceeds EEK 5 million or the number of employees of the company exceeds ten.
Registration in the Estonian Compulsory Voluntary Central Securities Register
Share transfer agreement No formality requirements Notarised form, except if the shares have been registered in the Estonian Central Securities Register.
Minutes of the general Notarised form required for changes in Simple written form meeting the composition of the supervisory board or the sections of the articles of associa- tion concerning the supervisory board 11.
2.2.7 Branch Office of Foreign Company/Filiaal 2.2.8 The Commercial Register. Notaries Public. A foreign company wishing to offer its products or Licensed Areas of Business services in Estonia under its own name on a permanent The aim of the Commercial Register is to establish a basis – but without the intention of establishing an reliable source of certified information for frequent use. affiliated company – is obliged to register a branch. The Commercial Register is maintained at the courts of A branch is not a company, and the foreign company is first instance, which means that its accuracy and liable for the obligations arising from the activities of protection from outside interference are generally the branch. Operating a branch may in many respects ensured. As it is a public register, anybody may request be more convenient and less bureaucratic than the release of information stored, except from certain establishing an independent entity, particularly with restricted data for which prior registration is required. respect to the requirements regarding annual reports The register is kept in electronic form. Information in to the authorities as well as the exemption from holding Estonian, English and German about all companies regular meetings. registered in Estonia is available online (www.eer.ee).
A foreign company has to appoint one or more directors Simple inquiries submitted via the Internet, for as the executive body of the branch. All members of the instance, for information about date of registration and management board have to be natural persons and at share capital, may be answered free of charge, whereas least one member must be a resident of Estonia, comprehensive inquiries require prior registration and another EEA country or Switzerland. payment of a fee. The amount of information provided in
9 About EUR 26,000, 10 About EUR 2,600. 11 The notarisation requirement does not apply to companies with one shareholder only or in case of several shareholders, if all shareholders accept and sign the resolution.
9 the latter case is substantial and includes data on the The Estonian M&A deals would not usually be covered legal representatives of the company, commercial by international databases. Also, not all major transac- pledges, annual reports and articles of association tions are announced to the public. Nevertheless, the (scanned). In addition, the government has joined the market is quite active, having facilitated the successful European Business Register, which permits cross- takeover bid of Hansabank by Swedish FoereningsSpar- usage of registered data on companies registered in banken (Swedbank) (EUR 1.7 billion) and the acquisition other member states via the Internet. of Skype by eBay (EUR 2.1 billion).
Verification by a notary public is required for a number 2.3.2 Types of Acquisitions of transactions. There are several ways to conclude an M&A With regard to limited liability companies, this involves transaction, for instance, acquisition of strategic notarisation of the application for registration and the assets, joint venture, franchise, targeted issue of establishment agreement or decision as well as shares, conclusion of a shareholders’ agreement, etc. applications for the amendment of Commercial Register The most common types of business acquisition, entries, the pledge and sale of shares of private limited however, are acquisition of shares, acquisition of the liability companies. Furthermore, the minutes of a assets of a going concern and merger. The answer to meeting of shareholders of a public limited liability the question of which acquisition type to choose de- company require notarisation in certain cases. pends on the specific transaction. For example, it is often important to consider the business risks involved Certain areas of activity require a state license, permit, in the transaction, the intentions of the parties, the authorisation or registration. The list of activities for restrictions of the legal regime, taxation questions, which these are required includes import of food prod- financing, payment options, etc. Prior to an acquisition, ucts, production and retail of pharmaceuticals, produc- it is important to analyse the structure of the business tion of alcohol and tobacco, mining, public utilities, acquisition in a legal and a financial context under the gambling, banking, etc. Licenses, permits, supervision of appropriate professionals. authorisations or registrations may be obtained from the relevant ministries, local governments or other Among the various possibilities, the most regulated and public authorities. Formal procedures for application time-consuming process is a merger (or division), which are set forth in various acts and a state fee may be is therefore rarely practiced. As the two most charged. In certain areas of activity, there may still be frequently used types of business acquisitions are some inconsistencies with the EC law principles of acquisition of shares and acquisition of assets, the freedom of establishment and free movement of following chapter will focus on the specific aspects of persons and services, but, generally, most of the these types. conditions for penetrating a specific field of activity in Estonia are the same for all persons within the EU. 2.3.3 Acquisition of Shares
2.3 Mergers and Acquisitions 2.3.3.1 General A transfer of shares does not change the legal status or 2.3.1 Introduction the liabilities of a company. This means that the share- The field of mergers and acquisitions (M&As) is holder in question is entitled to a certain number of considered relatively new in Estonia as it stems from shares in the company. Upon the transfer of shares, the the privatisation of businesses in the beginning of the buyer will be entitled to the rights and must meet the 1990s. Today, the legal practice area of M&A has obligations attached to the acquired shares of the developed into an established separate branch of company. business law that is recognised as a new emerging field of law. 2.3.3.2 Form As there are two main types of companies (public and In Estonia, acquisitions are mostly carried out through private limited companies), the form of the transaction the process of individual solicitations and negotiations. depends on the legislation governing the legal entity. Currently, the number of cases, which comprise international cross-border deals, is increasing in the Estonian law does not specifically prescribe a certain total amount of acquisitions. The Estonian legislation form of transfer of the shares of a public limited governing M&As does not usually prescribe such company. Due to the compulsory registration of shares formal procedures as auctions. in the Estonian Central Register of Securities (ECRS), there are no notarisation requirements for the transfer It should also be mentioned that there is a notable of the shares of a public limited company. Nevertheless, increase of pan-Baltic acquisitions. These deals involve some documents related to the process, for instance, targets or parties in either all or several of the Baltic applications to the Commercial Register, may have to countries. This is a natural result of an ever-integrating be notarised. Baltic market. However, the transfer of the shares of a private limited Probably, the main problems concerning the Estonian company requires notarisation unless the shares of the M&A transactions are regulation- (in particular, the target company are registered in the ECRS. It is usually lack of regulation) or transparency-related. recommended to register the shares in order to avoid a
10 complicated transaction process with the involvement of the share sale agreement. Then the management of a notary public. Registration of the shares means board must inform the other shareholders of the that the parties will also avoid paying notary fees when company immediately. According to the Commercial signing the share sale agreement. Code, the period in which the pre-emptive rights can be exercised may not be longer than two months from the 2.3.3.3 Transfer of Title submission of the sale agreement. As mentioned above, the shares of public limited companies in Estonia have to be registered As mentioned above, in the case of private limited electronically in the ECRS. As the shares are deposited companies, the pre-emptive share purchase rights are in a custody account with an Estonian commercial bank, considered a standard. Unless the bylaws of the com- the share transfer is carried out by giving orders to the pany have a different regulation, the other shareholders account operators (the buyer must also have a custody always have the pre-emptive right to acquire the shares account in Estonia.) Once the orders have been transferred to a third person within one month from the processed and the buyer has received the shares, the submission of the sale agreement. In this case, the seller title to the shares will be transferred. is also obliged to inform the management board of the company, who must then inform the other shareholders If the shares of a private limited company are of the company immediately. The bylaws of the company registered in the ECRS, the above-mentioned procedure may prescribe a different procedure for the share applies. If the shares are not centrally registered, the purchase, so that, for example, a 2/3 vote at the meeting parties to the transfer have to notify the target of shareholders can authorise the transfer. company of the transfer when submitting the transfer agreement. Having received notice of the transfer, the 2.3.4 Acquisition of Assets management board must make the relevant entries in the list of shareholders of the company within three 2.3.4.1 General days. As the regulation of private limited companies is The procedure for the acquisition of assets means that an slightly different in this matter, the shares are entire or a part of a business is transferred – the considered to be transferred once the list of underlying legal entity, however, is not. The shares of the shareholders has been amended. It is possible to target company are not transferred, whereas the target interpret the regulation of the Commercial Code, so that company itself, instead of its shareholders, acts as the the parties can stipulate the title transfer differently in seller and receives the consideration. their agreement. Nevertheless, it should be mentioned that the buyer is not entitled to exercise the According to the Commercial Code, an enterprise is shareholder rights until the entry has been made in the defined as a financial unit consisting of assets, rights and list of shareholders of the target company. obligations that are designated for the activities in which the enterprise is engaged. According to the Law of It is also possible to transfer part of a share of a private Obligations Act, the same rules apply to the transfer of an limited company. In order to do so, the share should be enterprise or a part thereof. A part of an enterpise could divided, and the seller may then transfer a part of his or be, for example, a single shop of a retail chain. The court her share once the other shareholders of the company practice on interpretation of the term “installation” and have given their consent. Their consent must be whether or not the transfer of assets constitutes a obtained due to the Commercial Code’s principle of transfer of an enterprise remains to be seen. Neverthe- shareholders’ pre-emptive share purchase rights, and it less, except for labour disputes, there is almost no court should be expressed by a resolution of the shareholders. practice regarding the matter. It is also possible to waive the right mentioned above in the bylaws of the company. The advantage of asset acquisition can be explained through the possibility to transfer the business name of In addition to the procedures prescribed by the the seller to the buyer. Another advantage is that the Commercial Code, the parties should always consider parties usually have the possibility to pick and choose the the relevant stipulations in the bylaws of the target assets. The sale of the assets of a going concern is usually company that may prescribe additional obligations on caught by the regulation of the transfer of an enterprise the parties and also the consent of the management that serves two primary purposes: to facilitate the trans- body of the target company (to the extent described fer of the rights and obligations of the business as well as above). to protect the interests of creditors.
