www.pwc.ee
Doing business and investing in Estonia 2018 2 PwC
Contents
5 Office location in Estonia 1 Country profile and investment climate 1.1 Introduction 6 1.2 Government structure 1.3 Legal system 1.4 People 1.5 Economy 1.6 Foreign trade 1.7 Further reading 2 Business environment 2.1 Business climate 12 2.2 Free trade zones 2.3 International agreements 2.4 Legal environment 2.5 Regulations for business 2.6 Property market 3 Banking, finance and insurance 3.1 Banking system 18 3.2 Specialised financial institutions 3.3 Investment institutions 3.4 Capital markets 4 Importing and exporting 4.1 Trends in customs policy 20 4.2 Import restrictions 4.3 Customs duties 4.4 Temporary import relief 4.5 Documentation and procedures 4.6 Warehousing and storage 4.7 Re-exports 5 Business entities 5.1 Legal framework 22 5.2 Choice of entity and business forms 5.3 Private limited company (OÜ) and public limited company (AS) 5.4 Partnerships 5.5 Branches 5.6 Representative offices 5.7 Sole proprietorship 6 Labour relations and social security 6.1 Labour market 26 6.2 Labour relations 6.3 Working conditions 6.4 Social security system 6.5 Foreign personnel 7 Accounting and audit requirements 7.1 Accounting 32 7.2 Chart of accounts 7.3 Audit requirements Guide to doing business and investing in Estonia 3
8 Tax system and administration 35 8.1 Tax system 8.2 Direct and indirect tax burden 8.3 Principal taxes 8.4 Legislative framework 8.5 Tax treaties 8.6 Tax returns and payments 8.7 Assessments 8.8 Appeals 8.9 Withholding taxes 8.10 Tax audits 8.11 Penalties 8.12 Advance clarifications 9 Taxation of corporations 9.1 Corporate tax system 41 9.2 Incentives 9.3 Taxable income 9.4 Deductibility of expenses 9.5 Related party transactions 9.6 Foreign exchange 9.7 Tax computations 9.8 Other taxes 9.9 Branch versus subsidiary 9.10 Holding companies 10 Taxation of individuals 45 10.1 Territoriality and residence 10.2 Taxable income 10.3 Non-taxable income 10.4 Deductions 10.5 Taxation of non-residents 10.6 Tax compliance 11 Value added tax (VAT) 48 11.1 Introduction 11.2 Scope of VAT 11.3 Zero-rating 11.4 Exempt supplies 11.5 Taxable amount 11.6 Non-deductible input VAT 11.7 VAT incentives 11.8 Simplification measures 11.9 Specific reverse charge 11.10 VAT compliance 12 PwC in Estonia 52 12.1 Assurance services 12.2 Tax services 12.3 PwC Legal 12.4 Advisory services 55 Appendices 4 PwC
Foreword
We welcome the opportunity through this Guide to provide relevant information for doing business and investing in Estonia.
Estonia is a small country located at the heart of the Baltic Sea Region - Europe’s fast growing market of nearly 100 million people. Attractive location between East and West, an excellent business environment, stable government and liberal economic policy, moderate costs and the ease of doing business have already attracted numerous international companies to Estonia.
Estonia’s economic freedom is among the highest in the world. In 2018 Index of Economic Freedom (prepared by the Heritage Foundation) Estonia is ranked 7th out of 180 countries. The Ease of Doing Business index by the World Bank (2017) sets Estonia at the 12th position. According to Transparency International (Corruption Perception Index 2017), Estonia is ranked 21st out of 180 countries.
This Guide has been prepared for the assistance of those interested in doing business in Estonia. It does not cover exhaustively the subjects it treats, but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws, regulations and decisions of the country and to obtain appropriate accounting and legal advice.
If you need additional information on doing business in Estonia, please do not hesitate to contact us in our office in Tallinn or through your nearest PwC office.
Tiit Raimla
Country Managing Partner Guide to doing business and investing in Estonia 5
Office location in Estonia
Tallinn Rakvere Kohtla-Järve Narva Paldiski Jõhvi
Kärdla
Haapsalu Rapla Paide Jõgeva
Viljandi Pärnu Tartu
Kuressaare Põlva
Valga Võru
The PricewaterhouseCoopers office in Estonia is located at the following address: Pärnu mnt 15 10141 Tallinn Tel. +372 614 1800 Fax. +372 614 1900 www.pwc.ee [email protected] 6 PwC
1 Country profile and investment climate
1.1 Introduction be permanent snow cover from Investor considerations: December to March and the sea may A small Nordic country, having close The Republic of Estonia is situated be iced over during these months. economic ties with Scandinavia and in Northern Europe along the Baltic Western Europe Sea. Finland lies to the north of History Estonia, across the Gulf of Finland. Estonians have been living in this A favourable geographic location on Sweden is the western neighbour territory since approximately 2500 the Baltic Sea, a region of intense across the Baltic Sea. Estonia B.C., making them among the economic activities and growth borders Russia in the east, with longest settled of the European potential with good access to Russia, St. Petersburg approximately 350 peoples. Due to Estonia’s strategic the CEE countries and the EU region kilometres across the north-eastern location as a link between East Member of both the EU and NATO border. In the south Estonia borders and West, it has been conquered Latvia. Estonia has approximately starting from spring 2004 numerous times, and under foreign 1.3 million inhabitants. rule for several centuries. Member of WTO Part of the Euro zone since 1 Tallinn, the capital of Estonia, lies At the beginning of the 13th century, January 2011 on the Baltic Sea coast, only about Estonia was conquered by the 80 kilometres (50 miles) south Teutonic knights whose castles still of Helsinki, across the Gulf of dot the countryside. By 1285, Tallinn Finland. The population of Tallinn is was a member of the Hanseatic approximately 450 thousand. Other League. During the Middle Ages, the bigger cities are Tartu, Narva and Hanseatic League, which combined Pärnu. 70 Baltic Sea cities, formed one of the most powerful trading blocs in The territory of Estonia covers 45 the world. The German merchant thousand square kilometres (17 families, which settled here, thousand square miles). Estonia dominated trading activities and is a lowland country with average successive generations of Germans elevation of about 50 meters (160 built their manor houses across the feet) and a considerable part of the country. territory covered with wetlands. Germans were only the first among The highest point, Suur Munamägi, successive waves of conquerors. is only 318m (1,043 feet) above Danes, Swedes, Poles and Russians sea level. More than 1,500 offshore all swept across Estonia, setting up islands make up 9 percent of the successive regimes, fortifying their country’s total territory. The largest towns and castles, and shipping their of the islands are Saaremaa and goods through Estonian ports. Hiiumaa. Estonia is a country of numerous lakes, the largest of which In the late 19th century a powerful are Lake Peipsi and Lake Võrtsjärv. Estonian nationalist movement arose and on 24 February 1918, Estonia Estonia has a temperate maritime declared its independence from climate. Russia. The period of independence Helsinki St. Petersburg was brief and Estonia was forcibly 80 km The Baltic Sea has a strong influence annexed by the Soviet Union in 350 km on local weather, especially in 1940. In 1991, Estonia regained its the coastal regions. Temperature independence, having managed to Tallinn ranges from -7ºC (19ºF) average break free from the Soviet Union daily in January to 17ºC (63ºF) without any acts of violence. average daily in July. Total rainfall Estonia became a member of NATO is between 500 and 700 millimetres on 29 March 2004 and joined the (20 to 28 inches) a year. There may European Union on 1 May 2004. Guide to doing business and investing in Estonia 7
Since 1 January 2011, Estonia is part All citizens over 18 years of age have Pursuant to the Constitution the of the Euro zone. the right to vote. Republic of Estonia is not to enter into international treaties which are 1.2 Government The Parliament is Estonia’s highest in conflict with the Constitution. structure legislative authority and it is vested with the right to adopt laws. If laws or other legislation in Estonia The highest authority of national are in conflict with international legislation in Estonia is the A distinction is made between treaties ratified by the Parliament, Constitution of the Republic of ordinary laws which are passed by the provisions of the international Estonia (Eesti Vabariigi põhiseadus). a simple majority of votes in the treaty shall apply. The constitution was adopted by a Parliament, and constitutional laws, referendum and came into effect the adoption and amendment of The President on 29 June 1992, after Estonia had which requires a vote by the majority The President of Estonia is elected regained its independence. of all members of the Parliament. for five years by the Parliament or, under specific circumstances, Any other legislative acts must be in In addition, the Parliament has the by an electoral body consisting of conformity with the Constitution as right to ratify and withdraw from the members of the Parliament well as with the generally recognised international treaties and decide on and representatives of local principles and rules of international government loans. governments. The President is law which are an inseparable part of the Estonian legal system.
The Parliament According to the Constitution, Estonia is an independent and sovereign democratic republic wherein the supreme power of state is vested in the people. The people exercise their supreme power of state through the election of the Estonian parliament (Riigikogu).
Ordinary elections of the 101 members of the unicameral Parliament are held every four years. 8 PwC
the formal head of state and the emergency, the President of the is founded upon the principle of the commander-in-chief of the Estonian Republic may, in matters of urgent priority of legislative acts as a source Defence Forces. state need, issue decrees which of law and their precedence over have the force of law. any other sources, such as judicial The laws passed by the Parliament practice, doctrine or custom. are presented to the President for As a member of EU since 1 May proclamation. The President has 2004, Estonia is bound by EU Courts a right to veto the laws passed by law. The Ministry of Justice is Estonia has a three-level court the Parliament pursuant to which responsible for the coordination of system, where: he/she may return the act to the the harmonisation of Estonian law Parliament. and EU law, making suggestions (i) county courts and administrative about harmonising Estonian legal courts adjudicate matters in the first If the Parliament does not thereafter acts with EU legal acts and giving instance; amend the law, the President can the ministries and other institutions proclaim the law or has the right advice about the EU legal system (ii) appeals against decisions of to propose that the Supreme Court and the principles of legislation. courts of first instance are heard by declare the law unconstitutional. courts of second instance and; If the Supreme Court finds that Local government councils the law is in conformity with the Local Government Councils (iii) the Supreme Court is the court Constitution, then the President are regional representative and of the highest instance. proclaims the law. legislative bodies, elected by the residents of a rural municipality or County courts as courts of first The Government city for the period of three years. instance hear all civil, criminal and Under certain conditions other All permanent residents (including misdemeanor matters. The decisions state institutions may also exercise citizens and non-citizens) of at least of county courts can be appealed legislative power. The Government 18 years of age are eligible to vote. to the courts of appeal (also called of the Republic (Vabariigi Valitsus) Local executive power is vested in circuit courts), being the courts of and the ministers carry out the local governments that resolve local second instance. Administrative legislative function by using the right issues and have local budgets to fulfil courts hear administrative matters to pass regulations on the basis of their duties. as courts of first instance. and for the implementation of laws (so called intra legem regulations). 1.3 Legal system The decisions of county and administrative courts are reviewed If the Parliament is unable Like all continental European legal by courts of appeal in the second to convene in a situation of systems, the Estonian legal system instance by way of appeal Guide to doing business and investing in Estonia 9
proceedings on the basis of an third rural. 69% of the population Estonians are predominantly appeal, an appeal against a ruling, is of Estonian ethnicity. The second Lutherans, but religion does not or a protest. largest ethnic group is Russian, have any considerable impact on forming approximately 25% of the daily life. There are small Russian The Supreme Court is the court of population. 1.7% of the population Orthodox, Baptist and other the highest instance, which reviews has Ukrainian roots, and Belarusians communities across the country. decisions by way of cassation and Finns make up approximately proceedings, i.e. the parties to 0.9% and 0.6% of the population Estonia has been reforming its the proceedings have the right respectively. education system since regaining to appeal to the Supreme Court independence in the beginning of against the decisions of the courts The official language is Estonian. 1990s. The current system consists of appeal. A matter is accepted for More than one million people speak of compulsory basic education, proceedings in the Supreme Court Estonian, which belongs to the followed by upper-secondary if the statements presented in the Finno-Baltic group of the Finno- education, at either a general high appeal show an opinion that the Ugric language family. Estonian school or a vocational school. The appeals court applied incorrectly, is closely related to Finnish (the general education process then or materially violated a procedural similarity is comparable to that offers higher education at university rule that may involve an incorrect between Italian and Spanish), while or at an applied higher education judicial decision. The Supreme Hungarian is a more distant relative. institution, and the vocational Court is also the constitutional Estonia uses the Latin alphabet. As process offers post-secondary review court. a majority of the Estonian business education at a technical school. The community is internationally reformed educational system does, 1.4 People oriented, English is understood and however, provide for movement spoken fluently by a large number between the general and vocational The total population of Estonia is of businesspeople. Furthermore, processes. Education is mostly around 1.3 million people. As in many Estonians speak Russian and, provided in Estonian. State and other countries in the region, the especially in Northern Estonia, municipal education establishments population growth rate has been Finnish, among other foreign are mostly free of charge. There are very modest recently. Average life languages. 20 institutions of higher education expectancy was 78 years in 2015; in Estonia, including the renowned 73 years for men and 82 years for Overall, most Estonians are not University of Tartu, Tallinn women. The population density is religious. There is a tolerance toward University of Technology, and other approximately 30 inhabitants per all religions and in general religious universities. The study programs square km. Around two-thirds of beliefs do not affect business of the bigger universities tend to be the population is urban, and one- activities in Estonia. Formally, internationally accredited. Some 10 PwC
universities have programs in the over the last twenty years. Estonia fishing, timber and wood products, English language. has a liberal market-based economy. shipbuilding, electronics, The government has pursued nearly transportation and various services After regaining independence balanced budgets and low public debt. remain key sectors of the Estonian from the Soviet Union, Estonia has economy. Estonia produces nearly been among the most advanced Oil shale-based energy production, all of the energy needed for the emerging markets in Central and telecommunications and IT country, supplying large part of its Eastern Europe, mostly owing to the products, textiles, chemical electricity needs with locally mined success of its socio-economic reforms products, banking, food and oil shale. Alternative energy sources such as wood, peat, and biomass
Key economic indicators 2007–2017
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GDP In current prices (EUR billion) 16.2 16.5 14.2 14.7 16.7 18.0 19.0 20.0 20.4 21.0 23.0 Real growth (%) 7.2 (5.0) (14.2) 1.8 7.6 4.3 2.0 2.8 1.8 2.2 4.8 Prices Consumer price index (%) 6.6 10.4 (0.1) 3.0 5.0 3.9 2.8 (0.1) (0.5) 0.1 3.4 Labour market and wages Unemployment rate (%) 4.6 5.5 13.5 16.7 12.3 10.0 8.6 7.4 6.2 6.8 5.8 Average monthly gross wages 726 825 784 792 839 887 949 1005 1065 1146 1221 and salaries (EUR) General government budget Revenue (EUR billion) 6.0 6.1 6.2 6.0 6.4 7.0 7.2 7.7 8.2 8.5 - Expenditure (EUR billion) 5.5 6.6 6.5 6.0 6.2 7.0 7.3 7.6 8.2 8.5 - Balance (+/-) (EUR billion) 0.4 (0.4) (0.3) 0.0 0.2 (0.0) (0.0) 0.1 0.0 0.0 - Foreign trade (special trade system) Exports (EUR billion) 8.0 8.5 6.5 8.7 12.0 12.5 12.3 12.0 11.6 11.9 12.9 Imports (EUR billion) 11.4 10.9 7.3 9.3 12.7 14.1 13.9 13.8 13.1 13.6 14.8 Balance of payments Current account balance (EUR (2.4) (1.4) 0.4 0.3 0.2 (0.3) (0.1) 0.2 0.4 3.9 4.0 billion) Current account balance/GDP (%) (17.1) (9.8) 2.9 1.8 1.3 (1.9) (0.5) 0.3 2.0 1.9 - Direct investments assets’ 1.7 0.9 1.0 0.9 (1.0) 1.0 0.6 0.8 (0.5) 1.6 - transaction (EUR billion) Direct investment liabilities’ 2.2 1.3 1.3 1.9 0.8 1.4 0.8 1.3 (0.6) 0.7 - transaction (EUR billion) International investment position (at end of year) International investment position (11.6) (12.5) (11.3) (10.5) (9.1) (9.2) (9.5) (9.2) (8.1) (7.8) - (EUR billion) Direct investment assets’ 5.6 6.3 6.0 6.5 6.1 7.1 7.7 8.8 8.5 8.9 - positions at the end of period (EUR billion) Gross external debt (EUR billion) 17.4 19.0 17.3 16.5 16.7 18.0 17.6 19.1 19.2 19.0 - Source: Bank of Estonia Guide to doing business and investing in Estonia 11
contribute approximately 20% of flight network via its international General information about Estonia: primary energy production. airport in Tallinn, serving direct http://www.visitestonia.com/ flights to numerous European cities. Key economic indicators over the Statistical information about period 2007–2017 are summarised 1.6 Foreign trade Estonia: http://www.stat.ee/en in the table below. In 2017, the export of goods totalled Background on the investment 1.5 Economy EUR 12.7 billion and total imports climate in Estonia: amounted to EUR 14.7 billion. http://www.investinestonia.com/ Transport and telecommunications Estonian foreign trade is mostly are well developed in Estonia. An based on strong economic ties with Information about foreign trade: efficient road network covers the Finland, Sweden, Russia, Latvia, http://www.estoniantrade.ee whole of Estonia, though the quality Lithuania and Germany, as well as of some secondary roads remains with other countries. Information about the Estonian below western standards. There is language: a well-developed rail connection 1.7 Further reading http://www.einst.ee/publications/ between Estonia and Russia. In language/ combination with the well-located Some general tips for business ice-free ports in the northern part of visitors on visas, currency and public Information about the capital city the country (the Port of Muuga near holidays can be found in Appendix Tallinn: Tallinn being the largest), Estonia B. For further background reading http://www.tourism.tallinn.ee/eng has served as a major transit corridor on Estonia, the web pages referred between the West and East. Estonia to below contain some very reliable is connected to the international material.
