Business Guide Estonia Preface Business Guide Estonia is intended as a preliminary exploration of the questions that typically arise when a com- pany wishes to enter the Estonian market. The guide is not intended to cover all issues arising in relation to activities in Estonia. However, we hope that it will provide an overview of typical issues. This publication has been prepared for general guidance or matters of interest only and does not constitute pro- fessional advice. Danske Bank A/S, including Danske Bank A/S Estonia branch, does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. The guide will be featured on the following website, which will be updated regularly: www.danskebank.com. Danske Bank A/S Danske Bank A/S (Danske Bank) is the largest bank in Denmark and a leading player in the Scandinavian finan- cial markets. The Danske Bank Group, which includes Danske Bank, Realkredit Danmark, Danica Pension and a number of subsidiaries, offers a wide range of financial services, including insurance, mortgage finance, asset management, brokerage, real estate and leasing services. In Denmark, Norway, Sweden, Finland, Northern Ireland, the Republic of Ireland, Estonia, Latvia, Lithuania and Russia, the group serves 5 million retail customers and a significant part of the corporate, public and institutional sectors. It also has a large number of international corporate clients, particularly in the northern European markets. Some 2.3 million customers use the bank's online services. Danske Bank also has branches in London, Hamburg and Warsaw. Moreover, a subsidiary in Luxembourg. For more information go to www.danskebank.com. Contents 1 Facts about Estonia 7 2.5.3.2 Change of ownership 20 2.5.3.3 Form of Agreements 20 1.1 Estonian economy and politics 7 2.5.3.4 Language Requirements 20 1.1.1 Prospects for the Estonian economy 7 2.5.3.5 Due Diligence 20 1.1.2 Facts 7 2.5.3.6 Pre-emption Rights 20 1.1.2.1 Politics 7 2.5.3.7 Typical Purchase Price Arrangements 20 1.1.2.2 Economic indicators and demographics 7 2.5.3.8 Related Costs 20 2.5.4 Restrictions 21 2 Legal aspects of doing business in Estonia 9 2.5.4.1 Restrictions on Acquiring Real Estate 21 2.5.4.2 Public Restrictions on the Use of Real Estate 21 2.1 Legal Environment 9 2.5.5 Encumbrances 21 2.1.1 State Structure 9 2.5.5.1 Mortgage 21 2.1.2 Courts. Arbitration Courts 9 2.5.6 Property Management 21 2.2 Corporate Law 9 2.5.7 Lease Agreements 21 2.2.1 Forms of Companies 9 2.5.7.1 General 21 2.2.2 Foundation of a Limited Liability Company 10 2.5.7.2 Duration and Expiry of Lease Agreement 22 2.2.3 Public and Private Limited Liability 2.5.7.3 Lease Payment and Accessory Expenses 22 Companies –A Short Comparison 11 2.5.8 Planning Requirements and Construction 2.2.4 Share Capital and Shares 12 of Buildings 22 2.2.5 Management of the company 12 2.5.8.1 Planning 22 2.2.5.1 Management Board 12 2.5.8.2 Construction 22 2.2.5.2 Supervisory Board 13 2.6 Employment Law 22 2.2.5.3 Meeting of Shareholders. General Meeting 13 2.6.1 General 22 2.2.6 Public and Private Limited Liability Companies 13 2.6.2 Employment Contract 22 2.2.7 Branch Office of Foreign Company 13 2.6.3 Hiring 22 2.2.8 The Commercial Register. Notaries Public 13 2.6.4 Terms of employment contract 22 2.3 Mergers and Acquisitions 14 2.6.5 Salary 23 2.3.1 Introduction 14 2.6.6 Minimum salary 23 2.3.2. Types of Acquisitions 14 2.6.7 Salary Payments 23 2.3.3 Acquisition of Shares 14 2.6.8 Overtime Pay 23 2.3.3.1 General 14 2.7 Working time and vacation 23 2.3.3.2 Form 14 2.7.1 Working time 23 2.3.3.3 Transfer of Title 15 2.7.2 Regular vacation 23 2.3.3.4 Pre-emptive Rights 15 2.7.3 Pregnancy Leave/Paternal Leave 23 2.3.4 Acquisition of Assets 15 2.8 Termination of employment contract 23 2.3.4.1 General 15 2.8.1 Advance notice 23 2.3.4.2 Form 16 2.8.2 Severance Pay 24 2.3.4.3 Transfer of Title 16 2.9 Visa and Work Permit 24 2.3.4.4 Transfer of Liabilities 16 2.9.1 Visas 24 2.3.5. Comparison of Share and Asset Acquisition 17 2.9.2 Types of visas 24 2.4 Competition Law 18 2.9.3 Employment 24 