2.3.3.4 Pre-emptive Rights It should be noted that, under the Law of Obligations Act, As the legal institute of a shareholder’s pre-emptive the rules for the transfer of a business do not apply when share purchase rights usually applies to private limited the transfer of assets is concluded in bankruptcy companies, the Commercial Code also provides for the proceedings, the process of compulsory execution, a possibility to modify the company bylaws by prescribing dissolution, a transformation of companies or a merger. a pre-emptive share purchase right of the other share- holders in case the shares of a public limited company 2.3.4.2 Form are to be transferred to a third person. Such a share The law prescribes different forms for the transfer of sale restriction requires the seller to inform the different objects. For example, under the Law of Property management board of the company about the conclusion Act, a transfer of an immovable requires a notarised form.
11 A business usually consists of things, rights and obliga- As to the regulation, it should be noted that the buyer is tions, thus all these elements will be transferred under an obliged to promptly notify creditors of the acquisition of enterprise sale agreement. Accordingly, the procedure for obligations, and the seller is obliged to promptly notify the transfer of an enterprise is dependent on its objects. debtors of the transfer of claims to the buyer. Usually, the parties send the relevant notice jointly to Enterprise sale agreements are not usually notarised due all contractual partners of the transferred business as to the lengthy coordination with the notary public and high soon as the acquisition has been concluded. notary fees. When the target business includes assets which require a notarised purchase agreement form, the 2.3.4.4 Transfer of Liabilities common practice is to split the agreement into two Whereas the transfer of an enterprise under the Law of separate documents. The main sale agreement (with its Obligations Act is rather simplified, the protection of appendices) regulates the transfer of business matters, creditors is regulated through the legal succession of excluding the assets (e.g. immovables) that require a all liabilities related to the enterprise. notarised transfer form. It is usually recommended that such a notarised agreement should also stipulate that There is no rule for defining whether or not a certain accessory obligations related to the assets must be obligation is related to the transferred business. It is regulated in a written agreement. Under the Estonian important to evaluate this on a case-by-case basis, for Law of Obligations Act, all employment contracts of example, the obligations related to a loan could be the employees of the target company must also be considered as an obligation related to the enterprise transferred; however, the specific regulations of the and are therefore subject to automatic transfer to the Employment Contracts Act should be followed. buyer.
2.3.4.3 Transfer of Title According to the principle of freedom of contract, the There is no specific rule for the transfer of the assets of parties can, in the sale agreement, specify that certain an enterprise. The title to the assets is transferred liabilities related to the enterprise will not be pursuant to the provisions for the transfer of such transferred to the buyer. Such stipulation, however, has things. The rights are transferred according to the no effect in relation to third parties, but this does not appropriate regulations; contracts follow their own mean that it is not valid against creditors who have transfer regulations. consented to the non-transfer of the liability. In order to ensure that the liability is not transferred, the buyer Where the assets are registered in a register, the seller should get the relevant consent of the creditor or get is obliged to make sure that the corresponding entries the seller to perform its obligation before the transfer. are made in the registers (e.g. Public Title Book, It is also possible to agree on different conditions to trademark register, vehicle register, etc.). If the assets regulate the matter. In any case, the enterprise sale are registered in a register, third persons‘ ownership of agreement should clearly divide the risks between the the assets, if any, is specified in the register, thus the parties for the sake of their own relations. buyer should set a deadline in the sales agreement for the seller to make the appropriate changes in the The creditors are also protected by the joint and relevant register. several liability of the buyer and the seller. According to the Law of Obligations Act, the buyer and the seller are One of the most important aspects of a business jointly and severally liable for the obligations that have transfer is the rule that the consent of the other party arisen before the transfer of the enterprise and that, by of the contract is not required for the transfer of the the time of the transfer, have fallen due or will fall due enterprise. This regulation arising from the Law of Obli- within five years after the transfer. This regulation gations Act is considered the main benefit of follows the same principle as the transfer of liabilities acquisition as neither third persons nor the sellers’ with respect to having no effect in relation to third contractual partners have a say in the transfer of the parties, except for creditors who have consented to enterprise. Nevertheless, another important aspect is such agreements. that public permits and licenses cannot generally be transferred together with the business, and the buyer The Estonian rules of automatic transfer of liabilities has to apply for such permits and licenses separately. and joint and several liability make the transfer of a This is due to the fact that some permits and licenses business by an asset acquisition slightly less attractive require possession of certain assets or rights or in Estonia than in many other countries. It may be that employment of employees with certain qualifications. the transfer of an enterprise may involve higher risks The transfer parties should carefully find a way to avoid than the transfer of shares. Nevertheless, the parties a lengthy undefined period between the transfer of the often choose to implement the acquisition by an asset business and the buyer’s receipt of permits and transfer because of the possibility to pick and choose licenses. The solutions to the problem can be found by the assets or for other reasons. transferring certain assets and employment agreements before the rest of the business.
12 2.3.5 Comparison of Share and Asset Acquisition
Acquisition of Shares Acquisition of Assets
Seller Shareholder(s) of the target company Target company
Purchase object Shares Assets and goodwill
Ability to pick and Purchase of shares does not generally The parties are free to pick and choose assets affect the assets of the target company. In choose the assets. order to avoid purchase of certain assets of the business, the target company needs to transfer those assets separately.
Ability to pick and Purchase of shares does not generally af- All liabilities related to the enterprise choose liabilities fect the liabilities of the target company. will be considered transferred to the buyer (unless the creditor has con- sented otherwise)
Form No form prescribed for the shares of AS Form depends on the underlying and for those shares of OÜ that are regis- assets that are transferred, e.g. a tered in the CSD. notarised form is required in case the The transfer of the shares of OÜ not regis- transferred business includes tered in the CSD requires notarised form. immovables.
Transfer of title In case of CSD-registered shares, According to the rules applicable to a securities transaction should be carried the specific things, rights and out. In case of shares of OÜ not registered obligations. In case of registered in the CSD, upon entry in the board of the assets, entries should be applied for in company. the relevant registers.