Estonian exports and imports by commodity groups, 2017
EUR in billions Exports % of total Imports % of total
Food and live animals 1.0 8% 1.2 8%
Beverages and tobacco 0.1 1% 0.3 2%
Crude materials, inedible, except fuels 1.2 9% 0.6 4%
Mineral fuels, lubricants and related 1.2 14% 1.4 10% materials
Animal and vegetable oils, fats and 0.0 0% 0 0% waxes
Chemicals and related products 0.9 6% 1.7 12%
Manufactured goods classified chiefly 2.0 14% 2.3 16% by material
Machinery and transport equipment 4.1 34% 5.6 38%
Miscellaneous manufactured articles 2.1 13% 1.5 10%
Commodities and transactions not 0.1 1% 0.1 1% classified elsewhere in the SITC
Source: Statistical Office of Estonia 12 PwC
2 Business environment
2.1 Business climate and implementing e-government Investor considerations: solutions and cyber security. 99% of Estonia is one of the most politically Estonia is the leading country in people use Internet banking services stable countries in CEE region a Central and Eastern Europe in and more than 95% complete their income tax return over the Internet. membership in Eurozone, WTO, terms of attracting foreign direct investments. Estonia is within a Estonia hosts both the cyber security NATO and OECD. 3-hour flight from most major centre of NATO and the IT-agency of Estonia does not have corporate European, Scandinavian and the European Union. income tax on reinvested profits and Russian cities. Overall, the business it has the lowest public debt in the climate in Estonia is characterised as 2.2 Free trade zones EU. free business and trade in alignment Estonia has a highly educated and with EU practices. Many companies There are three free trade zones are subsidiaries of European, established under separate orders motivated workforce. particularly Scandinavian, firms. of the Estonian Government: at the Estonia is a frontrunner in applying Estonia has some of the highest ports of Muuga; Paldiski and Sillamäe modern IT solutions having a wide credit ratings in the region in the northern coast of Estonia as range of state e-services, e-banking, (Standard & Poor: AA-; Moody's: A1; well as in Valga in the south-east nation-wide ID-card and a digital Fitch IBCA: A+). Estonia (see also chapter 4.6). signature legally equal to handwritten signature. In 2014, Estonia launched Estonia is a member of euro area 2.3 International its e-residency program, which allows since 2011, but the country’s cost agreements non-Estonians to access Estonia’s level is still significantly lower than that of neighbouring Scandinavian Estonia is a member of the WTO e-services and run an Estonian countries. from 1999 and the European company remotely. Estonia is the most transparent Throughout the and the least corrupt country in period of regained CEE (Transparency International independence, Corruption Perception Index 2017, the economic and 21st out of 180 countries) fiscal policy of the Government has Economic freedom is regarded as mostly been aimed one of the highest in the World and at achieving long- one of the best in EU (Economic term economic Freedom World Ranking 2018, 7th growth. The overall out of 180 countries) Government attitude Regulatory environment is conducive is very welcoming for starting and operating a company towards foreign (World Bank Ease of Doing Business capital, especially 2017, 12th out of 190 countries) into sectors that are export-oriented, innovative and support regional development. 0% corporate income tax is imposed on all reinvested earnings in Estonia.
Estonia is one of the leading countries in the world in creating Guide to doing business and investing in Estonia 13
Union and NATO from 2004. 2.5 Regulations for basic fees, premiums, additional fees, In 2010, Estonia became the business interest rates, rent or lease payments 34th member of OECD, the applicable to third parties are organisation that includes most of Competition policy prohibited. This principle is applied the world's wealthiest and most Estonian competition policy in conformity with the European developed countries. Currently is generally in line with EU Commission Notice on Vertical Estonia has 58 double taxation competition principles. Restraints (2000/C 291/01), which treaties in force. prohibits the establishment of a fixed The Estonian Competition Authority resale price. However, the provision 2.4 Legal environment is the responsible body for of a list of recommended prices or supervisory and regulatory activities maximum prices by the supplier to Estonia has systematically reformed in this area. The Authority consists the buyer is not considered in itself a its legal system since the 1990s of the Competition Division, Energy violation of price controls regulation. with the top policy priority being and Water Regulatory Division facilitation of entrepreneurship. and Communications Regulatory Consumer protection Legislators and governments have Division. Estonia is one of the The principal legal acts regulating always displayed the clear will to few countries in the European consumer protection are the make the business environment Union, where the anti-competitive Consumer Protection Act, the attractive in order to benefit from agreements, so-called cartels, are Trading Act, the Advertising Act tax revenues and the jobs created by processed in criminal proceedings. and the Law of Obligations Act. The attracting foreign investors. protection of the legitimate rights of Price controls consumers and development and the The Estonian legal environment The Estonian Competition Act implementation of consumer policy favours entrepreneurship and the provides a general rule under in accordance with the provisions entrepreneurial mind-set. Foreign which agreements between of UN Guidelines, the Consumer investors have equal rights and concerted practices and decisions Protection Act and of EU consumer obligations with local entrepreneurs. by associations of undertakings policy is vested mainly in the Estonian All foreign investors may establish which directly or indirectly fix prices Consumer Protection Board (CPB). a company and conduct business or any other trading conditions, in Estonia in the same way as local including prices of goods, tariffs, The three most important functions investors; no restrictions apply. fees, mark-ups, discounts, rebates, of the CPB are to supervise the 14 PwC
consumer market, settle consumer Patents, trademarks, Berne Conventions, the Geneva Act complaints and inform and advise copyrights of the Hague Agreement and the consumers. The CPB constitutes an The principal Estonian laws Madrid Protocol. inexpensive alternative to the civil governing intellectual property courts, and the decisions of the are the Copyright Act, the Patents Patents Board serve as guidelines for trade Act, the Trademark Act, the Utility Inventions in any field of technology enterprises. The Board is entitled Models Act, the Industrial Design are entitled to patent protection to impose fines and prescriptive Protection Act and the Geographical provided they meet the criteria orders in case of a violation of Indication Protection Act. Business set forth in the Patent Act. An the Consumer Protection Act and names and trade secrets are invention may be in the form of other regulations. Together with protected under the Commercial a device, process or material, other state and local government Code and the Competition Act. including biological material, or institutions, the Board also monitors Estonia has been a member of the their combination. An invention the following fields: product safety, WIPO (World Intellectual Property is patentable if it is new, involves misleading advertising, consumer Organization) since 1994, and also an inventive step and is capable of contracts, public services, product a signatory to several international industrial application. The creator labelling, etc. treaties, including the Paris and of a patented invention has a moral Guide to doing business and investing in Estonia 15
right of authorship. This right is of the invention and the author’s measures. The EU import regime inalienable and extends for an legal successors. Patent applications applies to Estonia. indefinite term. Creators also have are filed with the Patent Office and the economic right to receive fair an applicable state fee is paid. The As stated in the law, dumping is the proceeds from profits made on the Patent Office will then conduct an export of goods by a foreign exporter invention. Economic rights are investigation to determine whether to Estonian customs territory for free transferable and inheritable. the invention meets the criteria and circulation of those goods, below either issues a patent or rejects the their normal value according to the An invention is granted patent application. Customs Code. The anti-dumping protection upon its registration in measures are customs taxes the State Registry of Patents. The Trademarks applicable with the rate ascertained owner of the patent has exclusive The Trademark Act defined by investigative procedure for rights to the patented inventions trademarks and service marks reducing damage to Estonian throughout the validity of the as signs used to distinguish the industry resulting from the import of patent term (20 years). The right goods and services of a particular goods at dumping prices. to apply for and hold a patent is, as person from similar types of goods a general rule, vested in the author and services offered by other While the EU has a rather liberal persons. Trademarks are entitled to foreign trade policy, some products protection if they are registered in need import licenses. There are the Estonian Registry of Trade and some restrictions, especially Service Marks, with the WIPO or the on farm products, following EU Office for Harmonisation in the the implementation of the CAP Internal Market. (Common Agricultural Policy): the application of compensations on To register a trademark with the import and export of farm products, Estonian Registry of Trade and aimed at favouring the development Service Marks, an application has of agriculture within the EU, to be filed with the Estonian Patent implies a certain number of control Office and the applicant has to pay and regulation systems for goods a state fee. The Patent Office will entering the EU territory. review the application and issue a decision granting or denying the Acquisitions application. The term of protection The two main types of acquisitions for registered trademarks lasts are acquisition by way of business for ten years and is renewable for (asset) purchase, and acquisition further ten-year periods. by way of share purchase. The actual type of acquisition depends Copyrights on the intentions of the parties, Copyright protection extends to e.g. whether the investor is any original works in the realms interested in whole or part of the of literature, art or science that are business of the target company, expressed in an objective form and are and what are the outstanding perceived and reproduced in this form liabilities of the target company, either directly or by means of technical etc. It is always recommended to devices. A copyright to a work arises conduct the due diligence before automatically upon the creation of the acquisition, regardless of the the work; neither publication of the type of acquisition. work nor registration of a copyright is necessary. Transfer of business The Estonian Commercial Code defines Estonian copyright law provides business as an economic entity through for both moral and economic which the company is operating. One rights. Protection of moral rights is company can have several enterprises, perpetual while economic rights are e.g. structural entities like production subject to protection for 70 years plants, retail stores, etc. from the author’s death. A transfer of business enterprise is Anti-dumping usually undertaken when the buyer Estonia applies EU trade policy such is not interested in some parts or as anti-dumping or anti-subsidy liabilities of the company. 16 PwC
In practice, the investor is mostly particular assets (such as real estate) shares may be made on the basis interested in certain assets, are transferred separately from the of a simple written contract. In the rights and goodwill of the target rest of assets. case of a public limited company company and negotiates the price (aktsiaselts or AS), a written share accordingly. Alternatively, the acquisition may be transfer agreement is sufficient. performed by different transactions Nevertheless, under the Law of in different forms. The parties are free to determine the Obligations Act, upon transfer of date when the title to the shares is assets that form a business enterprise, It should also be noted that public transferred, but for the purposes of obligations related to the assets sold permits and licenses cannot the target company (i.e. with regard are also transferred to the buyer. be transferred upon sale of the to the right to vote, right to dividends, business enterprise and must be etc.), the shares are deemed to be As a result, the buyer of the obtained by the acquiring company transferred as of the entry of the assets will be jointly and severally separately. transfer into the list of shareholders. liable for the enterprise-related obligations of the seller, which Transfer of shares If the buyer is not an existing are created before the transfer of If the shares in a company are shareholder of the target company the enterprise and the due date of acquired, the buyer acquires and does not acquire a 100% which falls within five years after all rights and obligations as a shareholding in the target company, the transfer of assets. shareholder of the company. the other shareholders of the private limited company (OÜ or osaühing) A similar regulation is included The assets and liabilities of the have a pre-emptive right to purchase in Estonian labour law for the company will not be modified, i.e. no the shares, unless the articles of protection of employees in case of a “pick and choose” like in the transfer association of the target company business transfer. of business. say otherwise.
There is no statutory requirement In the case of a private limited In the case of a public limited regarding the form of the asset company (osaühing or OÜ), the company (AS or aktsiaselts), the purchase. However, if particular acquisition of shares generally shareholders have the pre-emptive assets involved require a particular requires a notarised share transfer right only if it is prescribed in the form of contract (e.g. transfer of agreement, unless the shares of an articles of association. real estate must be notarised), the OÜ are registered with the Estonian entire purchase agreement needs Central Registry of Securities. It should also be noted that to be in the same form, unless the In the latter case the transfer of transfer of majority shareholding, Guide to doing business and investing in Estonia 17
or acquisition of control over the their way of doing business. In the segments has increased the prices company by some other means, second half of 2011 and in 2012, considerably. The average price might be (if the sales in Estonia of the real estate market recovered and per square meter of an apartment the target company and the sales both the transaction volumes and in 2017 in Tallinn was 1751 €/m2. in Estonia of the buyer exceed a values started to increase again. Apartments in a new residential certain threshold) considered as a building cost between 2500-3500 €/ merger for the purposes of Estonian In 2013, the Estonian real estate m2 (excluding unique apartments). Competition Act. market continued to rise. The rise has mainly been based on The number of transactions has Thus, acquisition by way of share the positive developments of the increased considerably due to the purchase may be subject to merger Estonian economy, the growing low interest rates, which has kept the control but the acquisition by way of confidence of people, low interest real estate market accessible to many business (asset) purchase is not. rates and the gradual addition of buyers. In recent years the monthly new real estate developments. average interest rate of housing loan The legal aspects of acquisitions in has steadily been around 2-3%. Estonia are not very different from In 2017, 51,780 purchase-sale countries in the EU and there are no transactions of real estate with the special restrictions on foreign capital. total value of about 3.24 billion euros were notarized. Over half Apartments' 2.6 Property market of the purchase-sale transactions average concerned apartments. The real price per m2 1751 €/m2 The Estonian real estate market estate market was the most active Tallinn was the most active in the period of in Harju and Tartu Counties, which 2017 2004-2006, but in 2007 the number accounted for 44% and 10% of all and value of real-estate transactions transactions, respectively. began to fall gradually. From 2007 to 2011, the real estate market went The most active part of the real through a severe recession. To cope estate market in Estonia is the with the new situation, market market of apartments. However, participants had to face a number the high number of transactions of difficult decisions and reorganize and limited offering in some market 18 PwC
3 Banking, finance and insurance
Investor considerations: 3.1 Banking system
Estonia is part of the Euro zone since The Bank of Estonia (Eesti Pank) is 1 January 2011 the independent central bank. As The largest banks are subsidiaries Estonia is part of the Euro zone, the and affiliates of Scandinavian core tasks of the Bank are to help banking groups to define the monetary policy of the European Community and to A wide range of financial services implement the monetary policy of is available to both local and foreign the European Central Bank. Eesti customers Pank is also responsible for holding and managing Estonian official foreign exchange reserves as well as transaction systems. The number supervising overall financial stability of internet clients is growing and maintaining reliable and continuously. Active co-operation well-functioning payment systems. between major banks and mobile Eesti Pank is responsible for the operators has also led to innovative circulation of cash in Estonia. solutions for customers. Debit and credit cards are widely used in The developments in the banking everyday transactions. sector since Estonia regained independence have been 3.2 Specialised financial rapid, along with the trend of institutions 39.5% welcoming foreign capital. The Swedbank banking sector has gone through Estonian commercial banks are the major restructuring as a result largest providers of leasing and of privatisation, consolidation factoring services. The services and bankruptcy in late 1990s, provided are becoming more 23.4% 14.2% following a relatively stable period sophisticated and diverse while Luminor SEB in the 2000s. The banking sector is the clients are also becoming more dominated by two major commercial aware of the services on offer. The banks, Swedbank and SEB, owned sector has been growing extensively by Swedish banking groups. These as a result of the decline in interest Market share in Estonia two banks control approximately rates and the increase in customers’ 31 Dec 2017 63% of the financial services market. welfare. The range of potential The third largest bank is an affiliate leasing objects has grown to include of the Finnish Nordea group and the anything from bikes, home furniture fourth largest bank is an affiliate of and travelling arrangements up to the Danish Danske Bank. There are real estate, personal vehicles, trucks no state-owned commercial banks or and farming equipment. other credit institutions. The factoring services include Estonian banks offer a full range of domestic factoring, export factoring, services. There is no differentiation invoice factoring as well as tax between local and foreign factoring. There are also options to businessmen and entities, which can finance VAT returns. For international generally access the same range of companies, the available factoring banking services in Estonia as they services include the handling of the do in Western European countries. entire accounts receivable portfolio of local companies. Estonian banking has achieved significant success in the The Estonian insurance market development of electronic has similarly gone through a major Guide to doing business and investing in Estonia 19
Market share of banks by total asset s as of 31 December 2017
Total assets EUR in billion Market share % Swedbank AS 9,96 39,5% AS SEB Pank 5.92 23.4% Luminor Bank AS 3.58 14.2% AS LHV Pank 1.73 6.8% Danske Bank A/S Eesti filiaal 1.56 6.2% OP Corporate Bank plc Eesti filiaal 0.65 2.6% Bigbank AS 0.46 1.8% AS Eesti Krediidipank 0.37 1.5% Versobank AS (in liquidation) 0.29 1.2% Tallinna Äripanga AS 0.23 0.9% AS Citadele banka Eesti filiaal 0.18 0.7% Svenska Handelsbanken AB Eesti filiaal 0.15 0.6% AS Inbank 0.13 0.5% Scania Finans AB Eesti filiaal 0.05 0.2% Nordea Bank AB Eesti filiaal 0.00 0.0% Folkefinans AS Eesti filiaal 0.00 0.0% Total 25.25 100% Source: Financial Supervision Authority consolidation over the years since cancel the contract afterwards. investment banking units are also independence and has reached The contribution to the mandatory involved in direct investment activity stability. A wide choice of insurance pension fund is calculated as 2% of by providing companies with private services is available from Estonian the salary to which the state add 4% equity finance. insurance companies as well as from of the individuals’ salary. Overall, international service providers. mandatory pension funds have 3.4 Capital markets become popular among individuals. 3.3 Investment Voluntary pension funds offer All Estonian public limited company institutions aside pension, and also traditional (AS-type) securities are registered insurance services as for example life in the Estonian Central Security Investment funds provide a wide insurance. There is a tax incentive Depository. Transactions with range of different investment options. according to which individuals can securities can be made using There are four types of investment make contributions up to 15% of over-the-counter systems or on the funds allowed in Estonia. Contractual their income that are considered to regulated market. investment and investment funds be exempt from income tax. founded as a joint-stock company The regulated stock market operates are the main types of funds used for Venture capital facilities have become in the context of a cross- Baltic stock investment purposes. The majority more and more accessible. In addition exchange maintained by the NASDAQ of Estonian investment funds are to expanding small and medium OMX Group that coordinates managed by Estonian commercial enterprises, it has become easier the trading process and imposes banks. Operations of mandatory and to gain access to financing through regulations. Investors can enjoy voluntary pension funds build on the EBRD and other development simplified access and minimised pension reform that was gradually programs. Nevertheless, the amount investment barriers when operating implemented by 2003. of venture capital committed to on Estonian, Latvian and Lithuanian Estonia is still relatively small when markets. Overall, the Baltic stock Contributions into the pension compared to developed countries markets have similar market fund are compulsory for young and some CEE countries. The practices and rules for all three Baltic people. Others may voluntarily capital is usually of foreign origin countries, with common market join the system but they cannot although many local brokerage and information and trading systems. 20 PwC
4 Importing and exporting
Investor considerations: All customs clearance procedures are carried out electronically. Common customs tariff duties are applicable to all goods imported into the EU. Importers may apply for deferred taxation. VAT is not imposed on the import of goods subject to immediate tax warehousing on the condition that the recipient of the imported goods is the keeper of the tax warehouse. Exporters and importers must have EORI registration.