2.4.1 General Principles of Competition Law 18 2.9.4 Residence and work permits 24 2.4.2 Applicability of EC Competition Rules 18 2.9.5 General requirements regarding 2.4.3 Prohibited Agreements 18 residence permits 24 2.4.3.1 Exemptions 18 2.9.5.1 Types of residence permits 25 2.4.3.2 De Minimis Rule 19 2.9.6 Work permits 25 2.4.3.3 Hardcore Restrictions 19 2.4.4 Concentration Control 19 2.4.4.1 Threshold 19 3. Taxation in Estonia 27 2.4.4.2 Notification 19 2.4.4.3 Joint Ventures 19 3.1 Corporate taxes 27 2.5 Real Estate 19 3.1.1. Significant developments 27 2.5.1 Introduction 19 3.1.2 Taxes on corporate income 27 2.5.2 Title to Real Estate, Land Register 19 3.1.3 Corporate residence 27 2.5.3 Acquisition of Real Estate 20 3.1.4 Branch income 27 2.5.3.1 General 20 3.1.5 Group taxation 27 3.1.6 Tax returns 28 3.1.7 Payment of tax 28 3.1.8 Withholding taxes 28 3.2 Individual Taxes 29 3.2.1 Territoriality and residence 29 3.2.2 Gross income 29 3.2.2.1 Gross income and exclusions 29 3.2.2.2 Employment income 29 3.2.2.3 Capital gains and investment income 29 3.2.3 Tax rates 30 3.3 Value Added Tax 30 3.3.1 VAT 30 3.4 Duties 30 3.4.1. Customs duties 30 4 Banking Environment 33 4.1 Overview 33 4.1.1 Bank of Estonia 33 4.2 Sampo Pank 33 4.3 Legal & Regulatory Issues 33 4.3.1 Introduction 33 4.3.2 Resident and Non-Resident Status 34 4.3.3 Account Ownership 34 4.3.4 Cash Pooling Regulations 34 4.3.6 Bank of Estonia Reporting Requirements 34 4.3.7 Money Laundering 34 4.3.8 Regulations Applicable for Electronic Transactions 34 4.4 Payments & Collections Methods & Instruments 34 4.4.1 Introduction 34 4.4.2 Card Payments 34 4.4.3 Credit Transfers 35 4.4.4 Direct Debits 35 4.4.5 Cheques 35 4.5 Electronic Banking 35 4.5.1 Introduction 35 4.5.3 EDIFACT / Host-to-Host Solutions 35 4.5.4 E-payments and E-invoice / EBPP 35 4.6 Cash Pooling Solutions 35 4.6.1 Introduction 35 4.6.2 Notional Pooling 36 4.6.3 Cash Concentration 36 4.6.4 Multicurrency and Cross Border Pooling 36 5 Useful Links – Estonia 38 Danske Bank 39 General Information 39 Facts about Estonia 6 1 Facts about Estonia 1.1 Estonian economy and politics is centre-left, claiming its goal is the formation of a Estonia formally regained independence in August strong middle class in Estonia. 1991, and, since then, accelerated growth and eco- Union of Pro Patria and Res Publica (19% of votes in nomic reforms have followed. Estonia joined the EU the parliament): Constituted by two conservative par- in May 2004 and was included in the ERM II in June ties, Pro Patria Union and Res Publica. 2004. Estonia became a member of the Euro zone on The Social Democratic Party (10% of votes in the January 1st, 2011. parliament): A centre-left, pro-European and fairly reformist party. 1.1.1 Prospects for the Estonian economy Estonian Greens (6% of votes in the parliament): As in the other Baltic States, the strong growth per- Based on green politics, but is fiscally conservative. formance has changed to deep recession. The current People’s Union of Estonia (6% of votes in the parlia- developments show some signs of recovery stem- ment): Left-wing populist party, representing people in ming from the positive impulse from external demand. the rural areas of Estonia. However, a sustainable recovery in domestic demand is still far off as fiscal stimulus will remain tricky in the Bank of Estonia medium term. The main growth driver will be external The Bank of Estonia (Eesti Pank) is an independent demand and, in a more favourable global outlook, we central bank. Its main function is to ensure price sta- might see a more positive GDP outcome next year. bility in Estonia. 1.1.2 Facts International relations A member of the UN, EU, BIS, NATO and the OSCE, 1.1.2.1 Politics among other organisations. Official name Republic of Estonia/Eesti Vabariik 1.1.2.2 Economic indicators and demographics Population 1.34 million (2010) Form of government Parliamentary democracy Religion Unaffiliated 34%, Evangelical Lutheran 14%, Orthodox Parliament 13%; Methodist, Roman Catholic and others 39%.