2.4 Competition Law associations of states. The Competition Board has the right to request all natural persons and undertakings 2.4.1 General Principles of Competition Law and their representatives as well as all state agencies The Estonian Competition Act (hereinafter the Act) has and local governments and their officials to submit been drafted in accordance with Articles 81 (formerly information necessary for analysing the competitive 85) and 82 (formerly 86) of the EC Treaty. The scope of situation, defining a relevant market, inspecting an the Act is the safeguarding of competition in the agreement, activity or decision, deciding on the grant of interest of free enterprise upon the extraction of exemptions, monitoring the activities of an undertaking natural resources, manufacture of goods, provision of in a dominant position or monitoring a concentration. services and sale and purchase of products and services (hereinafter goods), and the preclusion and 2.4.2 Applicability of EC Competition Rules elimination of the prevention, limitation or restriction Since 1 May 2004, the EC competition rules have had of competition in other economic activities. full applicability in Estonia and, as required by EC law, the Competition Board co-operates with the European The Competition Board exercises state supervision Commission in this field. The Competition Board is over the implementation of the Act, except the responsible for enforcing the EC competition rules in implementation of the provisions concerning state aid Estonia and, if necessary, provides the Commission and unfair competition. The Ministry of Economic with assistance when the latter executes supervision in Affairs and Communications governs the Competition respect of competition matters in Estonia. Board. 2.4.3 Prohibited Agreements The Competition Board has mainly a directing function, Estonian legislation on prohibited agreements follows but it also exercises state supervision, applies the the principles and partly also the wording of Article 81 enforcement powers of the state in cases provided by (former 85) of the EC Treaty. According to section 4 of law and executes pre-trial procedures. The Competition the Act, the following is considered prohibited: Board is entitled to analyse the competitive situation, agreements between undertakings, concerted propose measures to promote competition, make practices, and decisions by associations of recommendations to improve the competitive situation, undertakings (hereinafter agreements, practices and make proposals for legislation to be passed or decisions) which have as their object or effect the amended, and develop co-operation with the restriction of competition. competition supervisory authorities of other states and
13 Except as regards price fixing, this general prohibition An agreement, practice or decision is considered to be does not apply to agreements and practices of of minor importance if the combined market share of agricultural producers or to decisions by associations the total turnover of the undertakings that enter into the of agricultural producers that concern the production agreement, engage in concerted practices or adopt the or sale of agricultural products or the use of joint relevant decision does not exceed: facilities, unless competition is substantially restricted 1. 15% in the case of a vertical agreement, practice or by such agreements, practices or decisions. decision; 2. 10% in the case of a horizontal agreement, practice 2.4.3.1 Exemptions or decision; Not all agreements that restrict competition are 3. 10% in the case of an agreement, practice or prohibited. Some transactions that by their nature decision that includes the characteristics of both restrict competition may have other effects benefiting vertical and horizontal agreements, practices or consumers that override the competition restriction decisions. concern and are therefore exempted from the prohibition (i.e. individual exemption). However, an 2.4.3.3 Hardcore Restrictions undertaking entering into such an arrangement must be Some measures that may be adopted by undertakings able to prove that the arrangement meets the following are considered to be so blatantly against the principles requirements for exemption: of free competition that the de minimis rule is not 1. Contributes to improving the production or distribu- applied and exemptions are not possible. For example, tion of goods or to promoting technical or economic price fixing cartels are considered naked cartels, which progress or to protecting the environment while are always prohibited no matter how small their effect allowing consumers a fair share of the resulting on trade is. Other hardcore restrictions include market benefit; sharing, sharing sources of supply and limiting 2. Does not impose on the undertakings that enter into production. the agreement, engage in concerted practices or adopt the decision any restrictions which are not 2.4.4 Concentration Control indispensable to the attainment of the objectives specified in clause 1) of this subsection; 2.4.4.1 Threshold 3. Does not afford the undertakings that enter into the A concentration is subject to review by the Competition agreement, engage in concerted practices or adopt Board if, during the previous financial year the decision the possibility of eliminating competi- tion in respect of a substantial part of the goods 1. the aggregate turnover in Estonia of the parties to market. the concentration exceeded EEK 100 million12; and 2. the aggregate turnover in Estonia of each of at least In addition to individual exemptions, some types of two parties to the concentration exceeded EEK 30 transactions are exempted for a limited time period million13. under block exemptions by regulations adopted by the government. Block exemptions currently in force and Concentrations subject to control by the Commission valid until the year 2010 include the following: under the Merger Regulation are generally not subject 1. Block exemption regarding co-operation between to control by the Competition Board. undertakings for research and development and specialised manufacturing; 2.4.4.2 Notification 2. Block exemption regarding vertical arrangements The notification to the Estonian Competition Board for distribution of goods; must be made in Estonian, must be in writing and must 3. Block exemption regarding arrangements for be submitted after the relevant agreement has been distribution and servicing of motor vehicles. concluded but before control of the undertaking has been acquired. If the measure fulfils the conditions stated in the block exemption, the exemption applies automatically to the Within 30 days after submission of the notification measure with no further applications or notifications letter, the Competition Board either authorises or needed. A block exemption does not apply to an under- prohibits the concentration. The Competition Board taking in a dominant position or if competition is may also initiate supplementary proceedings on the virtually non-existent in the goods market affected by particular concentration case. If supplementary the respective agreement, practices or decision. proceedings are initiated the Competition Board has four months to either authorise or prohibit the 2.4.3.2 De Minimis Rule concentration. Until the Competition Board has reached Restrictions on competition and the effect on trade a decision, the persons concerned are not allowed to must be appreciable; therefore agreements, practices perform the concentration or any other acts that may or decisions are not prohibited if they are of minor hinder the enforcement of a prohibiting decision. Notifi- importance. cation of concentration is subject to a state duty in the amount of EEK 30,00014.