4.1 Trends in customs imported into the EU. However, in policy certain circumstances, such duties are not applied. As the member of the EU, Estonia has implemented the EU customs The customs duty rates are based legislation. As of May 1 2016, a new on value and dependent on the Union Customs Code and related type of goods and the country of acts became applicable, which origin. Imports from EFTA countries, replaced Community Customs Code Switzerland, and EU candidate or and its implementing provisions associated countries are generally effective before that. free of duty. The duty rate usually stays between zero and 10%. The priority of Estonian customs Additional rates are usually levied as authorities has been and will be in the a result of anti-dumping cases. future the contraband trade, especially tobacco products and alcohol. Estonia’s membership in the EU implies that all aspects of customs 4.2 Import restrictions duties are decided by the common customs tariff - TARIC. Customs duties There is no banned list in Estonia, on imports and exports and charges but some goods (e.g. drugs, military having an equivalent effect are prohib- equipment, cultural objects, ited between member states. hazardous waste, CITES goods) need specific permission for importation In TARIC all measures relating to which is given by the authorities tariffs, commercial and agricultural concerned. legislation are integrated. This database gives economic operators Some quotas for certain types of a clear view of measures to be goods are imposed by the EU and undertaken when importing or are applied to all member states. The exporting goods. The TARIC does quotas enable the importation of not contain information relating to duty-free goods or goods at a lower national levies as rates of VAT and rate, until the quotas are filled. excises.
4.3 Customs duties Valuation rules are based on the WTO Customs Valuation Agreement Common customs tariff duties are transposed onto the applicable generally applicable to all goods European Community legislation. Guide to doing business and investing in Estonia 21
The customs value usually • persons who are established or free-zone procedure in includes the charges for goods, in the customs territory of the accordance with the customs transportation, insurance and other Community; legislation or Community services provided for importing the • persons who provide the necessary legislation governing specific goods into the EU. assurance of the proper conduct of fields, or in order to benefit from operations and, in cases where a a decision granting repayment Usually the import taxes should be customs debt or other charges may or remission of import duties. paid at the point of entry. Importers be incurred for goods placed under Generally there is no limit to the may apply for deferred taxation. a special procedure, provide a length of time goods may remain guarantee required; in case of the under a storage procedure. 4.4 Temporary import temporary admission or inward relief processing procedure, the person 4.7 Re-exports who uses the goods or arranges Under the temporary admission for their use or who carries out Non-Community goods destined procedure, non-Community goods processing operations on the to leave the customs territory of intended for re-export may be goods or arranges for them to be the Community are subject to a used in the customs territory of the carried out, respectively. re-export notification to be lodged at Community, with total or partial the relevant customs office and with relief from import duties. 4.6 Warehousing and the exit formalities. The re-export storage notification should meet the 4.5 Documentation and requirements for customs clearance procedures Under a storage procedure, non- documentation. Community goods may be stored All customs clearance is carried in the customs territory of the The re-export procedure is not through electronically. Community without being subject to applied for: any of the following: • goods placed under the external Any economic operator established • import duties; transit procedure which only pass in the EU needs to have an EORI • other charges as provided for under through the customs territory of number. Economic operators other relevant provisions in force; the Community; established outside the EU have to • commercial policy measures, insofar • goods trans-shipped within, or be assigned an EORI number if they as they do not prohibit the entry or directly re-exported from, a free lodge a customs declaration, an Entry exit of goods into or from the cus- zone; or an Exit Summary Declaration. toms territory of the Community. • goods under the temporary storage procedure which are directly A special authorisation from the Community goods may be placed re-exported from an authorised customs authorities is required for: under the customs warehousing temporary storage facility. • the use of the inward- or outward- processing procedure, the temporary admission procedure or the end-use procedure. • the operation of storage facilities for the temporary storage or customs warehousing of goods, except where the storage facility operator is the customs authority itself.
The conditions under which the use of one or more of the procedures referred to above or of the operation of storage facilities is permitted is set out in the authorisation.
The authorisation will be effective from the date of issue and is usually at a fixed date.
Except where otherwise provided for in the customs legislation, the authorisation mentioned above is granted only to the following persons: 22 PwC
5 Business entities
Investor considerations: A foreign investor may operate through the following corporate forms that should be registered within the commercial register: a public limited company, a private limited company, a general partnership, a limited partnership, a commercial association or a branch. The private limited company and public limited company are the most commonly used forms of entities for doing business in Estonia due to their most essential characteristic – the limitation of the shareholders’ liability. Business units like permanent establishments or representative offices are not registered with the Commercial Register. A permanent establishment should be registered in the registry of Estonian Tax and Customs Authorities. As a general rule, Estonian legislation does not recognise the concept of a representative office. However, the branch must be registered in the Commercial Register. The estimated minimum cost of setting up a branch or subsidiary in Estonia may range between EUR may not be misleading with regard 1,000 to EUR 3,000 (excluding a 5.1 Legal framework to the legal form, area or scope minimum compulsory share capital). The legal environment for business of activity of the undertaking nor Establishing a company in Estonia entities in Estonia is mostly contrary to good morals. may take from few days up to a regulated by the Commercial Code couple of weeks. Foreign investors (Äriseadustik). When starting operations in Estonia, may also buy ready-made companies it should be kept in mind that there (in this way, these procedures The passive legal capacity of an are certain areas of activity for which might take only a few days upon entity commences as of its entry a license is required or in which receiving all the relevant information/ in the commercial register and only a particular type of entity may terminates as of its deletion from the operate, as well as areas of activity in documents). Commercial Register. which operation is prohibited by law.
Every entity must have a business There may also be special name which is entered in the requirements deriving from the law Commercial Register and under with respect to the obligations of which the undertaking operates. companies which are dependent on the area of business of the The business name always contains company (e.g. banking, investment, the appendage referring to the legal insurance, lending, sale of fuel or form of the entity. A business name alcohol, etc.). Guide to doing business and investing in Estonia 23
As a general rule, entities are subject most essential characteristic – the to the Commercial Register to accounting obligations and need limitation of the shareholders’ electronically and authenticated to submit financial statements to the liability. with digital signatures. Commercial Register. An audit of the financial statements may be required Consequently the main emphasis of Even though the number of depending on the legal form and the this chapter is on these two forms of shareholders is unlimited by law amount of share capital of the entity. business, and the central aspects of in both cases, the private limited their operation are presented in the company is suited for a more closed Entities may merge, divide or be form of a comparison. circle of contributors. transformed only in the cases and pursuant to the procedure provided 5.3 Private limited Accordingly, safeguards enabling by law. In the cases provided by company (OÜ) and public respective control are provided by law, the permission of a competent limited company (AS) law, including rights of pre-emption agency is required for merger, in case of the sale of shares to non- division or transformation. Private limited companies and shareholders, and even the possibility public limited companies have a of prescribing (in the articles of 5.2 Choice of entity and share capital divided into private association) that a resolution of the business forms limited company shares and public partners is required to transfer a share limited company shares, and the or a part thereof to a third party. The Commercial Code provides shareholders are not personally for five types of business entities: liable for the obligations of the The shares of a public limited general partnership (täisühing), companies – the companies are company are freely transferable, limited partnership (usaldusühing), liable for the performance of their but shareholders may establish private limited company (osaühing), obligations with all of their assets. pre-emptive rights in the articles of public limited company (aktsiaselts) association. and commercial association Limited companies are established (tulundusühistu). by concluding notarised certified As for the minimum share capital, foundation agreements and it is EUR 25,000 in the case of a Of the five types of entities regulated adopting articles of association. public limited company and EUR under the Commercial Code, the 2,500 in the case of a private limited private limited company and public Private limited companies may also company. In certain fields of activity limited company are the most be established with an expedited (e.g. banking, insurance companies, commonly used forms of entity for procedure. In such cases all the etc.) the laws may provide for higher doing business. This is due to their necessary documents are presented share capital requirements. 24 PwC
each EUR 1 of the share generally public limited company shares are gives one vote at the meeting of registered in the CRS. shareholders unless articles of association states otherwise. Corporate governance The The management structure of The shares of a public limited the public limited company consists € 2,500 company must be registered with of three levels, the shareholders’ Private limited company the Estonian Central Registry of general meeting, the supervisory minimum share capital Securities (CRS). The shares of a board and the management board, private limited company can be whereas the management structure registered with the CRS if desired. of the private limited company The private limited companies If the shares of the private limited usually lacks the levelof the may also be established without company are not registered in the supervisory board. contribution of share capital, CRS, the share registry is kept by the provided that the founders are company’s management board. However, a private limited company private individuals only and the must have a supervisory board if planned minimum share capital Transactions for transferring and it is prescribed by the articles of does not exceed EUR 25,000. The pledging the shares of private association. share capital of such a company limited companies must be will consist of claims against the notarised, unless the shares are The management board, the shareholders, who are liable with all registered in the CRS. members of which are elected of their assets up to the amount they by the supervisory board, is a have promised to pay to the share Thus registration of the shares of a directing body of the limited capital of the company. private limited company in the CRS company, which represents and is advisable if numerous transactions directs the company, whereas In a public limited company with the shares are anticipated. the supervisory board plans each share grants one vote at the There are no similar requirements the activities and organises the shareholders’ general meeting. In as to the form of transactions with management of the company as a private limited company each shares of public limited companies. well as supervising the activities of shareholder holds one share and Transfers as well as pledges of the management board. Guide to doing business and investing in Estonia 25
For the management board, consent of the supervisory board is required for conclusion of transactions, which are beyond the scope of everyday economic activities. Where the company lacks a supervisory board, these rights and obligations are exercised by the meeting of the shareholders.
The shareholders’ general meeting is the highest management body of a public limited company whereas the respective body of a private limited company is called the meeting of shareholders. under a common business name, and The branch must be registered These management bodies are at least one of the persons (general in the Estonian Commercial vested with powers to take the most partner) is liable for the obligations Registry through submission of an crucial decisions from the perspec- of the limited partnership with all application and certain required tive of the company’s development of the general partner’s assets, and documentation. – division of dividends, approval of at least one of the persons (limited financial statements, election and partner) is liable for the obligations Certain entities such as foreign recalling of the members of the of the limited partnership to the banks or insurance companies supervisory board, etc. extent of the limited partner’s located in non-EU states must also contribution. obtain a required license. Banks Liability and insurance companies from A member of the management Commercial association – a company EU member states must notify the board is expected to perform his for which the purpose is to support Estonian Financial Supervision or her duties with due diligence. and promote the economic interests Authority that they intend to Management board members shall of its members through joint commence activities in Estonia. be jointly and severally liable for economic activity in which the damage wrongfully caused to the members participate as consumers It should be considered that a company, unless they prove that or users of other benefits, suppliers, branch is not a business entity and they have acted with due diligence. through work contribution, through the foreign enterprise is liable for The same applies with respect to the the use of services or in any other obligations arising from the activities supervisory board members. similar manner. of the branch. The foreign enterprise is also liable to appoint one or more Generally, the liability of A commercial association is liable directors that are accountable to shareholders for the limited for its obligations with all of its the foreign enterprise. At least one company’s obligations is limited to assets. Members of a commercial director must be resident in an EU their payments into the company’s association are not personally liable state or Switzerland. share capital. for the obligations of the association. However, the articles of association 5.6 Representative However, shareholders are held liable may prescribe that the members are offices for any damage wrongfully caused solely liable for the obligations of the to a public limited company, another association with all of their assets, or As a general rule, Estonian shareholder or third persons. liable to a certain extent. legislation does not recognise a representative office. 5.4 Partnerships 5.5 Branches 5.7 Sole proprietorship General partnership – a company in Another way for a foreign which two or more partners operate company to permanently offer In addition to the possibility of under a common business name and goods or services in its own name establishing a business entity, it are solely liable for the obligations in Estonia is to establish a branch is possible for any natural person of the general partnership with all of (filiaal). The business name of the to conduct business as a sole their assets. branch of a foreign company must proprietor who must be entered consists of the business name in the commercial register before Limited partnership – a company in of the company and the words commencing with permanent which two or more persons operate Eesti filiaal (Estonian branch). business activity. 26 PwC
6 Labour relations and social security
Investor considerations: Trade unions and employers generally have a cooperative relationship; strikes are rather unusual in Estonia. Social security contributions (33.8%) calculated from the gross employment income are payable by the employer. Employees do not make any personal social tax contributions. Employee’s part of unemployment insurance contributions and compulsory accumulative pension contributions are withheld from the gross income by the employer. Foreigners, residing in Estonia on 6.1 Labour market (Võlaõigusseadus), the Individual the basis of residence permit, are, Labour Dispute Resolution in general, permitted to work in The economically active population Act (Individuaalse töövaidluse Estonia. Separate work permits are is approximately 600 thousand. lahendamise seadus), and the not issued. About one third of them have higher Occupational Health and Safety Act education and 86% of adults speak (Töötervishoiu ja tööohutuse seadus). Short-term employment of non- at least one foreign language. For residents must be registered with the older generation the main foreign Compared to rather strict and Police and Border Guard Board. language is Russian and for younger protective labour laws of „old Non-resident may act as a member adults English. Estonian students are Europe“, Estonian employment of the management or supervisory amongst the best in Europe on their law is more liberal and offers more board of Estonian legal entity without English language skills. flexibility in agreeing on terms the registration. and conditions of employment. Structural unemployment continues However, the principle of protection to be an issue and there’s a of employees, as the economically continuous need for talent in sectors weaker party, is applied – therefore relying on skilled labour. At the the agreement between employee same time there are 30 thousand and employer on terms that are people registered as unemployed disadvantageous to employee, and over 3,000 jobs available. The compared to what is set forth in 86% unemployment rate has been around legislation, may be void. of adults 5% of total population in last few years. Also the principles of equal treatment and non-discrimination of 6.2 Labour relations employees need to be followed. speak at least one foreign language Employer/employee relations Regulations regarding employment Trade unions and collective and labour issues are regulated agreements by the Employment Contracts Act Trade unions are visible generally in (Töölepinguseadus). transportation, health services and the processing industry. However, Work relations are also regulated the level of activity is significantly with the Law of Obligations Act lower than in western European Guide to doing business and investing in Estonia 27
countries. Membership in a union is equal to those of Estonian citizens not compulsory. unless otherwise prescribed by law.
A collective agreement as a The employment contract must voluntary agreement between be concluded in writing. An oral employees or a union or federation employment contract may be of employees, and an employer entered into only for employment or an association or federation for a term of less than two weeks. of employers can be concluded. Employment contracts must contain Currently there are slightly over € 500 certain mandatory terms. Employers 800 effective collective agreements Minimum wage for 2018 bear administrative liability for registered. formalising employment contracts.
