Urmas Ustav. Doing Business in Eestonia 07.06.2013

The Baltic Law Firm / www.LEXTAL.eu
Law Firm LEXTAL
Tallinn-Riga-Vilnius
DOING BUSINESS IN ESTONIA
June 2013
Attorney at Law / Partner
Urmas Ustav

Estonia
Population: 1.34 million
GDP (2011): $20.325 billion
Latvia
GDP (2011): $26.141 billion
Lithuania
GDP (2011): $40.333 billion

THE BALTIC LAW FIRM
Law Firm LEXTAL
• 3 Baltic jurisdictions – Estonia, Latvia, Lithuania
• ~30 lawyers and 12 working languages
• Provides full scale of services in all main practice areas
• Acts as one-stop-shop for clients in any Baltic country,
but also in former Soviet Union (local experts involved)
• Employs uniform procedures to guarantee the same
service standards across the Baltics

THE MAIN TOPICS OF THE
PRESENTATION
• Benefits at a Glance
• Real Property
• Corporate / Establishment
• Tax Regime
• Labour Regime
• “Bewares”
• View of a Foreigner

BENEFITS AT A GLANCE

Benefits at a Glance (1/2)
• Legal & economic system harmonised with EU /
Scandinavia in general
• Small & dynamic economy
• Reasonable & entrepreneur-friendly tax system
• Well-developed banking system
• Very sophisticated IT-sector / ability to use IT-solutions
• High level of language skills (including Russian!)
• Understanding of human & business mentality in Russia &
former Soviet Union but also EU & Scandinavia
• Reasonable geographic distances (incl. throughout the
Baltics)
• Dynamic decision-making process
• Ability to “find a way out” and “get things done” – legacy
from old time

Benefits at a Glance (2/2)
• Efficient and transparent (as a rule) arrangements with
state & local governments and institutions; dynamic means
of official communication, signing contracts etc. (e-
registrars, digital signing, e-notary, e-government)
• Ownership structure of property & assets (incl. real estate)
transparent and trustworthy
• Background information of companies easily accessible
• Devoted working mentality
• Not too many public holidays
• Low enthusiasm for strikes etc.
• Low level of corruption (especially in legal system)
• Conclusively – too good to be true (but wait until the last
slide)

REAL PROPERTY

Real Property
• Almost no restrictions for foreign investors to invest in real
property in Estonia, exceptions:
– Forest and agricultural land of 10ha or more (special permission
needed for legal entities if not an agricultural / forestry entrepreneur
registered in the EEU)
– Military protection zones / border area municipalities (not allowed for
foreigners / companies outside of the EEU)
– Other minor restrictions (certain types of land auctions by State etc.)
 Contracts on transfer of title in real property must be
concluded before a notary public;
 Title transfer valid from registration with the Real Estate
Registry
 The usufruct instrument acknowledged and widely used
(comparable to ownership of real property, up to 99 years,
exceptions apply)

CORPORATE / ESTABLISHMENT

Corporate / Establishment (1/3)
• Incorporation Agreement (incl. Articles of Association) certified
by a Public Notary in Estonia, exceptions apply
• Incorporators: natural persons or legal entities, no restrictions
on nationalities
• If incorporated by a foreign company, respective Company’s
Registry extract and Articles of Association (certified &
apostilled)
• Registered office must be in Estonia
• Minimum Share Capital of a limited liability company (OÜ) is
EUR 2,500 and of a public limited company (AS) EUR 25,000
• The share capital may be paid in by monetary or non-
monetary contributions
• General rule: Share Capital must be paid in at the
incorporation (exceptions)

• As a rule, the shareholders are not liable for company’s
obligations (excemptions apply, e.g. liability could apply if
the Share Capital isn’t fully paid in)
• Until full payment of the SC it cannot be increased or
reduced, no payments to shareholders can be done until
the SC is paid in
• Non-resident MB members, Chairman of the Supervisory
Council and shareholders must present their full residential
address and e-mail address to the Commercial Registry

• The Registration Application can be notarized abroad but
must be furnished with an apostille and later translated into
Estonian by a certified translator
• Text of any document to Commercial Registry should be
coordinated with an Estonian counselor in advance (formal
approach by Commercial Registry towards documents)
• Estonian ID-card holders, Finnish, Portuguese and Belgian
ID-card holders and Lithuanian mobile-ID users can
establish companies via Electronic Company Registration
Portal (express registration in 2 days with a standard form
of Incorporation Decision and the AoA (only monetary
share contributions can be used)
• The ordinary incorporation procedure (or registration of
corporate amendments) usually takes approximately 5
business days

TAX REGIME

Tax Regime (1/3)
• General:
– Considered simple and liberal
– Corporate and personal income tax rate 21% (20% as from
2015)
– Corporate taxation at the moment of profit distribution
– 50 tax treaties
• Corporate taxation
– Unique system of corporate earnings taxation - the moment of
corporate taxation is the moment of distribution of profits (no
general corporate income tax)
– Corporate income tax rate is 21/79 on net dividends (i.e. 21%
to gross dividends)
– No further income tax is charged or withhold if Estonian
company pays dividends to its non-resident shareholders

Tax Regime (2/3)
• Taxation of salaries
– Direct taxes are automatically withheld from the salary by the
employer. Direct taxes are income tax (21%), unemployment
insurance tax (2%) and the funded pension payment (2%,
exceptions apply)
– Social tax (33%) is paid by employers, as well as 1% the
employer’s share of the unemployment insurance tax
• Value added tax
– VAT regulation based on the EU VAT Directive
– General VAT rate is 20%, exceptions apply (e.g. books,
medicines etc 9%)
– Registration is required of taxable supply exceeds EUR 16 000
in a calendar year, for a foreign person engaged in business in
Estonia the registration obligation arises as of the first date on
which the taxable supply occurs