12 About EUR 6,4 million, 13 About EUR 1,9 million, 14 About EUR 1,920
14 2.4.4.3 Joint Ventures are considered movable property. Transactions If two or more undertakings create a joint venture that concerning these buildings cannot be made under the is created on a lasting and independent basis, it is Estonian law. deemed to be a full functioning joint venture and is subject to concentration control. Creation of a joint 2.5.3.2 Change of ownership venture of which the object or effect is the Under Estonian law, the registration of ownership must co-ordination of the competitive behaviour between the be made within one month of the submission of the founders can also be subject to the regulation on application along with the submission of a signed prohibited agreements (i.e. section 4 of the Act). notarised agreement to the Land Register. Accordingly, Compliance with section 4 of the Act is assessed the title to the property is transferred upon the during the concentration control by the Competition registration of the ownership in the Land Register. Board. Of course, a temporary or non-independent joint venture not subject to concentration control can be 2.5.3.3 Form of Agreements considered a prohibited agreement as any other The form of transferring title to the real estate requires arrangement. the conclusion of two agreements:
2.5 Real Estate 1) A purchase agreement (determining the terms and conditions of sale); and 2.5.1 Introduction 2) A real right agreement (agreement to transfer title). With the regaining of independence, the Estonian legal regime shifted and triggered the process of privatisa- These two agreements are usually contained in one tion of buildings and land and the restitution of land. document. Hence the time of the re-establishment of private ownership was initiated in the beginning of the 1990s. Agreements on transactions concerning real estate Since the beginning of land restitution, most of the land require notarisation in order to create legally binding has been privatised, and its title has been entered into obligations. It means that all sale-purchase agreements the Estonian Land Register. need to be verified by the notary public. The idea behind the regulation is for the notary to verify the 2.5.2 Title to Real Estate, Land Register authorisation of the person signing the contract and As stated in previous chapters, the national registers also to inspect the content of it and the will of the hold the legal capacity of ownership of real estate and parties to the contract. The signing of the contract may convey it to third persons. Real-estate ownership requires personal appearance at the notary’s office. in Estonia is registered in the Land Register. This is a national register, which includes information about the 2.5.3.4 Language Requirements ownership (with details and all related encumbrances). As both of the contracts mentioned above need to be The Land Register is a public (and electronically kept) notarised, they are also drafted and verified by a notary register, which is open to all persons with a legitimate in the Estonian language. Naturally, a written interest. translation of the contract and the signing procedure may be required. Not all information about land is registered in the Land Register. For example, detailed geographical data about 2.5.3.5 Due Diligence the plot of land is registered in the Estonian Land As in the case of any other valuable agreement, it is Cadastre – a database maintained by an administrative important to consider the risks involved in the department of the Land Board. The Land Cadastre does procedure. Therefore, a legal due diligence of the real not have the same public reliability as the Land estate might be very useful before signing an agree- Register. ment. Practice has also shown that the specific knowledge of property will provide the buyer with better 2.5.3 Acquisition of Real Estate bargaining possibilities. The legal due diligence of property comprises the analysis of public restrictions, 2.5.3.1 General zoning, permits, encumbrances, third persons’ rights, The concept of property is construed as land, etc. apartment ownership or building title under the Estonian law. The land can be an entire plot or a legal 2.5.3.6 Pre-emption Rights share of land. Usually, it is not permitted to transfer a Pre-emptive rights may be entered into the Land building separately from the underlying land. Register on the basis of a transaction or law. The latter The exception is a building title that has been could be exemplified by the co-owner’s pre-emptive established to be transferred. right to purchase the real estate upon the sale of a legal share of the property to third persons. The local As mentioned above, a few exceptions still exist in government of Tallinn also possesses a pre-emptive connection with the registration of property. right to the sale-purchase agreements in relation to the Due to the land reform, buildings may be located on land real estate in the Old Town of Tallinn. Other local which has not yet been privatised or restituted. As such governments may have a pre-emptive right to property buildings are not entered into the Land Register, they on the coast. The general rule with regard to the
15 timeframe of exercising the pre-emptive rights is two 2.5.4.2 Public Restrictions on the Use of Real Estate months after the parties have concluded the agree- The restrictions usually state that real estate or part ment. thereof may not be used for buildings and that the owner has to avoid activity in protected zones, etc. 2.5.3.7 Typical Purchase Price Arrangements The use of real estate may also be restricted in the The procedure of property sale often dictates that the coast area, protected zones of power lines, etc. These agreed sum is to be transferred to the deposit account restrictions apply to a few types of real estate only. of the notary before the agreement is concluded. The funds are released after the title to land has been 2.5.5 Encumbrances registered in the Land Register. It must also be noted The following restricted real rights, which are entered that, usually, 5-10% of the purchase price is paid by the into the Land Register upon submission of a notarised buyer and transferred to a broker’s account as a agreement, may encumber the real estate: servitudes, booking fee before an agreement is made. real encumbrances, building title, pre-emptive rights and rights of security (incl. mortgages). 2.5.3.8 Related Costs Depending on which services that are used, the follow- In general, these rights are used in real estate transac- ing costs may occur during the real-estate purchasing tions with the intent to secure the interest of the process: bank fees, legal fees for carrying out a legal purchaserbuyer, seller, third persons or the due diligence, legal fees for reviewing the purchase and neighbouring real estate. For example, a mortgage is security agreements, brokerage fees, fees for evalu - registered on the real estate in favour of the bank to ation of the real estate, notary fees and a state duty. secure the loan granted for acquisition of the real estate or a servitude is registered on the real estate in The registration of ownership and encumbrances in the favour of the neighbouring real estate to secure access Land Register is subject to a state duty. The amount of to the latter through the encumbered real estate. the duty depends on the value of the transaction. 2.5.5.1 Mortgage As mentioned, the notary also charges a fee for the Usually, a mortgage agreement is concluded at the conclusion of a transaction. The notary fees are also same time as the purchase agreement. The purchase dependent on the value of the transaction, although of property is often financed by a loan, which is secured fixed by law. The notary fee for verifying the real right by a mortgage in favour of a bank. It is possible to have agreement has been fixed to EUR 3. several mortgages on the real estate. Each mortgage will get a certain rank as agreed between the parties, 2.5.4 Restrictions upon which the rights can be exercised.
2.5.4.1 Restrictions on Acquiring Real Estate 2.5.6 Property Management According to current legislation, some restrictions for This field is scarcely regulated by law, except for some EU citizens and companies will exist until 1 May 2011. basic management standards. Usually, the common For example, in order to acquire 10 hectares or more of practice is to use property management companies for agricultural or forestry land, the buyer must be an the maintenance of buildings. There are usually apart- Estonian citizen; a citizen of a state which is a ment associations to administer the building and Contracting Party to the EEA Agreement who has lived structures. in Estonia for the past three financial years and has been registered in an Estonian register as sole 2.5.7 Lease Agreements proprietor in the area of production of agricultural products; an undertaking and branch of a foreign 2.5.7.1 General company registered in Estonia which has operated in Lease agreements may be concluded for a specified or Estonia for at least the past three financial years in the an unspecified term. In general, the principle of freedom area of production of agricultural products (or forest of contract applies as to the content of the lease agree- management for forestry land). Other persons are ment. However, as to the residential lease, the law entitled to become owners of land on rather limited protects the rights of the lessee and provides many grounds. They will also need the approval of the county mandatory rules. governor. Upon the transfer of real estate, the lease agreements Otherwise, there are no significant restrictions for for- under which the tenant holds the possession of the eigners to acquire real estate in Estonia with the excep- leased object will remain valid and will automatically be tion for forestry and agricultural land mentioned above transferred with the real estate. However, the lessor as well as some island, coast and borderline areas of the may terminate the lease agreement within three state. It should be noted that land on smaller islands and months from the acquisition of the real estate provided in certain border areas can be transferred to non-citi- that the lessor needs the leased commercial or zens or undertakings of the states which are contracting residential premises urgently for its own use. parties to the EEA agreement only upon the permission The lessor does not have such right if a notation of the Government of the Republic. relating to the lease agreement has been entered into the Land Register.
16 2.5.7.2 Duration and Expiry of Lease Agreement The municipality will also have to issue a permit for the According to statutory provisions (if the parties have use of the building. This can be done if it has been not agreed otherwise), either party of a lease erected on the basis of a building permit and in agreement entered into for an unspecified term may accordance with the design documentation after terminate a residential or business premises lease completion of the construction work. It is forbidden to entered into for an unspecified term by giving at least use a building without a permit of use. The buildings three months’ notice. The lease of furnished rooms may also receive a guarantee from the constructor as a be terminated by giving at least one month’s notice. mandatory rule. A lease agreement entered into for a specified term expires upon expiry of the term. A material breach will 2.6 Visa and Work Permit also terminate the lease. The agreement itself may also provide for a right of earlier termination. 2.6.1 Visas According to the Aliens Act, an alien (a person who is 2.5.7.3 Lease Payment and Accessory Expenses not an Estonian citizen) needs a legal basis to enter The common practice in Estonia is to pay a deposit in Estonia, such as a visa or a residence permit. the amount of one to three months’ rent upon the signing of the lease agreement. Utilities (accessory 2.6.1.1 General Requirements regarding visa expenses) like electricity, water, etc., are included in the As Estonia is a member of the EU, citizens of the EU lease payment. Nevertheless, it is often agreed in the countries are not required to obtain a visa. Estonia has lease agreement that the lessee must pay extra for also concluded several multilateral agreements on free utilities in accordance with the invoices of the service movement with a number of countries (available at the providers. following address: http://www.vm.ee/eng/kat_132/915.html). For citizens 2.5.8 Planning Requirements and Construction of of other states, it is possible to apply for a transit visa Buildings (with a maximum period of stay of five days), a short-term visa (with a maximum period of stay of 90 2.5.8.1 Planning days) or a long-term visa (with a maximum period of The central instrument in this field is a detailed plan. stay of 180 days). According to the law, detailed plans are established for city areas and some rural municipality areas to regulate The requirements for a visa applicant are: a sufficient zoning and to determine building rights for plots. financial status to cover the costs of his accommoda- The detailed plans also set limits for construction tion in, stay in and departure from the country; a visa activities in the specific areas. The authority to approve invitation; payment of a state fee of approximately EUR detailed plans is given to the local governments. 10 and submission of an application form. The process dictates public hearings and discussions after the conclusion of the plan of the project. 2.6.1.2 Employment The approval of the detailed plan may take from six An alien is not allowed to engage in employment months to a few years, depending on the area and activities in Estonia unless he holds a valid working complexity of the project. permit (please see article 2.6.2.3).