6.3 Working conditions An employment contract is generally entered into for unlimited term, Salaries and wages years, the average gross salary has unless the limited term if justified All rules regarding remuneration increased at the pace of 6,5 % per by good reasons arising from the for employees working under an year and equalled EUR 1,221 in temporary fixed-term characteristics employment contract are set forth 2017. Also the legally established of the work. Probation period up to 4 in the Employment Contracts minimum wage has increased months can be applied. Act. Employment contracts must almost every year and is EUR 500 Employment agreement can be specify the employee`s wage rate, for 2018. amended only with mutual consent, additional payments, if any, method so it’s advisable to sign off all for calculation of the remuneration The employer’s obligation is to important terms including work and procedures for paying calculate and withhold all payroll responsibilities, internal work rules remuneration. taxes. and all company’s regulations while entering into employment contract. Due to free movement of workforce Employment contracts and competitiveness of Estonians Foreigners and stateless persons who A natural person of eighteen years at Scandinavian (and other) job Foreigners and stateless persons who or over, who has an active legal markets the pressure on wages is reside in Estonia permanently have capacity or restricted active legal expected to continue. In recent rights pertaining to employment capacity can be employed. As for 28 PwC
the employment of minors, there applying summarised working time 1 January – New Year’s Day; 24 are legal restrictions towards the calculation within specified period February – Independence Day; Good conclusion of an employment up to 4 months. Friday; Easter Sunday; 1 May – May contract as well as towards the Day; Pentecost; 23 June – Victory nature of the work that may be The hours of part-time employees Day; 24 June – Midsummer Day; performed by minors and their are agreed between the employer 20 August - Day of Restoration working conditions. and employee; overtime is normally of Independence; 24 December permitted upon an agreement – Christmas Eve; 25 December All natural and legal persons between the employer and – Christmas Day; 26 December – providing the work are required to employee. Boxing Day. Employers are required register the persons employed by to grant employees paid leave in the them with the Estonian Tax and Certain limits must be observed amount of three hours on a work day Customs Board. The requirement when working overtime; total directly preceding the New Year`s applies to all workers, including working time may generally not Day, Independence Day, Victory Day also in addition to employees, the exceed an average of 48 hours per and Christmas Eve. Work on public contractors, managers without week over a four-month period. holidays has to be compensated at a employment contract, trainees double rate. and volunteers. The registration Details regarding the work regime, is required by the moment an such as the start and end of the work Equal opportunities employee commences the work, i.e. day, time for meals and other breaks, According to prohibition on directly before starting the work. may be determined by internal work discrimination against employees, The tax inspectors perform regular procedures, collective agreement or an employer cannot discriminate inspections, mainly in specific work contract. against a potential or existing sectors such as construction works, employee on any of the following restaurants and catering etc. An employee is entitled to annual grounds: sex, race, religion, age, paid leave in the amount of 28 disability and sexual orientation. Working hours calendar days. It is presumed that a full-time Termination of employment employee works 40 hours during Paid holidays Bases for the termination of an a 7-days period, 8 hours per day. There are ten legally-imposed employment contract are provided in Certain flexible options exist for holidays in Estonia. These are: the Employment Contracts Act. Guide to doing business and investing in Estonia 29
An employer may not cancel an employment contract ordinarily, but it may be terminated upon agreement between the parties at any time. The extraordinary termination of the employment contract on the initiative of the employer is allowed on economic reasons (decrease in the work volume or reorganisation of work or other cessation of work) or on reasons related to employee (inability to perform his/her duties, breach of trust etc).
6.4 Social security system
The social protection system is made required to make any personal social contributions must be paid both up of two pillars: the social security tax contributions. by the employer and the employee system that comprises pension (again by withholding). insurance, health insurance, child The Estonian pension system is benefits, unemployment benefits divided into three pillars: The rates of unemployment insurance and funeral grants; and the social • First pillar: state pensions. contributions set by law are flexible: welfare pillar that consists of social The state pension insurance 0.5 - 2.8 % for employees and 0.25 assistance cash benefits and social guarantees an income for people - 1.4 % for employers. Currently services. In the Estonian context, no when they retire or in the event the applicable contributions are distinction is made between social of their becoming incapacitated respectively 1.6% and 0.8%. insurance and social security, which or losing their provider. State are covered by the same term in the pensions are paid out from the For income tax purposes, the Estonian language. The pension social tax calculated on salaries. employee’s unemployment contribu- and health insurance schemes are • Second pillar: the compulsory tion is deductible from the resident contributory social security schemes accumulative pension scheme to individual’s taxable income. Unem- that are financed principally by the which resident employees make ployment insurance contribution social tax. The Estonian social tax of contributions at 2% of their gross does not apply to the remuneration 33% (comprising 20% social security salary and the state adds 4% of the paid to the members of the Manage- contributions and 13% health 33% social tax calculated on the ment Board, members of the Super- insurance contributions) must be employee’s salary. visory Board and to the procurators. paid by employers on top of the gross • Third pillar: supplementary salary. Currently, employees are not funded pensions i.e. additional EC regulation 1408/71 may make it voluntary pensions. possible for employees assigned to Estonia from another EU Member The government sets specific rules for State, EEA country or Switzerland to the three-pillar system: administering remain covered by their home coun- the 1st pillar, guaranteeing the 2nd try social security system. In order to pillar and providing supervision and remain covered by the social security regulation system for both the 2nd and system of his/her home country, the 3rd pillars. employee has to apply for a certificate of social security coverage (e.g. A1) I II III Employers make contributions to be issued by the social security (through the national social tax) authorities of his/her home country to the 1st pillar. Employees make before moving to Estonia. mandatory payments into the 2nd pillar and are free to choose whether Besides the EC regulation, Estonia or not to contribute to the 3rd pillar. has concluded social security treaties with the Canada, Ukraine and Russia Under Estonian unemployment which include similar provisions of insurance legislation the social security coverage for assigned State pensions Compulsory accumulative pension Supplementary funded pensions unemployment insurance employees. 30 PwC
6.5 Foreign personnel Temporary residence permit may be Employment permit issued to a foreigner: Foreigners, residing in Estonia on Residence permit the basis of residence permit, are, The Citizen of European Union Act 1. for settling with a spouse; in general, permitted to work in prescribes the terms for settling in 2. for settling with a close relative: Estonia. Separate work permits are Estonia of citizens of member states 2.1. for settling of a minor child not issued. of the European Union and the with his/her parent European Economic Area and the 2.2. for settling of an adult child In addition to the employment in Swiss Confederation (hereinafter with his/her parent Estonia on the basis of a residence “EU citizens”) and their family 2.3. for settling of a ward with permit, a person may work in members who are citizens of third his/her guardian Estonia temporarily for up to 270 countries and the procedures 2.4. for settling of a parent/ days during a year if (a) he/she necessary for it. grandparent with his/her stays legally in Estonia on the basis child/grandchild; of visa or on the basis of visa-free Generally, an EU citizen who has 3. for settling permanently in stay and (b) whose employment resided in Estonia permanently for Estonia; has been registered prior to the five successive years, on the basis 4. for study; commencement of work. of the right of temporary residence, 5. for employment; will obtain the right of permanent 6. for business Registration of short-term employ- residence. 7. to participate in Criminal ment in Estonia must be done by Proceedings. employer. Expedited procedure The residence permits to the third applies for employment of teachers country nationals and persons with For additional information, see and lecturers in educational institu- undetermined citizenship are issued also: https://www.politsei.ee/ tions, for scientists and top specialists. under the Aliens Act. Residence en/teenused/residence-permit/ permit may be temporary (validity tahtajaline-elamisluba/ Ordinary procedure of registration of period up to five years) or long-term. short-term employment is for experts, Guide to doing business and investing in Estonia 31
consultants and skilled workers Current offers from the Estonian Health care (employment for start-up), as well as real estate market are available on An individual insured in another for au pairs, seasonal workers in agri- the following web pages: www. EU member state (i.e. a holder of culture, artists, sportsmen, coaches kv.ee, www.city24.ee or www. the European health insurance card and some other limited occasions. ekspresskinnisvara.ee. or its replacement certificate) will receive all necessary health care For registration of employment see In practice, it may be advisable to while staying temporarily in Estonia. also: https://www.politsei.ee/en/ get in touch with one of the leading This insurance covers all medical teenused/working-in-estonia/ real estate companies in Estonia, treatment similarly available to which are involved in house-hunting locals. However, it is advisable to EU citizen may reside and work in services as their main business. have an additional private medical Estonia without registration of his/ insurance in order to extend the her right of temporary residence for Education security coverage. a term of up to 3 months. The majority of Estonian schools are teaching in Estonian language and Restrictions on employment A foreigner may carry a managing there are Russian schools for ethnic There are no additional restrictions or supervising role as a member of minority. The only accredited school on the number of foreign employees management body of a legal entity for offering general education based on payroll or on the time period they registered in Estonia. on the European Schools curriculum may be employed in Estonia. is Tallinn European School (www. Living conditions est.edu.ee ) where about 120 Fiscal registration number Real estate children from over 40 nationalities When moving to Estonia an currently study. The languages of individual does not need a separate In Estonia, the real estate market is instruction at the school are mainly fiscal registration – the data logging well established and there exist no English, French and German and formalities described below in sub- restrictions on buying or renting a there’s both primary and secondary points are sufficient for the fiscal flat or a house. school as well as nursery. authorities. 32 PwC
7 Accounting and audit requirements
Investor considerations: 7.1 Accounting Financial statements should be Statutory requirements At the end of each financial year, an prepared in accordance with either The length of a financial year is accounting entity (public limited IFRS as adopted by the European twelve months. In the event of an company, private limited company) Union, or Estonian financial reporting accounting entity being founded is required to prepare an annual standard. or terminated or the date of the report. Starting from 1 January commencement of its financial year 2016, the content and volume of the Annual reports are to be submitted being changed, or in other cases annual report depends on the size to the Commercial Register prescribed by law, the financial year of a company. The size groups and electronically. of the accounting entity may be applicable requirements are defined shorter or longer than twelve months by the Accounting Act as follows: but shall not exceed 18 months.
Micro-Sized Entity Small-Sized Entity Medium-Sized Entity Private limited companies (OÜ) which Entities which do not exceed the Entities which do not exceed are in compliance with all of the limits of two of the following three the limits of two of the following following criteria: criteria: three criteria: • Total assets1 do not exceed EUR • Total assets1 do not exceed: • Total assets1 do not exceed: 175 thousand; EUR 4 million; EUR 20 million; • Revenue2 does not exceed EUR • Revenue2: EUR 8 million; • Revenue2: EUR 40 million; 50 thousand; • Employees3: 50. • Employees3: 250. • Total liabilities1 < total equity1; • One shareholder who is also member of the Management Board. • Two primary statements: abridged • Two primary statements: long • Full financial statements in balance sheet and income or abridged balance sheet, and accordance with Estonian statement; income statement (if chooses GAAP or IFRS as endorsed by • Specified information in limited abridged primary statements, the EU. amount of notes; certain additional disclosure • Management report. • No management report has to be requirements apply); prepared. • Specified information in limited amount of notes; • Management report. 1 At the end of the financial year 2 Of the financial year 3 Average during the financial year Annual report is to be submitted to the Commercial Register within six months of the end of the financial year.
All annual reports prepared in accordance with Estonian GAAP, except for consolidated annual reports, are to be submitted electronically in XBRL format through Company Registration Portal https://ettevotjaportaal. rik.ee/. Other annual reports are to be submitted in pdf format. Consolidated annual reports Guide to doing business and investing in Estonia 33
prepared in accordance with Accounting principles in are usually the same, regardless Estonian GAAP and annual reports Estonia whether the financial statements are prepared in accordance with IFRS as Financial statements should be prepared in accordance with IFRS adopted by the EU can voluntarily be prepared in accordance with either: for SMEs or Estonian GAAP submitted in XBRL format. • Estonian financial reporting standard (Estonian GAAP); or In areas not specifically covered by Entries in the Commercial Register • IFRS as adopted by the EU. Estonian GAAP, the treatment in are public. Everyone has the right IFRS for SMEs is recommended, but to examine the card register and the Listed companies and financial not mandatory. Each Estonian GAAP business files, and to obtain copies of institutions are required to prepare standard contains a brief comparison registry cards and of documents in financial statements in accordance with the respective section of IFRS the business files. with IFRS as adopted by the EU. for SMEs.
Branches of foreign companies Estonian GAAP is written by the 7.2 Chart of accounts need not to prepare annual reports. Estonian Accounting Standards Instead, an unattested copy of the Board (EASB). Generally the chart of accounts is audited and approved annual report used in Estonia, but is not compulsory of the company is submitted to the Estonian GAAP effective from under the current legislation. Commercial Register of the location 2013 is based on IFRS for Small of the branch no later than one and Medium-sized Entities (IFRS 7.3 Audit requirements month after approval of the annual for SMEs) with limited differences report or seven months after the end from IFRS for SMEs with regard Public limited companies (AS) that of the financial year. to accounting policies as well as at any point during the financial disclosure requirements. Differences year had more than 2 shareholders This requirement does not apply in accounting policies arise mainly are subject to audit. In addition, to companies of states which are due to the fact that in some areas audit or review is mandatory if an Contracting Parties to the EEA Estonian GAAP allows a choice entity exceeds certain quantitative Agreement if the legislation of the of accounting policy, one of the thresholds (consolidating country of the registered office of alternatives being the only policy entities apply the thresholds to the company does not require the accepted under IFRS for SMEs. the consolidated numbers). The annual report to be disclosed. Except for differences from limited thresholds effective from 1 July 2017 reasons, net profit and equity are presented below: Obligation to preserve accounting documents: • accounting source documents – for Review Audit seven years from the end of the financial year during which the Exceeds at least 2 of the 3 source document was recorded in Revenue1 EUR 1.6 million EUR 4 million the accounts; 2 • accounting ledgers, journals, Employees 24 50 contracts, financial statements, Total assets3 EUR 0.8 million EUR 2 million reports and other business Exceeds at least 1 of the 3 documents which are necessary for reconstructing business Revenue1 EUR 4.8 million EUR 12 million transactions during audits – for Employees2 72 180 seven years from the end of the corresponding financial year; Total assets3 EUR 2.4 million EUR 6 million • business documents relating to 1 long-term rights or obligations – Of the financial year 2 Average during the financial year for seven years after the expiry of 3 At the end of the financial year their term of validity; • accounting rules and procedures – for seven years after the amendment or replacement Audit is mandatory thereof; if the number of • accounting registers created employees exceeds 180 electronically should be preserved electronically. The legibility of the data should be ensured within the preservation period. 34 PwC
An entity subject to a review may instead opt for an audit.
The Authorised Public Accountants Act provides requirements for public interest entities (PIEs).
The following entities are considered as PIEs (the list is not exhaustive): • Listed entities; • Credit institutions; or • Insurance companies.
A PIE must form audit committees if the PIE exceeds at least three of the following thresholds (consolidating entities apply the thresholds to the consolidated numbers): revenue of the financial year: EUR 14 million, total assets at the end of the financial year: EUR 7 million, average number of employees during the financial year: 200, number of members of supervisory board: 8. Audit committee has to consist of at least two members, including at least one member being an expert in accounting or auditing.
Auditors All certified auditors are members of the Board of Auditors (www. audiitorkogu.ee), a self-governing professional association of Estonian auditors, which organises the professional activities of auditors and protects their rights. At present there are ca 350 auditors in Estonia.
The Auditing rules include requirements for auditing and professional ethics to be based on the standards of the International Federation of Accountants. The Board of Auditors is responsible ~ for the supervision of the 350 professional activities of auditors Auditors in and compliance with the Auditing Estonia rules. Guide to doing business and investing in Estonia 35
8 Tax system and administration
8.1 Tax system Investor considerations Income Tax Law states that 11.6% Administration of the tax of resident individuals` income Main principles of Estonian tax policy: system tax before deductions is allocated simple tax system, broad tax base Taxes are levied on the basis of tax to local municipalities, but the and low rates. laws enacted by Parliament. Both rest, including all taxes levied The aim of the Estonian Government state and local taxes are imposed from pensions and capital gains, is under the taxation laws. The allocated to the state budget. is to shift the tax burden from labor to structure and basis of the tax system consumption. is regulated by the Law on Taxation. Classes of taxpayers Flat income tax rate since 1994 (flat Local taxes are introduced by local Estonian taxpayers are resident income tax rate at 20% applies to municipal councils according to the and non-resident legal entities and both individuals and companies). Law on Local Taxes. Local taxes play individuals. The term legal entity Unique corporate tax system since an insignificant role in the Estonian includes companies, partnerships, 2000: all undistributed corporate tax system. legal entities established under public law and non-profit profits are tax-exempt. The tax administrator is the Estonian organisations and foundations. Local taxes play an insignificant role Tax and Customs Board. Local in the Estonian tax system. taxes are administrated by the local A legal entity is treated as resident Estonia operates a self-assessment municipal councils and local offices in Estonia if it is founded under system. of the Tax Board. Estonian laws. An Estonian branch of a foreign company is The Government’s intention is The allocation of state taxes between generally treated as a permanent to improve tax administration national and local governments is establishment of a non-resident (electronic tax administration is well set out by the tax legislation. The entity. An individual is treated as established). 36 PwC
resident in Estonia if the person has a permanent place of residence in Estonia, is present in the country for 183 days or more during any 12-month period, or if a person is employed in the public state service of Estonia, dispatched abroad.