Tax Regime (3/3)
• Protection of foreign investments
– any restrictions on the movement of capital as well as
restrictions on the freedom of establishment prohibited,
foreign nationals treated equally as Estonian nationals
as regards participation in the capital of companies
– Bilateral Investment Treaties (BIT) with other states (50
treaties, number increasing)
– substantive protection by most BIT’s: prohibition to
discriminate foreign investors, compensation for any
expropriation of an investment etc.)
– claims for host state violations of the BIT submitted to
the international arbitration

LABOUR REGIME

Labour Regime (1/3)
• Minimum and Average Salary
– Min. hourly salary 1,90€, and min. monthly salary 320€ (full-
time work) – I q 2013
– Average income in 2012 879,5€, I q 2013 900€
– Highest salaries in financial services and insurance sector –
average 1407€, and telecommunication – average 1448€; the
lowest in the other service sectors – average 508€ - IV q 2012
– Unemployment benefits fairly modest and short in time,
therefore the work motivation is high
• Sickness Leave
– Right to receive the sickness benefit from 4th day
– Employer pays 70% of salary as sickness benefit from 4th
to 8th day of sickness, further paid by the health insurance
fund

Labour Regime (2/3)
• Labour Contract
– Fairly up-to-date Employment Contracts Act (2009)
– Labour contract assumingly concluded for an indefinite
period of time
– Normal working time 40/5, 8 hours a day
– Annual paid holiday 28 calendar days
– Initial pregnancy and maternity leave of 140 calendar
days (women only); later either of parents is entitled to
parental leave until the child reaches 3, can be used in
one part or in several parts at any time

Labour Regime (3/3)
• Labour Contract (continued)
– Parties may terminate at any point of time by an
agreement
– Employee may terminate a labour contract with min. 30
calendar days advance notice
– Employer’s grounds for unilateral termination limited
(breach of contract, decrease in capacity for work due to
state of health or decrease of work volume,
reorganisation of work, lay-off etc.)
– Advance notice for extraordinary termination 15 days to
90 days (depends on the length of labour contract)
– In case of lay-off, compensation of 1 month’s salary

BEWARE OF!

Beware of! (1/2)
• Possible lack of skilled specialists
• “Corporate” society – everybody knows everybody
• (Too) liberal insolvency & restructuring legislation
• Remains of puberty-age legal & business culture
• Formal & destructive approach by state & local public institutions
– still possible
• Lack of resources/ability/willingness to deal with white-collar
crimes in business sector

Beware of! (2/2)
• Necessity for profound written legal contracts etc. documents as
opposed to oral, email etc contracts
• Tendency to amend legislation / lack of established court practice
• Human greed – if your cow dies, don’t look for a new cow but try
to achieve the death of the neighbour’s cow as well
• Need for a trustworthy partners / securities in transactions
• Sometimes too quick decision-making process
• Enforcement of former MB members’ / key employees’
competition restrictions and risk of dishonest competition after
termination of the MB / labour contract

VIEW OF A FOREIGNER
thoughts by
Mr Johnny Swedberg
former
Tele2 Executive Vice President
and
Market Area Director
Baltic & Russia

View of a Foreigner (1/5)
Business and JV Experience:
 General climate is business-friendly in all countries, especially
Estonia
 The “wild west” more or less gone post entrance into EU
 Be careful with confidential information, be aware that many
things can be bought and the walls may have ears
 JV cooperation worked very well with clear separation of duties
between the parties - one took care of local relations and the
other business development and day-to-day operations
 JV partners happy campers until exit discussions, then things took
a different turn

Political Experience:
 Usually limited business interests from politicians in all the three
countries, even in highly regulated sectors
 Limited or no political interest in (foreign?) private business investments
and job creation, certain but still relatively low changes post the financial
chrisis in 2008
 Political difference between foreign and domestic (read: government)
owned companies, as in most other markets
 Government and public institutions still often not driven to save cost,
regardless of the official view which is quite the opposite

Cultural Experience:
 Baltic just a name for a region with three totally different
countries; very few, if any, communalities between the 3
countries
 Cultural difference much wider than one might think
 Almost impossible to implement cross boarder undertakings
to create geographical synergies but also to accept HQ
directives (goes both ways – the HQs would hardly copy
anything from Baltic region either)

Cultural Experience (continued):
 Early adaption of technology, e.g. Internet, electronic banking, SMS parking
payment, especially in Estonia
 Very ambitious, hard working people in general with clear performance focus (deliver
or out)
 Fairly easy to find good people in all three countries, although might me difficult to
find good people with commercial and marketing knowledge
 Historically loyalty primarily to its own wallet (especially in Latvia and Lithuania),
accelerated during the financial boom, less significant at present
 The national characteristics are quite different especially Estonia vs Lithuania
 Key for success is to give local management the room to manoeuvre and to take
independent decisions while still make sure the strategy and corporate objectives are
being met

Summary:
 The Baltic region is generally business-friendly but it consists of
three very different countries
 The national pride is more significant than one might be used to
 Takes an effort to create cross-boarder operational and business
synergies. Hence, one should assess the region country by
country
 Not very interested in orders from HQ. Direction objectives Yes,
but orders for how No.
 Key for success is to give local management the room to
manoeuvre and to take independent decisions while still make
sure the strategy and corporate objectives are being met

THANK YOU
FOR YOUR ATTENTION!
The content of the presentation cannot be applied as legal counselling as this
will always be subject to actual and specific knowledge of the client’s situation.

Urmas Ustav. Doing Business in Eestonia 07.06.2013

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Urmas Ustav. Doing Business in Eestonia 07.06.2013