2.5.8.2 Construction 2.6.2 Residence and work permits As a general rule, construction work has to be performed in accordance with building design 2.6.2.1 General requirements regarding residence documentation and the norms set for the buildings. permits According to the regulation, the building design has to As the requirements regarding alien immigration do not be drafted by a professional architect or an engineer. apply to EU citizens, it should be mentioned that the It must also be approved by the local supervisory general rule for the maximum period of stay in Estonia authority. In addition to the design, its documentation is 90 days without a residence permit within a period of must comply with the detailed plan and the official six months. norms. A residence permit may be temporary (validity up to According to the law, the local government is the five years) or long-term. An alien may submit an construction supervisory authority in Estonia. application for a temporary residence permit to a Thus it regulates the erection, modification and representation of Estonia which, upon identification of demolition of buildings and other structures. The the applicant, will forward it to the Citizenship and process is concluded by obtaining a permit from the Migration Board for processing. The basis for the supervisory authority. The permits are issued on the issuance of residence permits is specified below in basis of the design and the application. A building article 6.2.2. permit may be revoked if it is not used within two years from its issuance.
17 2.6.2.2 Types of residence permits As mentioned above, a residence permit may be temporary or long-term. A temporary residence permit may be issued to an alien who is married to a person with permanent residence in Estonia; who wants to settle down with a close relative permanently residing in Estonia; who wants to work in Estonia; who wants to study at an Estonian educational institution; who wants to engage in business in Estonia; whose permanent legal income ensures his/her subsistence in Estonia; or whose application for residence permit is based on an international agreement.
A long-term residence permit may be issued to an alien who has stayed in Estonia permanently on the basis of a temporary residence permit for at least five years, holds a valid temporary residence permit, has registered residence, health insurance and permanent legal income for subsistence in Estonia and has knowledge of the Estonian language at least at a basic level.
2.6.2.3 Work permits In order to work in Estonia, an alien must hold a work permit; however, the person must also possess a residence permit and the validity of the work permit cannot extend the latter. Activities as a sole proprietor, employment with an employment contract or any other contract, or any activity which may result in gaining profit or any other benefit, irrespective of the type or form of the contract, or the location or place of resi- dence of the other party to the contract, are deemed to be employment unless an international agreement stipulates otherwise.
18 3. Taxation in Estonia changes are expected to be made to the tax system to bring the taxation of distributed profits in line with the 3.1 Corporate taxes EC Parent-Subsidiary Directive.
3.1.1. Significant developments 3.1.3 Corporate residence The following significant developments have taken A legal entity is considered a resident of Estonia for tax effect from 1 January 2008: purposes if it is established under Estonian law and there is no management and control test for this pur- - The income tax rate is reduced from 22% to 21%. pose. All tax treaty tie-breakers for legal entities are The tax rate will be further reduced by 1% a year until based on competent authority procedure. Estonian gen- it reaches 18% in 2011. eral partnerships and limited partnerships have legal personality and are therefore considered residents of - Binding advance rulings have been introduced. Estonia for tax purposes.
- Estonia has implemented a system which, on certain A permanent establishment (including a branch regis- conditions, makes it possible to account for VAT on tered in the Commercial Register) of a foreign entity is imports on VAT return without the need to pay VAT to deemed to be a non-resident taxpayer. the customs authority (Art. 211 Recast of 6th Directive). 3.1.4 Branch income As is the case with resident companies, registered per- 3.1.2 Taxes on corporate income manent establishments of non-residents are subject to All undistributed corporate profits are tax exempt. corporate income tax only with respect to profit distri- This exemption covers both active income (e.g. trading butions, both actual and deemed, as defined in domes- income) and passive income (e.g. dividends, interest, tic law. royalties) as well as capital gains from the sale of all types of assets, including shares, securities and Transactions and dealings between a head office and immovable property. This tax regime is available to its permanent establishment(s) should be conducted on Estonian companies and permanent establishments arm’s-length terms. Thus, such profits should be attrib- of foreign companies that are registered in Estonia. uted to a permanent establishment of a non-resident taxpayer that the permanent establishment would be The moment of taxation of corporate profits is expected to make if it was a distinct and separate tax- postponed until the profits are distributed as dividends payer engaged in the same or similar activities under or deemed profit distributions, such as transfer pricing the same or similar conditions and dealing completely adjustments, expenses and payments that do not have independently with its head office. a business purpose, fringe benefits, gifts, donations and representation expenses. 3.1.5 Group taxation There is no consolidation or group taxation for Distributed profits are generally subject to a corporate corporate income tax purposes. income tax of 21% (21/79 on the net amount of profit distribution). For example, a company that has profits of Transactions between related parties (both residents 100 available for distribution can distribute dividends of and non-residents) and between a head office and its 79, on which it has to pay corporate income tax of 21. permanent establishment(s) should be conducted on The income tax rates are reduced from 21/79 in 2008 arm’s-length terms. Estonia has adopted a new transfer to 20/80 in 2009, to 19/81 in 2010 and to 18/82 in pricing regulation, which is in line with the OECD Trans- 2011. fer Pricing Guidelines and has been effective since 1 January 2007. Transfer pricing adjustments are From the Estonian perspective, this tax is considered a treated as deemed profit distributions, which should be corporate income tax and not a withholding tax, so the declared on a monthly basis and which are subject to tax rate is not affected by an applicable tax treaty. 21/79 corporate income tax in 2008. Estonia has also Certain distributions are exempt from such tax introduced special transfer pricing documentation re- (see “Inter-company dividends”). quirements for certain taxpayers in line with the EU Transfer Pricing Documentation Code of Conduct. The existing dividend taxation system is not fully in line with the EU Parent-Subsidiary Directive (90/435/EEC). 3.1.6 Tax returns Estonia has a transitional period ending on 31 Decem- The period of taxation is a calendar month. The com- ber 2008 to amend its present dividend taxation sys- bined corporate income tax and payroll tax return (form tem, which may therefore change by 1 January 2009. “TSD” with appendices) must be submitted to the local The Estonian government has announced that it is tax authorities by the 10th day of the month following a committed to maintain the underlying principles of the taxable distribution or payment. Tax returns can be filed tax system after 1 January 2009 (i.e. exemption of electronically via the Internet. retained earnings), which means that only minor
19 3.1.7 Payment of tax consultancy fees, are subject to a withholding tax of Corporate income tax and payroll taxes must be 15% under domestic law, but exemptions may be remitted to the local tax authorities by the 10th day of available under double-tax treaties. Service fee the month following a taxable distribution or payment. payments to “tax haven” entities are always subject No advance corporate income tax payments are to a withholding tax of 21%. required. 7. Salaries, directors’ fees and service fees paid to 3.1.8 Withholding taxes individuals are subject to a withholding tax of 21% Withholding agents must withhold income tax from under domestic law, but double-tax treaties may certain payments. Withholding agents include resident exempt service fee payments to non-resident legal entities, resident individuals registered as sole individuals from withholding tax. proprietorships or acting as employers and non- residents having a permanent establishment or acting 8. Payments for the activities of non-resident artistes as employers in Estonia. The tax must be reported and or sportsmen carried out in Estonia are subject to a paid by the 10th day of the month following the withholding tax of 15%. payment. Income tax is not withheld from payments to resident companies, registered sole proprietorships 9. Certain pensions, insurance benefits, scholarships, and registered permanent establishments of foreign prizes, lottery winnings, alimony, etc., paid to non- companies. Payments subject to withholding tax include resident and resident individuals are subject to a the following: withholding tax of 21% under domestic law.