Non-resident taxpayers include foreign entities and individuals, or their permanent establishments in Estonia.
Registration requirements Taxpayers that are based in Estonia and are registered in the Estonian Commercial Register (subsidiaries, branches etc.) will be automatically recorded into the taxpayers registry that is held by Estonian Tax and Customs Authorities. A separate registration is required for VAT purposes.
Foreign companies can only register with the Tax and Customs Authorities in certain circumstances (e.g. acting as a foreign employer, having a permanent establishment and as a VAT liable person).
8.2 Direct and indirect tax burden
Direct taxation in Estonia takes the form of corporate and individual income taxes, as well as a gambling tax. Indirect taxes include VAT, excise taxes and customs duty.
The rest of the national revenue consists of state fees, sale of state property, sale of goods and services and different subsidies. Income Social Land Gambling VAT Customs Excise Heavy tax tax tax tax duty duties load Tax collections have been stable vehicles within the last few years and this tax also applies to the apportionment of direct/indirect taxes. VAT collection The existing state taxes are: Currently, Estonia does not impose has improved since declaration of • Income tax (corporate and any gift or estate taxes. Various invoices exceeding the amount of personal); transactions subject to registration EUR 1000 became obligatory for • Social tax; with the authorities are liable taxable persons. • Land tax; to payment of a state fee (stamp • Gambling tax; duty). 8.3 Principal taxes • VAT; • Customs duty; Employers and employees The structure and basis of the tax • Excise duties (alcohol, tobacco, must also make mandatory system are set out in the Law on fuel, some packaging materials unemployment contributions and Taxation. and electricity); compulsory accumulative pension • Heavy load vehicles tax. contributions to the state budget. Guide to doing business and investing in Estonia 37
As permitted by the Law on Local 8.5 Tax treaties form over the Internet. Estonian Taxes, a few municipalities have tax system does not recognise any introduced the following local Estonia has tax treaties in force advance corporate income tax taxes: with Albania, Armenia, Austria, payments. • advertisement tax; Azerbaijan, Bahrein, Belarus, • road and street closure tax; Belgium, Bulgaria, Canada, China, The VAT taxation period is a • motor vehicle tax: Croatia, the Czech Republic, Cyprus, calendar month, and the VAT should • animal tax; Denmark, Finland, France, Georgia, be declared and paid on or before • entertainment tax; Germany, Greece, Hungary, Iceland, the 20th day of the following month. • parking charges. India, Ireland, Isle of Man, Israel, Italy, Jersery, Kazakhstan, Latvia, If the statistical threshold (in 2018 8.4 Legislative Lithuania, Luxembourg, Macedonia, per calendar year for dispatches framework Malta, Mexico, Moldova, the this is EUR 130,000 and arrivals Netherlands, Norway, Poland, this is EUR 230,000; in 2017 it Estonian tax law is harmonised with Portugal, Republic of Korea, was EUR 130,000 and 200,000 EU legislation and based on the Romania, Serbia, Singapore, the respectivelyhas been exceeded, continental European law model. As Slovak Republic, Slovenia, Spain, Intrastat declarations are required of 1 May 2004 EU legislation applies Sweden, Switzerland, Thailand, to be submitted to Statistics Estonia. in Estonia like in any other EU Turkey, Turkmenistan, Ukraine, the The due date for submission of an member state. United Arab Emirates, the United Intrastat declaration is the 10th Kingdom, the United States of working day following the calendar The Parliament has the authority America,Uzbekistan and Vietnam. month to which the declaration to impose taxes. Local government relates. The declaration liability is has a limited right to establish local Treaties have also been concluded valid until the end of the calendar taxes. with Russia, Morocco and Japan but year. A business may file its Intrastat these are not yet in force. declarations electronically. Tax administrators have no discretion to make alterations to 8.6 Tax returns and EC sales listing is due on a monthly legislation or to conclude contracts payments basis by the 20th day of the with taxable persons concerning following month. their tax liabilities. Legal entities The period of taxation is a calendar Individuals After accession to the EU, the case month. The combined corporate For individuals, the period of decisions of the European Court income tax and payroll tax return taxation is a calendar year. In of Justice are legally binding for (form “TSD” with appendices) general, resident individuals must Estonian courts and tax authorities. must be submitted to the local file an individual income tax return tax authorities and taxes must by 31 March following the year in Estonian law recognises the direct be remitted by the 10th day of which the income arises. Electronic effect of EU legislation. The courts the month following a taxable filing of tax returns becomes interpret the tax law. distribution or payment. Tax returns available from 15 February. can be lodged through an electronic Certain items of foreign sourced, tax exempt income must be reported for information purposes. Married resident taxpayers may elect to lodge their tax returns jointly or separately.
For non-residents, the tax withheld at source at domestic or treaty rates generally constitutes final tax as regards their Estonian source income and the non-resident is generally not obliged to submit a tax return to the Estonian tax authorities for income so taxed.
However, for certain types of Estonian source income, non- residents are liable under Estonian 38 PwC
domestic law to self assess Estonian to be paid and the reasons for the establishment or acting as employers tax and submit a tax return to the recalculation. in Estonia. Estonian tax authorities by the following deadlines: Resident individual taxpayers will The tax must be reported and receive an assessment notice upon paid by the 10th day of the month • Capital gains realised from certain the submission of individual income following the payment. Income types of assets should generally tax returns 30 days before the tax tax is not withheld from payments be reported by 31 March of the due payment deadline. to resident companies, registered year following the realisation of sole proprietorships and registered the gain. Capital gains from the 8.8 Appeals permanent establishments of foreign sale or disposal of immovable companies. property located in Estonia should Where there is a dispute regarding be reported within one month of the amount of tax assessed by the The following payments are subject realising the gain. tax administrator, the burden of to withholding tax: • Profits derived from business proof that the assessment was activities (without a registered incorrect rests with the taxpayer. • There is no withholding tax permanent establishment) on interest payments to non- conducted in Estonia should The taxpayer has the right to residents. generally be reported by 30 June appeal to the local office of the tax • Royalties (including payments for of the following year (or within administrator who calculated the the use of industrial, commercial, two months if business activities in amount of the tax due and dispute or scientific equipment) paid to Estonia are terminated). the assessment in question within 30 non-residents are generally subject • Other items of Estonian-source days after receiving obligatory notice to 10% withholding tax under income from which income tax of the amount due. domestic law, but reduced rates was not withheld but should or exemptions may apply under have been must be reported by If the local tax administrator double tax treaties. Certain royalty 31 March of the year following does not accept the appeal, the payments to associated EU and the year in which the income was taxpayer must forward the appeal Swiss companies meeting certain received. to the central institution of the tax conditions are exempt from administrator within seven days, withholding tax. A resident individual will receive which must make a decision within • Rental payments to non-residents an income tax assessment based on 30 calendar days of receiving the for the use of immovable property his/her filed return at least 30 days appeal. located in Estonia and movable before the tax payment is due and property subject to registration in based on that, must pay the final An appeal does not mean that Estonia (excluding payments for amount of income tax due by 1 July the taxpayer does not have to the use of industrial, commercial of the year following the period of pay the tax due. However, until or scientific equipment) are taxation. the decision is made, the tax subject to 20% withholding tax administrator cannot freeze or under domestic law, but double Resident taxpayers who reported extract funds from the taxpayer’s tax treaties may exempt payments business income,capital gains or bank account. for the use of movable property foreign income in their tax return from withholding tax. must pay the final amount of income The taxpayer or the withholding • Interest, royalties and rental tax due by 1 October of the year agent has the right to appeal in payments to resident individuals following the period of taxation. court at any stage of the tax dispute. are subject to 20% withholding However, again, this does not mean tax. 8.7 Assessments that the taxpayer does not have to • Payments to non-resident pay the tax due until the courts say companies for services provided Estonia operates a self-assessment otherwise. in Estonia, including management system. Tax returns show the tax and consultancy fees, are subject due and taxpayers must pay this 8.9 Withholding taxes to 10% withholding tax under amount without waiting for a formal domestic law, but exemptions may assessment notice. Withholding agents must withhold apply under double tax treaties. income tax from certain payments. Service fee payments to “tax The tax administrator has the right haven” entities are always subject to recalculate the tax due in the tax Withholding agents include resident to 20% withholding tax. return according to the terms and legal entities, resident individuals • Salaries, directors’ fees and order fixed in the Law of Taxation. registered as sole proprietorships service fees paid to individuals The taxpayer will be informed in or acting as employers, and non- are subject to 20% withholding writing about the recalculated tax residents having a permanent tax under domestic law, but Guide to doing business and investing in Estonia 39
double tax treaties may exempt • taxable capital gains; notification issued by the tax service fee payments to non- • profits derived from business administrator seven days before the resident individuals from conducted in Estonia without beginning of the revision. withholding tax. a registered permanent • Payments for the activities of establishment; 8.11 Penalties non-resident artists or sportsmen • other items of income from which carried out in Estonia are subject tax was not withheld but should In practice, in case of voluntary to 10% withholding tax. have been withheld. adjustments to tax returns the • Certain pensions, insurance taxpayers will only pay unpaid tax benefits, scholarships, prizes, 8.10 Tax audits and interest on the late payment. lottery winnings, alimony, etc. paid to non-residents and resident The Law on Taxation provides Currently the interest rate is 0.06% individuals are subject to 20% the tax administrator with a of the tax due for each day of delay. withholding tax. right to investigate taxpayers by commencing two different types of Under the Estonian Law on For non-residents who do not have a tax investigation: Taxation, if a legal person fails to permanent establishment in Estonia, • Audit of individual cases; submit a tax return, documents or the tax withheld from the above • Tax audit. other information by the due date payments at domestic or treaty prescribed by tax laws, or submits rates constitutes final tax as regards An audit of individual cases is false information or knowingly their Estonian source income and generally commenced for the submits incorrect documents to the they do not have any tax reporting purpose of investigating the Tax and Customs Authority, the requirements in Estonia. facts already known by a tax latter may assess a fine of up to EUR administrator. 32,000. For certain types of Estonian source income, non-residents are liable Tax audits are used for the purpose Failure to submit information or under Estonian domestic law to of a comprehensive investigation submitting incorrect information self-assess Estonian tax and submit of the taxpayer’s overall economic to the tax authority, to reduce tax a tax return to the Estonian tax activity, and to identify unknown or withholding obligations, or authorities. Such types of income facts. The related taxes and time to increase or create a claim for include: ranges will be stated on the refund, or to violate a withholding 40 PwC
obligation if the act results in a on the consequences of a transaction request, or within 90 days if the tax tax underpayment, refund, set off or series of transactions to be authorities have a valid reason to or compensation without basis of undertaken by a taxpayer. request an extension of the response an amount corresponding to or deadline. exceeding major damage, is subject The ruling will be binding on the to provisions of the Penal Code. tax authorities, provided that the Summaries of tax rulings that have transactions are concluded within general significance or deal with The limitation period for making the time and under the circumstances frequently asked questions may be an assessment is three years from described in the ruling request, and published on the tax authorities’ the due date of the tax return for a also provided that the relevant tax website, with due regard for the simple failure to pay. In the event of legislation had not been changed protection of tax privacy and personal intentional tax avoidance (or willful substantially before the taxpayer data of the persons involved. tax evasion), the limitation period for entered into the transaction. making a tax assessment is five years Upon the taxpayer’s request from the due date of the tax return. Rulings will not be issued on transfer the Estonian Tax and Customs pricing matters and may be denied Authorities may also issue an 8.12 Advance for hypothetical transactions and advance clearance within 30 days, clarifications transactions with the sole purpose of but this is not formally binding to tax avoidance. them; in practice the authorities A binding advance ruling will follow the clearance issued if all include the tax authorities’ opinion Binding rulings will be issued within facts and circumstances have been 60 days of the submission of the properly described. Guide to doing business and investing in Estonia 41
9 Taxation of corporations
Investor considerations All undistributed corporate profits are tax-exempt. Estonia has no thin capitalisation or CFC rules for corporate taxpayers. The period of taxation is a calendar month. Corporate income returns are due by the 10th day of the month following the taxation period.
9.1 Corporate tax system Mergers, divisions and re-organisations of companies are All undistributed corporate profits generally tax-neutral. are tax-exempt. This exemption covers both active (e.g. trading) and There is no form of consolidation or passive (e.g. dividends, interest, group taxation for corporate income royalties) types of income, as well tax purposes. as capital gains from sales of all types of assets, including shares, Dividends distributed by Estonian securities and immovable property. companies are exempt from This tax regime is available to corporate income tax (‘participation Estonian companies and permanent exemption’) if these are paid out of: establishments of foreign companies • dividends received from Estonian, that are registered in Estonia. EU, EEA and Swiss tax resident companies in which the Estonian Corporate profits are not taxed company has at least 10% until the profits are distributed as shareholding; dividends, share buy-backs, capital • profits derived through a reductions, liquidation proceeds or permanent establishment (“PE”) deemed profit distributions, such in the EU, EEA or Switzerland; as transfer pricing adjustments, • dividends received from all other expenses and payments that do foreign companies in which the not have a business purpose, fringe Estonian company has at least a benefits, gifts, donations and 10% shareholding, provided that business entertainment expenses. either the underlying profits have been subject to foreign tax or 9.2 Incentives foreign income tax was withheld from dividends received; There are no special tax incentives • profits derived through a foreign in Estonia but the whole Estonian PE in all other countries, provided corporate tax system, which that such profits have been subject provides for an indefinite deferral to tax in the country of the PE; or for taxing corporate profits, can • liquidation proceedings, share be viewed as a tax incentive that buy-backs or capital reductions, promotes re-investment of profits which have been subject to and thus stimulates economic taxation by the distributor of such growth. income. 42 PwC
Estonia has no thin capitalisation or 9.3 Taxable income making regular profit distributions is CFC rules for corporate taxpayers. available. The payment of dividends As noted above, Estonia levies in the amount that is below or equal There are specific anti-tax haven corporate income tax only on profits to the extent of taxed dividends rules for certain dealings with tax that are distributed as dividends, paid during the three preceding haven companies, treating these as share buy-backs, capital reductions, years (20%) will be taxed with a deemed profit distributions. liquidation proceeds or deemed rate of 14% (the tax rate on the profit distributions. net amount being 14/86 instead of There is a general anti-avoidance the regular 20/80). In cases where rule, which allows tax authorities to Starting from January 2015 the recipient of the 14% dividend ignore the legal form of a transaction distributed profits are generally is either a resident or non-resident and reclassify it for tax purposes subject to a 20% corporate income tax individual, a 7% withholding tax according to its “real” economic (20/80 on the net amount of profit (WHT) rate will apply unless a tax substance, if there are grounds to distribution). For example, a company treaty provides for a lower WHT rate believe that the transaction was that has profits of 100 available for (5% or 0%). undertaken for the purpose of distribution can distribute dividends avoiding tax. As of 1 November 2016 of 80, on which it has to pay corporate Dividends paid to non-resident there is also a special anti-avoidance income tax of 20. From the Estonian legal entities (including “tax rule under which the participation perspective, this tax is regarded as haven” entities) are not subject to exemption for dividends shall not a corporate income tax and not a additional withholding tax under be applied to an arrangement or withholding tax, so the tax rate is domestic law. a series of arrangements which not affected by double tax treaties. are not genuine, because the main Certain domestic and foreign taxes Distributable profits are purpose or one of the main purposes can be credited against the corporate determined by financial statements is obtaining a tax advantage. The income tax charge under domestic drawn up in accordance with exemption is applied to the extent law or double tax treaties. Certain Estonian GAAP or IAS/IFRS that they are put into place for valid distributions are exempt from such tax and there is no adjustment of commercial reasons which reflect (“participation exemption”). accounting profits for tax purposes the necessary and appropriate (e.g. there is no separate tax economic content for such business From 2018 onwards, a lower CIT at depreciation, or tax loss carry activities. the rate of 14% for those companies forward or carry-back). Guide to doing business and investing in Estonia 43
9.4 Deductibility of Fringe benefits are subject to special • 10% of the profit of the last expenses tax treatment in Estonia, as it is only financial year according to the employer who has the obligation statutory financial statements. Depreciation and depletion to pay taxes on the fringe benefits Distributable profits are determined furnished to the employee. Taxable Representation expenses are by financial statements drawn fringe benefits received by a resident generally subject to 20/80 corporate up in accordance with Estonian employee are in general not included income tax only if they exceed the GAAP or IAS/IFRS, and there is no in the taxable income of the threshold of EUR 32 per month plus adjustment of accounting profits employee for Estonian tax purposes. 2% of the calculated social tax base for tax purposes. Corporate entities of the calendar month in which the are not subject to tax depreciation Fringe benefits are subject to 20/80 expenses are paid. rules. corporate income tax and 33% social tax. Other significant items Net operating losses Corporate income tax of 20/80 There is no use for the losses carried For example, where the amount of is generally due on expenses and forward, as distributable profits are the benefit is 100, the income tax payments which do not have determined by financial statements due by the employer would be 25 a business purpose and which drawn up in accordance with (20/80 x 100) and the social tax are therefore regarded as being Estonian GAAP or IAS/IFRS and due 41.25 (0.33 x 125), making up profit distributions. These may there is no adjustment of accounting a combined total fringe benefit tax include, for example, late payment profits for tax purposes (tax loss charge of approximately 66. interest on tax arrears, penalties carry-forward or carry-back). imposed by law, bribes, purchases Gifts, donations and of services or settlements Payments to foreign affiliates representation expenses of obligations not related to Payments to foreign affiliates are Corporate income tax of 20/80 is the taxpayer’s business, and “deductible”, i.e. not subject to generally due on gifts and donations. acquisitions of assets not related to 20/80 corporate income tax, as they Gifts and donations made to certain the taxpayer’s business. are deemed profit distributions, qualifying recipients are only subject provided that the payment serves to 20/80 corporate income tax if Furthermore, there are specific a business purpose and provides such expenses exceed one or both of anti-tax haven rules treating certain a benefit to the payer, is at arm’s the following two limitations: transactions and dealings with “tax length, and is substantiated by haven” companies as deemed profit sufficient documentation (see also • 3% of the calculated social tax distributions, which are therefore section 10.5). base for the existing calendar year, subject to 20/80 corporate income or tax. These include: Payments to foreign affiliates may also be subject to various withholding taxes. Certain payments to affiliates located in “tax havens” are always subject to 20/80 corporate income tax or 20% withholding tax.