1. Dividends paid to non-resident legal entities which For non-residents who do not have a permanent own less than 15% of the shares of the distributing establishment in Estonia, the tax withheld from the company are subject to a withholding tax of 21% above payments at domestic or treaty rates constitutes under domestic law, but reduced rates may be final tax as regards their Estonian source income, and available under double-tax treaties. Dividends paid to such non-residents are not subject to any tax reporting “tax haven” entities are always subject to a with - requirements in Estonia. holding tax of 21%. There is no withholding tax on dividend distributions to corporate shareholders For certain types of Estonian source income, non-resi- owning at least 15% of the shares of the distributing dents are liable under Estonian domestic law to self company and to individual shareholders. assess their Estonian tax liability and submit a tax return to the Estonian tax authorities. Such types of 2. There is no withholding tax on interest payments to income include non-residents on the condition that the interest charged does not significantly exceed the arm’s- • taxable capital gains; length rate at the time the debt is incurred and the • profits derived from business conducted in Estonia interest payments are made. A withholding tax of without a registered permanent establishment; 21% will thus apply only to the part of the interest • other items of income from which tax has not been payment that significantly exceeds the arm's-length withheld but should have been withheld. amount. Estonia has effective tax treaties with Armenia, 3. Royalties (including payments for the use of Austria, Belarus, Belgium, Canada, the People’s industrial, commercial or scientific equipment) paid Republic of China, Croatia, the Czech Republic, to non-residents are generally subject to a Denmark, Finland, France, Germany, Hungary, Iceland, withholding tax of 15% under domestic law, but the Republic of Ireland, Italy, Kazakhstan, Latvia, reduced rates may be available under double-tax Lithuania, Luxembourg, Malta, Moldova, treaties. Certain royalty payments to associated EU the Netherlands, Norway, Poland, Portugal, Romania, and Swiss companies that meet certain conditions Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, are exempt from withholding tax. Ukraine, the United Kingdom, and the United States of America. Treaties have also been concluded with 4. Rental payments to non-residents for the use of Azerbaijan, Georgia, Greece, Russia and Singapore, immovable property located in Estonia and movable but these are not yet effective. property subject to registration in Estonia (excluding payments for the use of industrial, commercial or 3.2 Individual Taxes scientific equipment) are subject to a withholding tax of 21% under domestic law, but double-tax 3.2.1 Territoriality and residence treaties may exempt payments for the use of An individual who is a resident of Estonia is liable to pay movable property from withholding tax. tax on worldwide income, irrespective of the origin of the income. Non-residents are taxed on their Estonian 5. Royalties and rental payments to resident source income. Individuals are considered residents of individuals are subject to a withholding tax of 21%. Estonia if they have a permanent residence in Estonia, or if their stay in Estonia during any 12-month period 6. Payments to non-resident companies for services exceeds 182 days, or if they are Estonian public provided in Estonia, including management and servants who are sent abroad on assignment.
20 If the tie-breaker article in a double-tax treaty allocates 3.2.2.3 Capital gains and investment income the residence of a dual-resident individual to a foreign Capital gains from the sale or exchange of assets are country (most often if the home and family of the generally taxed on a net basis as part of ordinary individual remain abroad during an assignment to income, but capital losses can only be offset against Estonia), the individual will be taxed as a non-resident in capital gains. Certain qualifying capital gains are Estonia regardless of the above-mentioned Estonian exempt from income tax, for example, gains from the domestic rule. sale of a personal residence.
3.2.2 Gross income Rents and royalties generated from the use of certain assets are generally taxed on a gross basis as part of 3.2.2.1 Gross income and exclusions ordinary income, unless the taxpayer opts for net basis The gross income of resident individuals includes their taxation as part of business income. worldwide income from all sources, irrespective of the origin of the income. This includes both active income, Investment income is generally taxed on a gross basis such as employment and business income, as well as as part of ordinary income. This may include certain passive income, such as capital gains, rents and foreign dividends, interest and insurance proceeds. royalties, interest, dividends, certain insurance proceeds, etc. Domestic dividends are tax exempt for resident individuals. Foreign dividends are tax exempt provided In general, individual taxpayers are taxed on a cash that the underlying profits out of which the dividends basis. Exceptionally, the Estonian CFC (anti-deferral) are paid have been subject to foreign income tax or that rules attribute undistributed profits of foreign “tax income tax has been withheld from the dividends haven” companies to resident individual taxpayers if received. Interest paid by EEA banks (including Estonian such companies are controlled by Estonian residents. banks) or EEA branches of non-EEA banks to resident Most items of personal income are taxed on a gross individuals is also exempt from income tax. basis, mainly through withholding tax at source, whereas business income and capital gains are taxed For non-resident individuals, dividends and arm’s-length on a net basis on certain conditions. interest from Estonian sources are exempt from Estonian income tax, whereas rents and royalties are For resident individuals, there are numerous items of generally subject to withholding tax at source. tax-exempt income (excluded from gross income). Some of the more important items of tax-exempt income Certain capital gains realised by non-residents form include qualifying foreign employment income, domestic part of their Estonian source income, for which they are dividends, qualifying foreign dividends, qualifying bank liable to self assess their Estonian tax liability and interest and certain qualifying capital gains. submit a tax return to the Estonian tax authorities. For example, this applies to capital gains linked to 3.2.2.2 Employment income immovable property located in Estonia. Employment income is taxed on a gross basis and includes salaries, fees for personal services and 3.2.3 Tax rates directors’ fees. In general, fringe benefits are only The flat income tax rate for resident individuals is 21%. taxable at employer level and are not included in the Certain pensions are subject to income tax at a rate of gross income of an employee. 10%.
For resident individuals, foreign source employment The flat income tax rate was further reduced from 21% income is exempt from Estonian income tax if the in 2008 to 20% in 2009, to 19% in 2010 and to 18% following two conditions are met: in 2011. • the individual is present in a foreign country for employment purposes for more than 182 days 3.3 Value Added Tax during any 12-month period; and • foreign employment income is taxable in the foreign 3.3.1 VAT country and this can be substantiated by written The following transactions are subject to Estonian VAT: documentation which has to indicate the amount of the related foreign income tax (even if this is zero). • taxable supplies of goods and services (if the place of supply is in Estonia); Non-resident individuals are liable to pay Estonian • taxable imports of goods; income tax on Estonian source employment income. • taxable intra-community acquisitions of goods. This is deemed to arise if an individual performs work in Estonia for which he is paid remuneration by an The standard VAT rate is 18%. A reduced rate of 5% is Estonian employer (including non-residents having a applied, for example, to books, periodicals with a few ex- permanent establishment or acting as employers in ceptions, hotel accommodation services, listed pharma- Estonia), or if the individual has been present in Estonia ceuticals and the treatment of dangerous waste. for employment purposes for more than 182 days during any 12-month period. Directors’ fees paid by The VAT rate on the export of goods and certain Estonian companies are always taxable in Estonia. services is 0% (i.e. exemption with credit).