Taxes All taxes paid are “deductible” for income tax purposes. In certain circumstances domestic or foreign taxes may be creditable against the 20/80 corporate income tax charge under domestic law or an applicable tax treaty.
Fringe benefits Employers operating in Estonia (including foreign companies that have a permanent establishment or employees in Estonia) are liable to Estonian taxation on any fringe benefits granted to their employees (including directors). 44 PwC
• acquisition of securities issued by closure tax, motor vehicle tax, a tax a tax haven entity (exception for on keeping animals, entertainment certain listed securities); 12t tax and parking charges. • acquisition of an ownership interest in a tax haven entity: Environmental taxes • payment of fines or penalties to a Estonia does not impose any tax haven entity, unless settled by environmental taxes. However, court or arbitrage; there are certain pollution charges, • granting loans or making charges for the use of natural prepayments to a tax haven entity resources and environmental or otherwise acquiring a claim insurances (insurance against against a tax haven entity. pollution risk).
9.5 Related party value of land at rates between 9.9 Branch versus transactions 0.1% and 2.5%, depending on the subsidiary municipality. The tax is paid by the Transactions between related parties land owners, or sometimes by the As a general rule, branches and (both resident and non-resident) users of the land, generally in two subsidiary companies are subject and between a head office and its instalments, by 31 March and by 1 to similar tax rules in Estonia. In permanent establishment(s) should October. There is no property tax, both cases, the retained earnings be conducted at arm’s length terms. i.e. tax on the value of buildings. remain exempt from corporate tax until the distribution of profits to Transfer pricing adjustments Property transfers are generally the head office or parent company, are treated as deemed profit subject to state and notary fees. respectively. Upon distribution, a distributions, which should be 20% monthly corporate tax will declared on a monthly basis and Heavy goods vehicle tax be due. There is no branch profits which are subject to 20/80 corporate Heavy goods vehicle tax is paid for tax (on top of the corporate tax income tax. the following classes of vehicles that payable upon distribution) in are registered with the Estonian Estonia. Five transfer pricing methods listed National Motor Vehicle Register in the regulation are also accepted and intended for the carriage of Compared with a branch, in the case in the OECD guidelines: comparable goods: (1) lorries with a maximum of a subsidiary which is a private or uncontrolled price, resale price, authorised weight or gross laden public limited company, there may cost-plus, profit-split and the weight of over 12 tons; (2) ‘road- be more tax planning opportunities transactional net margin method. trains’ made up of trucks and trailers for the tax efficient repatriation of Estonia has also introduced special with a maximum authorised weight profits from Estonia. transfer pricing documentation or gross laden weight of over 12 requirements for certain taxpayers tons. The tax is paid by the owners The Estonian branch of a foreign in line with the EU Transfer Pricing or users of the vehicles. company is not subject to statutory Documentation Code of Conduct. audit requirement, but it must Gambling tax submit an annual report from the 9.6 Foreign exchange A gambling tax is imposed on head office to the Commercial amounts received from operating Register, and its own annual report Foreign exchange gains and losses games of skill, totalizators, betting to the local tax authorities within six are tax neutral, as in the absence and lotteries. Tax is also charged on months from the end of the financial of annual taxation of net profits all gambling tables and slot machines year. The subsidiary company must undistributed corporate profits are used for games of chance located in submit its annual report only to the tax-exempt. licensed premises. The tax is paid by Commercial Register. the authorised operators. 9.7 Tax computations 9.10 Holding companies Local taxes See section 9.3 above. There is no form Local taxes can be imposed by local Estonia has a favourable of consolidation or group taxation for municipality or city councils in their corporate tax regime whereby all corporate income tax purposes. administrative area in accordance undistributed corporate profits with the Local Taxes Act. However, are exempted from taxation 9.8 Other taxes the fiscal significance of local taxes and this provides for numerous is extremely low, as very few local opportunities to use Estonia as a Real estate and land tax municipalities have introduced location for holding, financing or Land is subject to annual land tax local taxes. Local taxes include trading activities by multinational that is calculated on the assessed advertisement tax, road and street companies. Guide to doing business and investing in Estonia 45
10 Taxation of Individuals
Investor considerations 10.1 Territoriality and items of income derived by a resident residence taxpayer. Certain pension payments A flat 20% income tax applies to are subject to 10% income tax. taxable income of individuals. Individuals are considered residents Estonian resident individuals are of Estonia if they have a permanent The gross income of resident subject to taxation on their worldwide residence in Estonia, or if their stay individuals includes their worldwide income. Non-resident individuals in Estonia during any 12-month income from all sources, irrespective period exceeds 182 days. An of the origin of the income. are subject to taxation on the listed individual may be deemed to have Estonian source income. become a tax resident from the date Taxable income includes both active Tax on employment income is of his arrival to Estonia. income such as employment and collected by employers business income, as well as passive If the tie-breaker article in an income, such as capital gains, rents applicable double tax treaty allocates and royalties, interest, dividends, the residence of a dual-resident certain insurance proceeds, pensions, individual to a foreign country (most scholarships, grants, prizes, lottery often if the home and family of the winnings, etc. individual remain abroad during an assignment to Estonia), then generally This list is not exhaustive and the individual will be taxed as a non- therefore any income derived by a resident in Estonia regardless of the resident individual not falling within Estonian domestic rule. the above categories is taxable, unless a tax exemption is available. 95% 10.2 Taxable income submitted via the In general, individual taxpayers are internet Estonia has a proportional (i.e. flat) taxed on a cash basis. Exceptionally, tax rate of 20% which applies to all the Estonian CFC (anti-deferral) 46 PwC
rules attribute undistributed profits income). Some of the more of foreign “tax haven” companies important items of tax-exempt to resident individual taxpayers if income include certain domestic such companies are controlled by dividends, qualifying foreign Estonian residents. dividends, qualifying foreign employment income, alimonies Most items of personal income and certain qualifying capital are taxed on a gross basis, mainly gains. through withholding at source, whereas business income and capital As an exception from the general gains are taxed on a net basis subject rule, foreign employment income to certain conditions. is exempted from Estonian income tax for a resident Investment account employee (including withholding Individuals are allowed to defer requirement), provided that: their income tax liability on the income earned from the • an employee has spent at least 183 transactions with certain financial days in a 12-month period in a assets when using a specific foreign country for the purpose of investment account system. In order employment; and to enter the system, an individual • the foreign employment income has to have an ’investment account’ is treated as taxable income which is an ordinary current in the foreign country (which account in a bank operating in must be proven by documentary a country that is a member of evidence) and the employee can European Economic Area or produce a certificate stating the OECD. The number of investment amount of income tax paid on the accounts per individual is not employment income (even if the 25,200, the basic tax exempltion is limited. Payment of income tax can tax amount is nil). calculated using a specific formula: be deferred if qualifying financial 6000 – 6000 ÷ 10 800 × (income assets are purchased for the money Tax exempt foreign employment amount – 14 400). If the annual in the investment account and income must be declared in the income exceeds EUR 25,200, the income from the transactions is annual income tax return of the basic tax exemption is zero.There immediately transferred to the resident individual. are also certain additional personal investment account. All transfers allowances, as well as certain in and out of the investment 10.4 Deductions deductible documented expenses, account(s) must be reported in which fall into two categories. an individual annual income tax Business deduction return. Income tax at 20% is paid If an individual is carrying out The first category includes certain only when the payments out of business activities through the form mandatory payments which can be the investment account exceed the of sole proprietorship, he/she is deducted without any limitations, amount paid in. allowed to deduct business expenses including unemployment insurance from the business income. contributions, contributions to Business account compulsory accumulative pension According to the law an individual schemes and certain obligatory will have the possibility to open Non-business deductions contributions to foreign social a specific bank account (so called (including personal security schemes. “entrepreneurship account”), where allowance) all income received will be taxed at a Resident individuals and certain The second category includes flat rate of 20%, if the total amount qualifying EU resident individuals deductions which are allowed is below EUR 25,000 in a calendar are allowed to make certain for tax policy reasons and year. If the total annual amount is deductions from their gross which have various limitations equal or exceeds 25,000 euros, then income. on deductibility. The second tax rate 40% is applicable. category includes certain bank and As of 1st of January 2018, the leasing interest paid in relation 10.3 Non-taxable income the basic personal allowance is to acquiring personal residence, EUR 6,000 or EUR 500 per month certain educational expenses, For resident individuals, there are (applicable up to annual income certain gifts and donations and numerous items of tax exempt fo EUR 14,400). If the annual certain payments to personal income (excluded from gross is between EUR 14,400 to EUR pension schemes. Guide to doing business and investing in Estonia 47
Tax credits • employment income on which A resident individual will receive an Estonian resident taxpayers who income tax has not been withheld income tax assessment based on his have received foreign-source taxable in Estonia; return as filed at least 30 days before income are generally allowed to • certain capital gains; the tax payment is due. credit foreign income tax against • profits derived from business their Estonian income tax liability. conducted in Estonia without Non-residents are liable to self- The tax credit is limited to 20% a registered permanent assess their Estonian tax and submit of foreign taxable income and establishment; a tax return to the Estonian tax is calculated separately for each • directorship fees of an Estonian authorities regarding the income foreign country. company; which is taxable but has not been • other items of income from which subject to withholding. Non- 10.5 Taxation of non- tax should have been withheld but residents will generally not receive residents was not. a tax assessment from the tax authorities. Non-residents are only taxed on 10.6 Tax compliance their Estonian-source income. For Based on the tax assessment non-residents, income tax withheld The period of taxation is a calendar received from the tax authorities, at source at domestic or treaty rates year. In general, individuals must resident individuals must pay the generally constitutes final tax. Non- file a personal income tax return final amount of income tax due by 1 residents are generally not obliged by 31 March following the year in July of the year following the period to submit a tax return in Estonia for which income was received. As an of taxation. The resident taxpayer income already taxed and reported exception, were gains were derived who reported business income, monthly by employer to Estonian from a transaction with real estate, foreign income or capital gains in Tax and Custom Board. non-residents must submit a tax his/her tax return must pay the return within one month from the final amount of income tax due by However, for certain types of receipt of such gains. 1 October of the year following the Estonian-source income, non- period of taxation. residents are liable under Estonian Electronic filing of tax returns domestic law to self-assess their becomes available from 15th of In general, non-residents must pay Estonian tax and submit a tax return February each year. Married resident income tax due within three months to the Estonian tax authorities. Such taxpayers may select filing their tax from the deadline of submitting the types of income include: returns jointly or separately. tax return. 48 PwC
11 Value added tax (VAT)
Investor considerations 11.1 Introduction • the supply of goods or services specified in the Estonian VAT Act, Estonian VAT legislation is based The current VAT Act was introduced if the taxable person has opted for on the EC VAT Directive (2006/112/ effective from 1 May 2004 when taxation of those. EEC). Estonia joined the EU. VAT as such The standard VAT rate is 20% and was introduced in Estonia effective 11.3 Zero-rating the reduced rate is 9%. from 1992 and is known in Estonian as “käibemaks”. Certain supplies are subject to a Estonia applies extended reverse 0% rate (i.e. exemption with credit charge mechanism. VAT applies to the supply of goods or zero-rating), including but not An option to tax is available in and services performed by a taxable limited to: respect of certain domestic exempt person in the course of its business • export of goods; and taxable supplies (such as activities in Estonia. • intra-Community supply of goods; specific steel products identified by • the products listed in the Annex A taxable person is a person who V of the VAT Directive, which CN codes). is engaged in business, which is can be placed into a licensed VAT independent economic activity in the warehouse; Reduced VAT rate: course of which goods or services • supply of services which are not are supplied, and is registered or deemed to be supplied in Estonia. required to register for VAT. 11.4 Exempt supplies The standard 20% rate applies to all 9% supplies of goods and services not Supplies that are exempt without qualifying for a reduced 9% rate or credit include but are not limited to the exemption. A reduced rate applies following activities of a social nature: to accommodation, books, certain • certain universal postal services; periodicals, listed pharmaceutical • listed health services; products and medical devices. The • listed social welfare services; VAT rate on the export of goods, • general education services, intra- Community supply of goods including learning materials, and certain services is 0% (i.e. except for business purposes. exemption with credit). The following supplies are also VAT and all other taxes are treated as exempt without credit: administered by the Estonian Tax • insurance services, including and Customs Board (www.emta.ee). reinsurance and insurance mediation; The information covered in this • leasing or letting of immovable chapter can also be found on property or parts thereof; www.globalvatonline.com, PwC • immovable property, except global website that provides a for the supply before the first comprehensive guide to global VAT occupation of buildings or information from over 70 countries their parts as well as renovated worldwide. buildings or their parts; • listed financial services; 11.2 Scope of VAT • transactions in securities.
The following transactions are Of the above exempt supplies, an subject to Estonian VAT: option to tax is available in respect to • the supply of goods and provision the following: of services with a place of supply • disposal of immovable property, in Estonia; except residential housing; • the import of goods into Estonia; • lease of or establishment of a • intra-Community acquisition of usufruct on immovable property or goods in Estonia; its parts, except residential housing; Guide to doing business and investing in Estonia 49
• listed financial services and purchase of goods and services used related to the purchase or use of a car transactions in securities, unless for: must ensure that the vehicle is solely such a service is provided to the • the reception of guests; or used for business purposes. There are taxable person (or taxable person • the provision of meals no specific rules in the Estonian VAT with a limited liability) of another or accommodation for law as to how ‘the exclusive use of a EU member state. employees (except input VAT company car for business purposes’ on accommodation services should be proved, but upon a tax 11.5 Taxable amount used during business trips by dispute the taxpayer has to defend employees). its position by presenting relevant The general rule is that the taxable evidence. value of a supply, or of the intra- Only 50% of input VAT on acquisition Community acquisition of goods of company passenger cars or other 11.7 VAT incentives or services, is the sales price of the related costs, including running and goods or services and other amounts maintenance, can be deducted if used Under certain conditions, importers which the purchaser of the goods, both for business and private use. registered for VAT purposes in the recipient of the services or a Estonia are able to account for VAT third party is to pay to the seller Passenger cars are defined as vehicle on imported goods, including capital of the goods or the provider of the of category M1 (including M1G) used goods, in their monthly VAT returns. services for the goods acquired or for the carriage of passengers and services received. which have eight seats at the most 11.8 Simplification in addition to the driver’s seat and measures The taxable value of imported goods whose maximum weight does not is comprised of the customs value exceed 3.5 tons. The vehicles outside Estonia has elected to extend the of the goods and all duties payable this category (including N1 and N1G, reverse charge mechanism to all upon import, as well as other also known as pick-up trucks) are local supplies of goods and services costs related to the carriage of the not considered as passenger cars and if the supplier is a foreign taxable goods to the destination, such as therefore not affected by the change in person, who is not established (i.e. commission, packing, transportation legislation. does not have a fixed establishment) and insurance costs which have not and is not registered for VAT been included in the customs value, There are some exceptions allowing purposes in Estonia. The liability to up to the first place of destination in deduction of whole input VAT paid pay tax is shifted to the customer the territory of Estonia. in relation to car related costs. These (the recipient of goods or services), exceptions comprise passenger cars who is registered for VAT in Estonia. The taxable value may be subject (i) purchased for resale or hire, (ii) In this situation, a non-established to adjustment only when the mainly used as a taxi or for driving foreign taxable person will not transaction is carried out between lessons and (iii) exclusively used for have to register for VAT in Estonia. related parties, and the resulting business purposes. Also, Estonia has introduced VAT price “distortion“ would give rise to warehousing. The products listed in a reduction of VAT revenues to the A VAT registered person, who has Annex V of the VAT Directive can be state budget. As a general rule, the deducted 100% input VAT on the costs put into a licensed VAT warehouse. open market value will represent the taxable value. When there are no comparable sales of goods or services, then the tax base will be the purchase price or the cost price for goods and the full cost for services.