21 Some supplies are exempt (i.e. exempt without credit), 3.4 Duties such as health care services, insurance services, certain financial services and securities transactions. 3.4.1. Customs duties After becoming a member of the European Union, Real-estate transactions are generally exempt from Estonia also became a member of the Customs Union. VAT, but there are certain significant exceptions (e.g. The Community Customs Code and related transactions in new and significantly renovated implementation regulations apply, which means that buildings). Taxpayers can choose to add VAT real-estate transactions if certain conditions are met. • trade between Estonia and other EU countries is customs-free; If the taxable supplies of Estonian businesses or • imports from non-EU countries are subject to EU permanent establishments of foreign businesses in customs tariffs; Estonia exceed EEK 250,000 (approx. EUR 16,000) in • numerous Free Trade Agreements concluded a calendar year, VAT registration is required. Voluntary between EU and non-EU countries apply to Estonia. registration is also possible. Certain transactions of foreign businesses require Estonian VAT registration For more information: without any threshold. www.pwc.com/ee
The VAT accounting period is generally a calendar Reference: month, and the VAT should be declared and paid on or World Fact Book before the 20th day of the following month. (www.cia.gov/cia/publications/factbook)
On certain conditions, an EU taxable person who is not PwC Worldwide Tax Summaries registered for VAT in Estonia is entitled to a refund of (http://www.taxsummaries.pwc.com/) input VAT paid in Estonia. Non-EU taxable persons are entitled to a VAT refund on the basis of reciprocity.
On 1 January 2008, Estonia implemented a system which, on certain conditions, makes it possible to account for VAT on imports on VAT return without the need to pay VAT to the customs authority (Art. 211 Recast of 6th Directive).
22 4 Banking Environment Sampo Pank specialises in investment and savings and provides banking services for retail, corporate and 4.1 Overview institutional customers. Sampo Pank's branches and Introduction other service channels also play a central role in offe- After Estonia regained its independence in 1992, a ring the investment and savings services of other significant number of new banks commenced opera- companies in the Danske Bank Group. Sampo Pank has tions - reaching a peak of 42 in 1992 - due in large part a network of approx 25 branches and offices, covering to low entry barriers. As the 1990’s progressed, the the main industrial centres of Estonia. banking environment experienced more change. 1998 saw many changes; several major mergers took place The bank offers all relevant products for corporate and a number of banks were declared bankrupt and customers such as cash management, foreign shut down. Additionally, the government privatised all exchange, trade finance as well as overdraft facilities remaining state-owned banks, and today foreign banking and term loans, credit cards, eBanking, leasing, etc. groups own the majority of shares in Estonian banks. It is very easy to start business with Sampo Pank in Sector Figures Estonia. Just contact your Danske Bank account As of March2008 there are 14 commercial banks manager in your country and he/she will manage to operating in Estonia, of which 7 are domestic and 7 are open the bank account in Sampo Pank, Estonia for your branches of foreign banks. business start. You will also be given the dedicated English speaking account manager in Estonia who will 4.1.1 Central Bank work closely with the account manager in your country Eesti Pank is the Central Bank of Estonia. Its mission is and provide the best financial solution for your cross- to guarantee price stability in Estonia. border and local businesses.
Currency See www.sampopank.ee for further information. The Government and Eesti Pank (Central Bank) had planed to join the euro area on January 1, 2007, 4.3 Legal & Regulatory Issues however, with inflation figures higher than expected, this was not possible. The objective is still to join as 4.3.1 Introduction soon as possible. As such the market for financial transactions is deregulated. However, due to the continued existence of Responsibilities Central Bank reporting requirements for transactions Its main tasks in carrying out its mission are: between residents and non-residents, Estonia is not the • Participating in the national economic policy through ideal place for maintaining cash concentration pooling the implementation of an independent monetary solutions involving non-resident companies. policy, consultancy to the government, and international cooperation; Under the European Single Market’s objective of free • Ensuring financial stability in Estonia by creating movement of capital Estonian Law has undergone policies for the financial sector and operating well- strong harmonisation toward the rest of the EU, e.g. functioning settlement systems; within Money Laundering where the law fully conforms • Arranging the circulation of cash in Estonia; to the EU directives. • Making preparations to become one of the policy- makers among other national central banks of the 4.3.2 Resident and Non-Resident Status euro area who design the coordinated economic A company is considered resident in Estonia if it is policy and single monetary policy in Europe. established under Estonian law. A permanent establishment (including an Estonian branch) of a In order to perform its core tasks, Eesti Pank has the foreign entity is considered a resident following main functions: • Monetary Policy 4.3.3 Account Ownership • Financial Stability Any type of account can be owned by a resident as well • Meeting ash requirements as a non-resident company. • Estonia's Accession to the Euro Area • Organisation and Cooperation 4.3.4 Cash Pooling Regulations Cash concentration and notional pooling are allowed 4.2 Sampo Pank domestically as well as cross-border. Banks are not Sampo Pank in Estonia dates back to 1995. allowed to offset their own balances in a notional cash In November 2006, the Danske Bank Group acquired pooling solution. Cash pooling across legal entities Sampo Pank’s parent, the Sampo Bank Group. This lead within the same group is allowed . Resident and non- to a corporate visual identity and at the same time resident companies can participate in the same cash Sampo Pank Estonia became a full branch of pool in Estonia, but Central Bank reporting require- Danske Bank Group. ments must be adhered to as well as withholding tax regulations must be observed. Estonian legislation allows for multicurrency cash pooling though it is not widely offered by the banks.
23 4.3.5 FX Controls An electronic signature and the system of using the The Estonian kroon is indirectly pegged to the euro via electronic signature shall: its participation in the European Rate Mechanism 2. • Enable unique identification of the person in whose It is the Bank of Estonia’s task to issue and enforce name the signature is given foreign exchange regulations. • Enable determination of the time at which the signature is given 4.3.6 Central Bank Reporting Requirements • Link the electronic signature to data in such a The Central Bank of Estonia collects statistics on manner that any subsequent change of the date or balance of payments on cross-border transactions. the meaning thereof is detectable All transactions exceeding EEK 200,000 (equivalent to approximately EUR 12,780) must be reported. 4.4 Payments & Collections Methods & Instruments
Credit institutions report all transactions made through 4.4.1 Introduction nostro and vostro accounts which exceeds EEK Cash is losing its status as the dominant form of 100,000 in detail every 15 days to the Central Bank of payment in Estonia. A breakthrough for payments made Estonia, including declared transactions. via banks compared with other payment options occurred in 2002, when, for the first time, more than Reporting is made on single transactions. half of regular payments were made through banks.