11.6 Non-deductible input VAT
In principle, a credit for VAT incurred in the course of business, except for VAT on tax exempt supplies, is given against the output tax due to the authorities.
No deduction is allowed for input VAT incurred on the 50 PwC
11.9 Specific reverse liability of the other member Voluntary registration is also charge state; possible, even if the threshold is not • intra-Community supply is created reached. For the purposes of preventing VAT as a result of the transport of the evasion, reverse charge mechanism goods to another Member State; VAT registration is effected within applies to domestic transactions in • upon importation of the goods, the five working days. The Estonian waste metal, certain precious metals, importer confirms the intention VAT number starts with a prefix EE certain real estate and investment to transport the goods to another which is followed by nine digits: gold opted for VAT, between member state where such goods EE123456789. Estonian VAT registered parties. will be received by a taxable person or a taxable person with Self-billing is allowed in Estonia. Ensuring fair competition and limited liability registered by the Each self-bill must be accepted combat VAT fraud in the metal other member state and, after by the supplier. The terms and sector, as of 01.01.2017 the reverse the goods have been transported, procedure shall be fixed by the charge mechanism also applies to provides the customs authority parties in awritten agreement. certain metal products with specific with documentation of proof of CN-codes. the intra-Community supply of the Certain transactions of foreign goods; businesses require Estonian VAT 11.9 Simplification • a security is required in order to registration without any threshold measure for importation guarantee the performance of the (e.g. intra-Community supply of tax liability which may arise as a goods from Estonia). • VAT is not imposed on the import result of the failure to perform the of goods upon the placing of above described tax obligation. Generally, a VAT representative is non-Community goods under the The security is given, released, only required for the registration of customs procedure of release for used and calculated pursuant to non-EU businesses. free circulation, provided that the the procedure provided by the following conditions are met: customs rules. Accounting requirements • the importer of the goods is an VAT taxpayers have an obligation to Estonian taxable person; 11.10 VAT compliance keep records on: • immediately after the goods • the amounts of input VAT ascribed have been imported, they Registration to taxable and exempt supplies; are transported, in the same If the taxable supplies of Estonian • taxable supplies by rate and tax condition, to another Member businesses or fixed establishments of exempt supply; State where such goods will be foreign businesses in Estonia exceed • the amount of output VAT by rate; received by a taxable person or EUR 40,000 in a calendar year, VAT • the amount of deductible input a taxable person with limited registration is required. VAT; and Guide to doing business and investing in Estonia 51
• all other particulars necessary to • the amount of VAT payable in • it is registered for VAT purposes in prepare a VAT return. Euros; its home country; • the date of dispatch of the goods • the VAT to be refunded would be Specific regulations are laid down or provision of services and/or recoverable to the EU business also by the Ministry of Finance regarding an earlier date of receipt of full in its home country; the content and form of the VAT or partial payment for the goods • the VAT to be refunded would accounting. or services if the date can be be recoverable by Estonian VAT determined and differs from the liable persons under the same The VAT legislation lays down a date of issue of the invoice. conditions; and retention obligation for a period of • the VAT refund application is seven years. This retention period In certain cases reference to the submitted via the electronic portal applies to the documents that should relevant clause of the VAT Act or set up by home country at the latest be kept according to Estonian VAT the article of the EC VAT Directive on 30 September of the calendar Law (i.e. copies of invoices and shall be added. The invoice has to year following the refund period. credit invoices issued by or on behalf be submitted to a recipient within of the taxable person, original seven days after the date of the Input VAT paid on representation invoices for goods and services taxable event which is the dispatch costs and provision of meals to received by taxable persons, and of goods or the provision of services, and accommodation of employees customs declarations certifying the or receipt of partial or full payment. of the applicant, except the import of goods). In case of intra-Community supply of accommodation during the business goods and provision of B2B services trips by employees, is not refunded. Books, registers and records may the invoice has to be issued by the be archived in any form provided 15th day of the following month. The non-EU business is entitled to a that the chosen data carrier allows refund of VAT paid in Estonia if: retrieving of the stored information. If the liability to account for VAT • it is registered for VAT purposes in VAT invoices need to be archived in is shifted to the recipient of goods its home country; the form guaranteeing the integrity or services, i.e. reverse charge VAT • the VAT to be refunded would of the content. applies, a clear reference on the be recoverable by Estonian VAT invoice shall state so. liable persons under the same A taxable person may choose the conditions; and place at which invoices are stored Invoicing in a foreign language and • the respective non-EU country on condition that the person makes currency is allowed. However, the VAT grants reciprocal rights for VAT the invoices or information stored amount must be presented in Euros. refunds to Estonian residents. therein immediately available to the tax authority upon request. Returns and payment VAT refund applications can be The VAT accounting period is submitted by EU businesses for Information in a VAT invoice generally a calendar month. VAT a period of not less than three The following information is should be declared and paid by the months within a calendar year and required to be stated on the VAT 20th day of the following month. the minimum VAT amount to be invoice: refunded must be at least EUR 400. • the name, address and the VAT In the annex (‘KMD INF’) to the VAT registration number of the return the information about invoices In cases of annual submissions of supplier; exceeding EUR 1 thousand per refund applications, the minimum • the serial number and the date of transaction partner must be reported. VAT amount must be at least EUR issue of the invoice; The annex consists of two parts in 50 and for non- EU business, the • the name and address of the which the part A is for invoices issued minimum VAT amount must be at recipient of goods and services; and the part B for invoices received. least EUR 320. • the name or a description of the As the purpose of the form is to goods or services; compare transactions conducted in Generally, the VAT refund for EU • the quantity of the goods or extent Estonia, it does not include cross- businesses is granted within four of the services; border transactions. KMD INF has months of the date of submitting • the price of the goods or services to be filed together with the VAT electronically the official refund exclusive of VAT and any return by the 20th day of the month application and VAT invoices. For discounts, if these are not included following the taxation period. non-EU businesses, the VAT refund in the price; is granted within six months and • the taxable amount divided by VAT refund to foreign the VAT refund application must be different VAT rates together businesses accompanied with the original VAT with the applicable VAT rates invoices and the VAT registration or the amount of tax exempt The EU business is entitled to a certificate (issued by the VAT supply; refund of Estonian VAT, if: Authorities of the home country). 52 PwC
12 PwC in Estonia
At PwC, our purpose is to build While we have experience working live. Making a lasting contribution trust in society and solve important with all industries represented in requires one to deliver real problems. We’re the largest Estonia, we have built particularly actions. It may come in various professional services network, uniting strong expertise in areas such forms - a monetary support, an more than 223,000 people from as mergers and acquisitions, environmentally responsible 157 countries who are committed banking, private equity, insurance, behaviour or advising those in need to delivering quality in assurance, real estate, data protection, are only a few of the possibilities. advisory, tax and legal services. energy, telecommunications and infrastructure. Therefore, on top of continuously In Estonia we are proud to offer striving to fulfil and exceed our services to more than 500 clients, More than 150 specialists provide clients’ expectations, we feel a including leading domestic and daily professional assurance, tax, wider responsibility – what we do multinational companies and public legal and business advisory services every day helps to increase the services institutions. Our clients to clients in Estonia by making use of transparency and reliability of the range from the largest and most their industry-focused expertise and Estonian business environment complex organisations to start-ups international competence. and contributes to alleviating the and innovative entrepreneurs. problems in the society.
PwC serves a significant amount of Corporate social We take pride in conducting our own the largest companies in Estonia. responsibility business in an honest and ethical We tailor our services to match the manner, we participate in vocational needs and requirements of each We know that it takes more than associations and legislative drafting client, considering their size and just nice words and good intentions as well as share our knowledge in specific needs. to make the world a better place to training sessions and seminars. Guide to doing business and investing in Estonia 53
We believe everyone has the right to a good education to build a KPMG 12% PwC provides audit foundation for a successful future. PwC 76% services to more For this, we support the educational than two thirds of aspirations of bright young people Deloitte the companies listed from foster homes and orphanages, 12% at Tallinn Stock offering scholarships for their Exchange university studies complemented with the advice of a personal mentor.
We help those in greater need. We participate in various charity initiatives, including supporting the Estonian Food Bank. In addition to offering funding, our employees act Deloitte 11% as volunteers to make a contribution of their time and know-how. PwC 50% PwC has the We care about those we work with largest market – respect and value our colleagues, KPMG 18% share in Big 4 in share work-related knowledge and auditing Estonian experience, appreciate healthy ways leading companies of living and promote sports and (business daily active lifestyle. Our ongoing efforts Äripäev TOP 50 to offer great working conditions and Estonian companies benefits together with the positive, by turnover) supportive atmosphere and feeling of equality has resulted in us earning E&Y 21% the honourable number 2 position in the Dream Employer competition in 2016.
We think and act green - both Deloitte 7 in the office and outside, being PwC 19 19 public interest conscientious about the environment entities have around us. appointed PwC as their auditors 12.1 Assurance services
PwC is the leading audit and KPMG 11 assurance services provider in Estonia. Having the highest quality audits is the key to success and the foundation of our brand. E&Y 6 Our audit approach, at the leading edge of best practice, is tailored to creating value for any type and size Our audit explores and thinks more • audit of financial statements of organisation. widely about our clients’ businesses prepared in accordance with as a whole, enabling us to offer new the Estonian financial reporting We audit 70% of the companies solutions to the problems, helping standard; listed at Tallinn Stock Exchange and the clients to gain important insights • review of financial reporting; more Estonian top 100 companies for addressing both present and • agreed-upon procedures; than any of our competitors, future challenges. • expert opinions on accounting but our client portfolio includes technical issues; also numerous small and mid- Our audit and assurance services • training on accounting and size businesses, subsidiaries of include: financial reporting; international corporations, as well as • audit of financial statements • assistance with various regional and local players. prepared in accordance with IFRS; accounting-related matters. 54 PwC
12.2 Tax services • Company administration: Our lawyers combine legal expertise Registrations (PE, VAT, foreign with a practical business approach The purpose of the Tax Services employer), other ongoing based on our international experience. practice of PwC in Estonia is to assist administrative activities (i.e. clients in finding tax-efficient business opening a bank account, set-up Practice Areas solutions and managing tax risks. of e-services for tax return filing • Mergers and Acquisitions purposes, providing mailbox • Banking, Finance and Insurance We work closely with our colleagues in function, assistance in recovery of • Employment other PwC offices worldwide and use taxes etc). • Corporate and corporate our access to international knowhow • Tax review: Periodic (annual, secretarial services and long-term experience to quickly quarterly) tax review of the • Public procurement and efficiently solve tax issues that monthly indirect, direct and/or • Data Protection arise both locally and in foreign payroll tax returns submitted to • Insolvency and restructuring jurisdictions. Tax and Customs Authorities etc. • Competition law • Intellectual Property Right We provide tax services mainly in the 12.3 PwC Legal • Dispute settlement following areas: • practical implementation of PwC Legal offers a wide range of 12.4 Advisory services Estonian tax law; legal services in Baltics to support • international taxation and tax the private and public sector in close PwC has a unique, dedicated and structuring; cooperation with PwC audit, tax and most experienced advisory team • transfer pricing; business advisory services. in Estonia that offers advice and • tax due diligence; support around key client issues. • administration of tax audits and PwC Legal operates within the global We bring the highest quality tax disputes; network of firms, uniting more than combination of financial, operational • preparation of requests for 3,500 lawyers working in 95 countries and commercial insight into advance clearances and binding worldwide. This allows us to provide servicing the needs of our domestic rulings; complex professional services with and international clients. • individual taxation and wide geographical coverage through a preparation of personal tax single point of contact. With its unique Our focus areas include: returns. approach, PwC Legal offers a seamless • Consulting – helps in improving the service of the highest professional efficiency and effectiveness of our We also provide tax training courses standards across continents in both clients’ key business operations. bothgenerally and in response to its legal services and the related Using our excellent skills in finance, specific client requests. tax, advisory, consultancy and audit risk management and compliance, services. IT systems and operations, we assist in the identification 12.2.1. Tax management and and implementation of cost accounting services More saving initiatives, improvement than of management and control, Where a company has decided identification and management of to expand its business to Estonia risk and quality improvement. through its local subsidiaries, • Deals - focuses on the deal branches or permanent continuum from strategy through establishments and there is no execution to post deal integration, finance function support available including due diligence and the following functions can be valuations, raising finance, helping assigned to PwC Estonia: 3,500 corporates and investors to sell or • Accounting: Day-to-day buy businesses, negotiating and bookkeeping and preparation of lawyers structuring deals, advising clients the annual accounts. in in Public Private Partnership and • Tax compliance: Monthly tax other large infrastructure projects. return preparation/submission, including indirect tax (VAT 95 Our team has a wide range of return/EC Sales listing/Intrastat) services tailored to the need and direct tax (corporate income/ countries of public sector clients and we payroll taxes compliance). worldwide extensive experience in business • Payroll compliance: Monthly restructuring, dispute analysis and payroll administration and general investigations and various other advice on employment matters. specialist areas. Guide to doing business and investing in Estonia 55
Appendices
Appendix A A Tips for business visitors Visas Nationals of the European Economic Area (EEA) and any third-country national holding a residence permit of a Schengen State do not need a visa to enter Estonia. The holders of passports of the following countries and regions do not need a visa to enter Estonia for stays of no more than three months in a six month period: Albania*, Andorra, Antigua and Barbuda, Argentina, Australia, Bahamas, Barbados, Bosnia and Herzegovina*, Brazil, Brunei Darussalam, Canada, Chile, Costa Rica, Colombia, Dominica, El Salvador, Georgia*, Grenada, Guatemala, Holy See, Honduras, Hong Kong Special Administrative Region of China, Israel, Japan, Kiribati, Macao Special Administrative Region of China, Macedonia*, Malaysia, Marshall islands, Mauritius, Mexico, Micronesia, Moldova*, Monaco, Montenegro*, New Zealand, Nicaragua, Palau, Panama, Paraguay, Peru, Saint Vincent and the Grenadines, Samoa, San Marino, Serbia*, Seychelles, Singapore, Solomon Islands, South Korea, St Kitts-Nevis, St. Lucia, Taiwan**, Tonga, Timor-Leste, Trinidad and Tobago, Tuvalu, Ukraine*, United Arab Emirates, United States of America, Uruguay, Vanuatu, Venezuela.
* Only for the biometrical ordinary passports holders
** Passports issued by Taiwan which include an identity card number
Business hours The hours between 8 am and 6 pm are considered to be standard business hours.
Public holidays in 2016 • 1 January – New Year’s Day; • 24 February – Independence Day; • 30 March and 1 April – Good Friday and Easter Sunday; • 1 May – May Day; • 20 May – Whit Sunday/Pentecost; • 23 June – Victory Day; • 24 June – Midsummer Day; • 20 August – Day of Restoration of Independence; • 24 December – Christmas Eve; • 25 December – Christmas Day; • 26 December – Boxing Day.
Credit cards Major credit cards (Visa, Mastercard/Eurocard, American Express etc.) are widely accepted in shops, restaurants and hotels and most of taxies.
International time GMT + 2 hours
Weights and measures The International System of Units (abbreviated SI) is used in Estonia. The metric system is used in everyday commerce and in science. 56 PwC
Appendix B B Tax rates Corporate income tax rates 20/80 14/86
Tax depreciation rates There is no adjustment of accounting profits for tax purposes; distributable profits are determined based on financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS.
Withholding taxes 5% / 10% / 15% / 20% / 7%1
Individual tax rates 20% / 7%
Personal allowances (and/or credits) The following deductions are available for resident (in certain cases also for non- resident) individual taxpayers:
1. As of 1st of January 2018, the the basic personal allowance is EUR 6,000 or EUR 500 per month (applicable up to annual income fo EUR 14,400). If the annual is between EUR 14,400 to EUR 25,200, the basic tax exempltion is calculated using a specific formula: 6000 – 6000 ÷ 10 800 × (income amount – 14 400). If the annual income exceeds EUR 25,200, the basic tax exemption is zero.2. In 2018, an additional personal allowance (€ 1,848 ) is granted to one resident parent per each child starting from the second child.
3. Interest on a loan and/or a finance lease for the purpose of acquiring a single- residence building or apartment. The deduction is given only for the one residential housing per tax period. The housing loan interest may be deducted up to € 300 euros.
4. Education expenses paid to a licensed school or a foreign educational institution of equal status during the tax period are deductible for a resident individual if these are paid by the individual for himself, or for his certain family member who is under 26 years of age. Expenses paid for studies at a hobby centre could be considered training expenses in case a person studying at a hobby centre is under 18 years of age on 1st January of the calendar year of the payment of the training expenses.
5. A resident individual may deduct charitable contributions from taxable income made to non-profit associations and foundations listed by the Government, as well as to cultural, sport, educational, health or social security institutions belonging to the state or local authorities and public universities.
6. Premiums to certain pension schemes and the expenses paid to buy shares of resident pension funds qualifying under the law may be deducted from taxable income. Such a deduction is limited to lesser of the two: € 6,000 or 15% of the income derived during the tax year from which business expenses (if any) have been deducted.