4.3.7 Money Laundering Instead of less efficient payment instruments, such as Estonia is member of the Financial Action Task Force telebank and paper-based credit orders, Internet banking (FATF), and has incorporated most of the forty and debit orders are used. Non-cash payment instruments recommendations under Estonian Law. have significantly larger volumes than cash payments in In November 1998 (in effect since July 1999) Estonian banking areas. In 2006, a half a million cash Parliament passed the Prevention of Money Laundering payments were processed while non-cash payment volume Act which is aimed at preventing money or other in the same period was well over 201 million. property obtained through illegal means from being placed within the Estonian financial system. Among 4.4.2 Card Payments other things, the legal act defined the terms of money Among the non-cash payment instruments, the laundering, credit and financial institutions, regulated popularity of cards has increased significantly in the activities of credit and financial institutions in Estonia. By the end of June 2007, Estonian credit preventing money laundering, provided for the creation institutions had issued more than 1.6 million payment of a bureau for collecting data on money laundering cards, of which 1.3 million were debit cards and almost under the Ministry of Internal Affairs, as well as 400,000 were credit cards. Debit cards issued consist organised supervision over credit and financial exclusively of either Cirrus/Maestro debit cards or Visa institutions. Electron debit cards. Further, Visa and MasterCard are both in use as credit cards in Estonia. On September 21, 2004, five fuel merchants were convicted for Money Laundering in the Tallinn City Along with the growth in the number of bank cards, the Court, establishing a precedent in Estonian court possibilities for their use also increased. New history. automated teller machines (ATMs) and point- of-sale (POS) terminals were established, raising their On 18 October 2007, the Estonian government respective numbers to 972 and 15,963. More than approved a bill designed to implement the Third 86% of ATMs accept most widespread international Directive for presentation to Parliament. The bill bank cards issued by credit institutions worldwide. provides more detailed regulations for the identification of customers than the present law. Any lawyer, notary, 16.3 million card transactions were processed from accountant, real estate agent, casino, trust and residents with a turnover of more than 653 million euro company service provider receiving a cash payment of in June 2007. more than 200,000 kroons (approx. EUR 12,780) will be subject to the new regulations. Also, they will have 4.4.3 Credit Transfers to notify the money-laundering information bureau of Credit transfer is the dominant payment instrument in each transaction involving a cash payment exceeding Estonia in both volume and value terms. Business to 500,000 kroons (approx. EUR 31,949). business transactions are almost exclusively executed as credit transfers, as many companies initiate 4.3.8 Regulations Applicable for Electronic payments via their own ERP-system, and send the Transactions payment requests directly to the bank in batches. Under the Electronic Signature Act, which entered into force in December 2000, an electronic signature has The maximum payment execution time allowed by the the same legal consequences as a handwritten regulations of the Bank of Estonia is +1. Current market signature if some requirements are met. practice is that all payments initiated before cut-off time (mostly banks have the cut-off time for domestic payments around 16:00 CET and for book transfers around 20:00 CET) are executed with same day value.
24 It means that in general, the beneficiary receives the 4.5.4 E-payments and E-invoice / EBPP money on the same day the payment was initiated. E-payments and E-invoices are emerging in the Estonian marketplace, both as B2B and B2C services, but not yet 4.4.4 Direct Debits that widespread. The use and limitations of the direct debit have to be previously agreed upon by the payer and the 4.6 Cash Pooling Solutions beneficiary. Direct debits expenses in Estonia are borne by the beneficiary's account, service is free 4.6.1 Introduction for the debtor. Cash pooling solutions offered are influenced by the fact that banks cannot set off their credit and debit On the Estonian non-cash payment instruments market, balances for capital adequacy ratio purposes. direct debit is still a novelty and its share is small as compared to the credit order, for example. The vast Foreign banks, primarily Nordic, which have entered the majority of direct debits are transferred from private Estonian market by purchasing large share holdings, accounts. have however pushed the use of cash pooling in recent years. In June 2007, banks launched a new service allowing customers to make domestic direct debit payments The Central Bank’s reporting requirements however, even if the remitter and beneficiary’s accounts are at make Estonia a less attractive environment for pooling different banks. The service was designed for of resident and non-resident cash balances. companies who wish to receive direct debit payments from customers who hold current accounts at different 4.6.2 Notional Pooling banks, without entering into contractual relations with A notional cash pool has been developed by many banks all of the banks where customers have opened current in the region using the framework of the European cash accounts. For consumers, this means that they will in pool, which is based on the notional consolidation of the future be able to pay invoices to all companies who group account balances in single or multi currencies. settle accounts using direct debiting, regardless of The conversion from local currency to the euro is done which financial institution they bank with. without a large expenditure because the Estonian kroon, like it’s Baltic neighbours’ currencies, is pegged to the 4.4.5 Cheques euro. E-banking tools provide the possibility of applying Payment cheques have never played an important role limits to group account balances and the easy in the payment instrumentsmarket within Estonia. distribution of funds, which ensures that money is However, there is a certain small group of people who moved quickly to the place where it is most needed. prefer this way of payment. Of course, no actual transactions are involved in this 4.5 Electronic Banking process.
4.5.1 Introduction Banks are now also offering interest compensation In recent years a plethora of banking services suited for pooling as an alternative to notional cash pooling electronic processing have been migrated to the because it is less complicated. The bank takes all of a internet. There are no country-wide standards or any company's same-currency accounts and joins them multi-banks offerings on the Estonian market. together in a collective pool.
4.5.2 General Functionality of EBS Offerings 4.6.3 Cash Concentration Many banks have shifted the focus from PC based Cash concentration is allowed and available as both electronic banking systems to web-based platforms. single legal account pooling – balance netting – and zero The services offered through the World Wide Web and target balancing solutions. It is primarily the banks include payment transactions, account information, with Nordic ownership that offer these solutions. inter-company netting solutions, FX dealings and information etc. (in quasi real-time). Even though the 4.6.4 Multicurrency and Cross Border Pooling web-based solutions are becoming more and more On a cross-border basis notional as well as cash advanced, a number of banks still offer more concentrating pooling schemes are offered. However, sophisticated services via PC-based tools. the primary tool for pooling continues to be the Electronic Banking Systems are offered based on the sweeping and funding of cash across borders. banks own proprietary formats. Cash pooling solutions across currencies are usually 4.5.3 EDIFACT / Host-to-Host Solutions not part of the services offered by the banks. However, The corporations growing effort of streamlining one or two of the more sophisticated banks (owned or payment processing is primarily supported by the banks dominated by Nordic banks) do offer such solutions, with foreign ownership, as the demand for the most domestically as well as cross-border, as interest part comes from corporates with headquarters outside compensation / enhancement solutions. Estonia. Host-to-host solutions are provided for domestic as well as international payments.
25 5 Useful Links - Estonia
Embassies Foreign embassies in Estonia
Embassay of Denmark Embassy of Norway www.ambtallinn.um.dk www.norra.ee
Embassy of Finland Embassy of Poland [email protected] www. tallinn.polemb.net
Embassy of Germany Embassy of Sweden www.germany.ee www.swedenabroad.com
Embassy of Ireland [email protected]
Embassies of Estonia abroad: Estonian Embassy in Denmark Estonian Embassy in Norway www.estemb.dk www.estemb.no
Estonian Embassy in Finland Estonian Embassy in Poland www.estemb.fi www.estemb.pl
Estonian Embassy in Germany Estonian Embassy in Sweden www.estemb.de www.estemb.se
Estonian Embassy in Ireland [email protected]
Lawyer -Accountant - Consultant Mazanti-Andersen, Sorainen Lawfirm Korsø Jensen & Partnere/ www.sorainen.com www.mazanti.dk CaRisMa Consulting PricewaterhouseCoopers www.carismaconsulting.dk www.pwc.com
26 Danske Bank
Denmark Lithuania Danske Bank Danske Bankas www.danskebank.com www.danskebankas.lt
Estonia Northern Ireland Sampo Pank Northern Bank www.sampopank.ee www.northernbank.co.uk
Finland Norway Sampo Pankki Fokus Bank www.sampopankki.fi www.fokus.no
Germany Poland Danske Bank Danske Bank www.danskebank.com/de www.danskebank.com/pl
Ireland Russia National Irish Bank ZAO Danske Bank www.nationalirishbank.ie www.danskebank.com/ru
Latvia Sweden Danske Banka Danske Bank www.danskebanka.lv www.danskebank.se
General Information
Bank of Estonia Ministry of Economic Affairs www.eestipank.info and Communications www.mkm.ee Hansabank www.hansa.ee The Estonian Financial Supervisory Authority Estonian www.fi.ee Banking Association www.pangaliit.ee Statistical Office of Estonia www.stat.ee Card Centre of Banks www.estcard.ee Estonian Chamber of Commerce and Industry Tallinn Stock Exchange www.koda.ee www.ee.omxgroup.com Enterprise Estonia Ministry of Finance www.eas.ee www.fin.ee
27 Danske Bank Holmens Kanal 2–12 DK–1092 Copenhagen K
Tel. +45 45 12 00 00 www.danskebank.com
2008.09 · Danske Bank A/S · CVR-nr. 61 12 62 28 – København