1 From 2018 onwards, a lower corporate income tax at the rate of 14% for those companies making regular profit distributions will become available. The payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years (20%) will be taxed with a rate of 14% (the tax rate on the net amount being 14/86 instead of the regular 20/80). In cases where the recipient of the 14% dividend is either a resident or non-resident individual, a 7% withholding tax rate will apply unless a tax treaty provides for a lower withholding tax rate (5% or 0%). 2018 is the first year to be taken into consideration for the purposes of determining the average dividend. Guide to doing business and investing in Estonia 57
7. The 1.6% employee’s unemployment insurance contributions and 2% compulsory accumulative pension contributions.
8. Contributions to a foreign national social security scheme if such contributions were mandatory under the laws of the respective country and were paid from the income taxable in Estonia.
According to the restrictions imposed on deductions available to resident individuals from taxable income, the total amount of deductions, which includes the total of items 3 to 5 (see above) for a resident individual in 2017 cannot exceed the lesser of: • 50% of the taxable income of the respective tax year, or • € 1,200.
Non-resident individuals of another EU Member State who have taxable income in Estonia are allowed under certain conditions to file tax returns as resident individuals in order to benefit from deductions available to Estonian residents.
Tax on foreign nationals working in Estonia 20%
Wealth tax Estonia does not levy a wealth tax.
Estate and/or inheritance and/or gift tax rates Estonia does not levy estate, inheritance or gift taxes.
Capital tax Estonia does not levy a capital tax.
Indirect taxes 9% and 20% VAT 58 PwC
Appendix C - Withholding taxes
The following WHT rates apply to dividends, interest, and royalties paid to a recipient C or beneficial owner resident in a tax treaty country. The lower of the domestic or the treaty rate is given.
Recipient Dividends (%) Interest (%) Royalties (%) (1) (2) (3) Non-treaty 0 0 0/10 Treaty: Albania 0 0 5 Armenia 0 0 10 Austria 0 0 0/5/10 (4) Azerbaijan 0 0 10 Bahrain 0 0 0 Belarus 0 0 10 Belgium 0 0 0 (7) Bulgaria 0 0 0/5 Canada 0 0 10 (7) China, People’s Republic of 0 0 10 Croatia 0 0 10 Cyprus 0 0 0 Czech Republic 0 0 0/10 Denmark 0 0 0 (7) Finland 0 0 0 (7) France 0 0 0 (8) Georgia 0 0 10 Germany 0 0 0/5/10 (4) Greece 0 0 0/5/10 (4) Hungary 0 0 0 (7) Iceland 0 0 0 (7) India 0 0 10 Ireland, Republic of 0 0 0 (7) Isle of Man 0 0 0 Israel 0 0 0 Italy 0 0 0 (7) Jersey 0 0 0 Kazakhstan 0 0 15 Korea, Republic of 0 0 5/10 (4) Latvia 0 0 0/5/10 (4) Lithuania 0 0 0/10 Luxembourg 0 0 0 Macedonia 0 0 5 Malta 0 0 0/10 Mexico 0 0 10 Moldova 0 0 10 Netherlands 0 0 0/5/10 (4) Norway 0 0 0 (7) Poland 0 0 0/10 Portugal 0 0 0/10 Romania 0 0 0/10 Serbia 0 0 5/10 (5) Singapore 0 0 7.5 Slovakia 0 0 0/10 Slovenia 0 0 0/10 Guide to doing business and investing in Estonia 59
Spain 0 0 0 (7) Sweden 0 0 0 (7) Switzerland 0 0 0 Thailand 0 0 8/10 (6) Turkey 0 0 5/10 (4) Turkmenistan 0 0 10 Ukraine 0 0 10 United Arab Emirates 0 0 0 United Kingdom 0 0 0 (8) United States 0 0 5/10 (4) Uzbekistan 0 0 10 Vietnam 0 0 10/7.5 (9) Notes: 1. Under the domestic law, the rate is nil for all non-resident individual and corporate shareholders. 2. As of 1 January 2014, under the domestic law, the rate is nil for all non-resident individual and corporate shareholders. 3. The rate is nil for arm’s-length royalties paid to an associated EU or Swiss company if certain conditions are met. 4. The lower 5% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment. 5. The lower 5% rate applies to royalties paid for the use of copyright royalties, excluding software royalties. 6. The lower 8% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment. 7. As of 1 January 2016, with relation to the enforcement of the Protocol Amending the Estonia – Switzerland Avoidance of Double Taxation Convention and the respective clause in this treaty, royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. 8. As of 16 October 2015, with relation to the enforcement of the Protocol Amending the Estonia – Switzerland Avoidance of Double Taxation Convention and the respective clause in this treaty, royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. 9. The lower 7.5% rate applies to fees paid for technical services.
Appendix D- Setting up in Estonia – a checklist The most common type of legal entity being set up by foreigners in Estonia is the D Private Limited Company “Osaühing, OÜ”. The most common way of setting up a limited company would be to establish one with help from a professional firm. It is also possible to purchase a pre-registered company. Pre-registered companies are sold by numerous accounting and law firms. However, in addition to the stamp taxes, a fee will be charged by an intermediary (generally EUR 1,500-2,000). For registering a new Private Limited company, the steps below should be followed:
1. The following documentation is prepared in Estonian: 1.1. Memorandum of Association, setting out, among other things, the business name, address, area of activity, names and residences of the founders, the amount of share capital, the nominal value of the shares and their division among the founders and the members of the management board. 1.2. Articles of Association, setting out, among other things, the name, address, business activity, share capital, procedure for payment of shares, reserve capital, and other terms and conditions for the company. 2. The founders sign the documentation at the Notary Public. 3. The Notary Public notarises the documentation. 4. The founder(s) visit a bank to open a bank account in the name of the private limited company being founded, and share capital (minimum EUR 2,500) must be paid to a designated bank account. If non-monetary contributions are made, special rules apply. Private limited company may also be established without any minimum capital requirement, provided that all founders are private individuals only and the planned minimum capital does not exceed EUR 25,000. The capital of such a company will consist of claims against the shareholders, who are liable with all of their assets up to the amount they have promised to pay to the capital of the company. 5. The management board submits an application petition to the Commercial Register together with the following documentation: 1) A notarised Memorandum of Association; 2) Notarized Articles of Association; 3) A bank notice concerning the payment of share capital; 4) The names and personal identification codes of the members of the supervisory board (if elected), and of auditors, if the company has auditors; 60 PwC
5) Information on the planned principal activity; 6) Contact details of the private limited company (telephone and fax numbers, e-mail and Internet home page address, etc.). Using the features of the Estonian electronic identification system and digital signature, it is possible to register a company electronically with an expedited procedure in less than hour by founders who are using Estonian ID card or Mobile ID or E-resident’s digi-ID or are the holders of Finnish, Latvian or Belgian ID cards.
Appendix E – Acquiring a business enterprise – a checklist 1. Business overview Key business information E • Brief description of activities. • Key performance and financial ratios overall and for each main activity. Key historical events • Brief history and significant events; major acquisitions and disposals, etc. Entity organisation • Legal structure, indicating main subsidiary undertakings. • Organisational structure (if different). • Key locations and premises.
2. Sales, products, customers and receivables Market and sales • Analysis of sales; sales by product/activity; sales by region; monthly sales. • Description of main product lines and their characteristics. • Analysis of sales by product in quantity and value; mix changes; seasonal patterns and shifts in patterns. • Profitability by product, gross margin, trend, growth. Customers • Customer base concentration. • Key customers and contractual arrangements. Receivables • General client terms of trade. • Credit control; discounts allowed; factoring of debt; product warranties, provisions for credit notes/returns. • Receivables analysis; ageing, roll forward of receivables reserve, major past due accounts; receivables day sales outstanding.
3. Purchases, vendors/suppliers and inventory Cost of sales components • Main cost of sales components: material, labour, overheads, other; cost of sales trends by product. • Breakdown of manufacturing cost by product. • Breakdown of manufacturing overheads by component. Main vendors/suppliers • Main vendors/suppliers; purchase contracts and commitments; currency of purchases. Terms of trade and payables • Terms of trade, days’ purchases outstanding; ageing analysis; reason for delays in settlement. Inventories • Summary of inventories by category; monthly inventory levels. • Location; method of valuation; treatment of overheads; inventory records and control. • Inventory roll forward. • Analyses of inventory reserve: raw material/finished goods ageing analyses, inventory turn; excess inventory (comparison with consumption/sales), lower of cost and net realisable value analysis.
4. Management and employees Management structure • Functional and line management charts for key functions. Guide to doing business and investing in Estonia 61
Employees • Headcount analyses by age, location and function; workforce age profile. Labour cost analysis • Analysis of all labour related costs; analyses by type of employee / by department / by location, average cost per employee; incentive schemes. Severance plans and costs • Redundancy payments (history and detail of any schemes); severance provisions, roll forward analysis, description of any existing plans. Other labour issues • Retirement schemes and other employees’ benefits and related liabilities. • Benefit schemes.
5. Historical results Summary of results • Sales; cost of sales and margins; gross profits; overheads; EBIT; EBITDA; ratio and trend analysis. • Any significant change in accounting policies or practices or impact of inappropriate policies. Overheads • Main classes of overheads below gross margin by type of cost / by department; significant trends; stand-alone issues. • Sales incentives; licensing; joint ventures. • Promotion, advertising; exhibitions expenditure. • Analysis and review of other overheads. Non-recurring items and quality of earnings • Adjusted EBITDA; reason for adjustments (review of management adjustments and further adjustments): nonrecurring revenue or costs, lost customers, accounting policy changes, reserve movements, other. • Significant impact on results resulting from differences between target and buyer’s accounting policies, if relevant. • Non-operating items. Reconciliation of EBITDA to net results; appropriateness of items recorded as exceptional.
6. Balance sheets Summary of balance sheets • Statement of net assets. • Comment on significant trends; change in accounting policies; any assets with a book value significantly different from market value. • Any non-trading items. • Significant off-balance sheet items. Fixed assets • Summary by type of asset and by location/activity. • Basis of valuation; depreciation rates; profits / losses on disposals. • Fixed assets held under finance leases. • Fixed assets register; extent of physical verification. • Nature of intangible assets; valuation; amortisation policy; own costs (research, development, other) capitalised. • Goodwill; patents, copyrights; brands; capitalised research and development. Other assets and liabilities • Summary of other assets and liabilities; review unusual items; significant fluctuations. • Adequacy of provision for outstanding liabilities; provision against guarantees and warranties given; after-sales service. • Retirement and post-retirement benefits; severance payments. • Litigation pending; claims not settled. • Dividends payable / receivable; deferred consideration; other significant balances. • Current and deferred taxation liabilities. Net interest bearing debt • Analysis of the net interest bearing debt by component and maturity (including cash and cash equivalents, bank overdrafts, loans, intra-group financing, finance leases, other interest bearing liabilities). Shareholders’ funds 62 PwC
• Movement in net assets; share capital; share option schemes; distributable/non- distributable reserves.
7. Cash flows Summary of cash flows • Reconciliation of EBIT, EBIDA and cash flows. Working capital • Analysis of working capital movements. Seasonality • Monthly analyses of cash flows; significant intra-month cash movements. Capital expenditure • Analysis of capital expenditure in value by activity/location and by purpose (for growth, maintenance, compliance / regulatory purposes).
8. Current trading and full year out-turn Current trading • Review of current year-to-date trading per latest management accounts. • Compared to budget, previous year-to-date. • Comment on reliability of management accounts. • Identify and quantify key trends in results. Full year out-turn • Present current year-to-date trading and full year forecast and compare to budget and previous year in the same format. • Comment on reliability of past budgets and forecasts. • Extrapolate key trends and form a view on achievability of management’s full year forecast.
9. Future results and cash flows Projected results • Summarise the projections, key lines in the profit and loss account, and compare to historic results and current year outturn. • Confirmation that accounting policies are consistent with last accounts. • Main assumptions underlying forecast and projections. • Analysis of sales, product mix, volume/price changes assumptions; analysis of projected cost of sales, manufacturing overheads, sales and general administration overheads. • Areas of vulnerability and upside. Projected cash flows • Reconcile projected cash flows with projected results. • Projected working capital requirements compared with past trends; highlight any seasonality. • Projected capital expenditure (for growth, maintenance, compliance/regulatory purposes); committed and planned expenditure. • Compare capital expenditure projections with identified needs. • Vulnerabilities and upsides in projected cash flows.
10. Stand-alone issues Operational changes • Significant changes required for the entity to operate on a stand-alone basis (quantified); nature of the changes required and related timing. Pro forma results • Effect on earnings if the entity had operated on a standalone basis over the past year(s). • Reconciliation between reported results and pro forma stand-alone results.
11. Management information, controls and information technology Management information • Arrangements for management and accounting information; reliability and efficiency; reconciliation with financial accounts; year-end adjustments; quality of internal controls, auditors’ management letters. Accuracy of past budgets and forecasts Guide to doing business and investing in Estonia 63
• Soundness and appropriateness of system; effectiveness of action taken on variances; frequency of updating; accuracy and reliability of past budgets and forecasts. • Comparison of budgeted and actual results for previous years. Information technology • IT strategy; facilities; management of IT; contingency plans; costs of improvements/ changes. • Overview of principal software, systems and applications.
12. Taxation Corporate taxation • Analysis of tax charges; comparison of effective and nominal tax rates. Treatment of deferred tax assets / liabilities. • Extent to which liabilities agree with the tax administration; outstanding issues; tax losses; tax planning; taxable distributable reserves. • Overall assessment of risks. Local taxes • Nature of these taxes; extent to which liabilities are agreed; outstanding issues. Value added tax • VAT schemes (if applicable); inspections; outstanding issues. Employment taxes • Social charges; administration inspections; outstanding issues.
13. Insurance and risk management Key insurance policies • Descriptions of the key insurance policies (plant, property, employer’s liability, loss of profits, key management life insurance), risks covered and associated costs; insurance brokers and any intra-group insurance policy; any uncovered significant risk. Recent claims and losses Analyses of recent claims with reconciliation of their impact on the results, balance sheet and cash flows.
Appendix F - Useful sources of information State portal www.eesti.ee/eng F Gateway to Estonia www.estonia.eu The Parliament of Estonia: http://www.riigikogu.ee/?lang=en Estonian Government: https://valitsus.ee/en Ministry of Education and Research: https://www.hm.ee/en Ministry of Justice: http://www.just.ee/en Ministry of Defence: http://www.kaitseministeerium.ee/en/ Ministry of Environment: http://www.envir.ee/en Ministry of Culture: http://www.kul.ee/en Ministry of Economic Affairs and Communications: http://www.mkm.ee/en Ministry of Agriculture: http://www.agri.ee/en Ministry of Finance: http://www.fin.ee/?lang=en Ministry of Interior: https://www.siseministeerium.ee/en Ministry of Social Affairs: http://www.sm.ee/en Ministry of Foreign Affairs: http://vm.ee/en Tax and Customs Authorities: http://www.emta.ee/?lang=en Estonian Health Insurance Fund: https://www.haigekassa.ee/en Citizenship and Migration Board: http://www.politsei.ee/en Bank of Estonia: http://www.eestipank.ee/en Confederation of Estonian Trade Unions: http://www.eakl.ee/index.php?pid=418&lang=7
Other useful addresses and websites PwC Estonia: http://www.pwc.com/ee/en www.pwclegal.ee Enterprise Estonia: http://www.eas.ee/en http://www.investinestonia.com/en/ Estonian Chamber of Commerce and Industry: www.koda.ee/en 64 PwC
Corporate social responsibility
At PwC we know that it takes more than just big words and good intentions to make the world a better place to live. Making a lasting contribution requires one to deliver real actions. These may come in various forms – a monetary support, giving expert advice to those in need or taking measures to decrease one’s environmental footprint are only a few of the possibilities.
It is therefore our aim to go beyond ‘doing the right thing’ to being a catalyst for positive change in the world around us. On top of continuously striving to exceed our clients’ expectations, we feel a wider responsibility – what we do every day contributes to solving the problems in the society and helps to increase the transparency and reliability of the Estonian business environment.
We take pride in conducting our own business in an honest and ethical manner and help others benefit from the expertise and experience we have both locally and through our global network. We participate in vocational associations and legislative drafting as well as share our knowledge in training sessions and seminars. We gladly give pro-bono advice for a good cause – as an example, organisations like the “Let’s do it!” Foundation and the Good Deed Foundation are among our good partners on the road of making a lasting contribution to the society.
We believe everyone has the right to a good education to build a foundation for a successful future. For this, we have supported the educational aspirations of bright young people from foster homes and orphanages, offering scholarships for their university studies complemented with the advice of a personal mentor.
We help those in greater need. We continue to participate in various charity initiatives and since we believe that doing good in the area closest to one’s hearts multiplies the positive effect, we grant every employee 8 hours a year for investing time in the charity of their choice, complemented by monetary support if needed.
We think and act green - both in the office and outside, being conscientious about the environment around us.
And last but definitely not least - we care about our people. We respect and value our colleagues, share work-related knowledge and experience, appreciate healthy ways of living and promote an active lifestyle. Our ongoing efforts to offer great working conditions and benefits together with the positive atmosphere and feeling of equality has resulted in the remarkable support from our employees – in the latest engagement survey 94% of our employees told us they are proud to be working with us.
© 2018 AS PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to AS PricewaterhouseCoopers. or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.