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Estonia


Estonia

HISTORY AND POLITICAL STRUCTURE

Estonia is located in Eastern Europe, and has a land area of 45,000 sq km. The country borders the Baltic Sea and the Gulf of Finland, between Latvia to the south and Russia to the east. The population is around 1.3m. The official language is Estonian.

The President is usually elected for a five-year term, although a second term is permitted. Since October 2006, the role has been occupied by Toomas Ilves.

Estonia’s five major cargo ports - and Tallinn especially - are key players in trade in the Baltic Sea region, and in trade between Russia and Western Europe. Business sectors in Estonia include engineering, electronics, wood products, textiles, information technology and telecommunications.

Before the Second World War Estonia’s economy was based on agriculture, but there was a significant academic sector (with Tartu known for scientific contributions) and growing industrial sector, similar to Finland. Products such as butter, milk and cheese were widely known on the western European markets. The Main markets were Germany and United Kingdom, and only 3% of all commerce was with the neighbouring USSR. The USSR’s forcible annexation of Estonia in 1940 and the ensuing Nazi destruction during World War II crippled the Estonian economy. Post-war Sovietization of life continued with the integration of Estonia’s economy and industry into the USSR’s centrally planned structure. Estonia and Finland had about the same GDP per capita before Estonia became a socialist economy. By 1987, the capitalist Finland’s GDP per capita was 14,370 USD and the socialist Estonia’s GDP per capita was around 2,000 USD. After Estonia moved away from socialism in the late 1980s and became an independent capitalist economy in 1991, Estonia emerged as a pioneer in the global economy. In 1994, Estonia became one of the first countries in the world to adopt a flat tax, with a uniform rate of 26% regardless of personal income. In January 2005 the personal income tax rate was reduced to 24%. A subsequent reduction to 23% followed in January 2006. In 2007 the tax rate was lowered to 22% and in 2008 to 21%. The rate was frozen in 2009. Estonia received more foreign investment per capita in the second half of the 1990s than any other country in Central and Eastern Europe. Estonia has been fast catching up with the EU-27, having grown GDP per capita from 34.8% of the EU-27 average in 1996 to 65% in 2007, similar to Central Europe. Estonia is already rated a high income country by the World Bank. The Estonian economic miracle has been termed a Baltic Tiger.

Estonia is ranked 12th of 162 countries in the Index of Economic Freedom 2008, the best of any former communist country. Estonia is ranked last in Europe by the labour market freedom, but the government is drafting improvements. Estonia is 24th on the Ease of Doing Business Index 2010 by World Bank Group. The Government of Estonia finalized the design of Estonian euro coins in late 2004, and adopted the euro as the country’s currency on 1 January 2011, later than planned due to continued high inflation. The Estonian kroon is pegged to the Euro at a rate of 1 EUR = 15.64664 EEK.

Tallinn has emerged as a financial center. According to Invest in Estonia, the advantages of Estonian financial sector are low taxes, unbureaucratic cooperation between companies and authorities, and an educated population. The largest banks are Hansabank, SEB, Nordea, and Sampo Bank. Several IPOs have been made recently on the Tallinn Stock Exchange, a member OMX system. Estonia is ranked 21st of 121 countries in the Capital Access Index 2005 by the Milken Institute, outperforming Austria and Italy among others. The rent levels of new office spaces in Tallinn starts at 15 euros per square meter or 2000 euro sale price, with demand exceeding supply.

The Estonian service sector employs over 60% of the workforce. Estonia has a strong information technology (IT) sector, partly due to the Tiigrihόpe project undertaken in mid 1990s, and has been mentioned as the most “wired” and advanced country in Europe in the terms of e-government.

Estonia has around 600,000 employees. Estonian productivity is growing fast, and consequently wages are rising fast, with an around 8% rise in private consumption in 2005. According to the Estonian Institute of Economic Research, the largest contributors to GDP growth in 2005 were processing industry, financial intermediation, retailing and wholesale trade, transport and communications. Estonia has a shortage of skilled labor and, since skill shortages are experienced everywhere in Europe, the government has increased the working visa quota for non-EEA citizens, although this measure is still criticized for being inadequate to address the skill shortage challenges.

The GDP per head in 2009 was estimated at USD18,500, a steep decline on 2008 figures of USD21,400. Unemployment in 2009 more than doubled to 13.8% up from 5.7% in 2008. The currency is the Kroon (EEK), which is pegged to the Euro at EUR1 = EEK15.64664.

The corporate income tax rate is 21% on gross distributed profits and 21/79 on net dividends; this will reduce to 18% (18/82) by 2012. There is no corporate income tax on undistributed profits. Companies operating in the three Free Zones at Muuga Harbour (part of the Port of Tallinn), Sillamδe Port and Valga can benefit from tax and customs duty exemptions on goods imported, processed within those zones, and then exported from Estonia. Businesses can also benefit from a number of start-up and development grants available through Enterprise Estonia in conjunction with funding available through the EU.

ECONOMY

As with many economies throughout the world, Estonia has been affected by the global financial crisis, and in mid2008 the economy fell into recession, with previously strong GDP growth declining; this decline continued in 2009 and GDP was estimated at USD24bn, down from an estimated USD27.41bn in 2008 and down from USD28.99bn in 2007. GDP per head in 2009 was estimated at USD18,500, a steep decline on 2008 figures of USD21,400. Unemployment in 2009 more than doubled to 13.8% up from 5.7% in 2008.

By sector, agriculture represented (in 2009) 2.8% of GDP, industry 23%, and services 74.5%. Key sectors include engineering, electronics, wood products, textiles, information technology and telecommunications.

The currency is the Kroon (EEK), which is pegged to the Euro at EUR1 = EEK15.64664. The government plans to adopt the Euro on 1, January 2011.

On 14 September 2003, following negotiations that began in 1998, the citizens of Estonia were asked in a referendum whether or not they wished to join the European Union. With 64% of the electorate turning out the referendum passed with a 66.83% margin in favor, 33.17% against. Accession to the EU took place on 1 May of the following year.

In its first European Parliament elections in 2004, Estonia elected 3 MEPs for the Social Democratic Party (PES), while the governing Res Publica Party and the People’s Union polled poorly, not being able to gain any of the other 3 MEPs posts. The voter turnout in Estonia was one of the lowest of all member countries at only 26.8%. A similar trend was visible in most of the new member states that joined the EU in 2004.

The European Parliament election of 2009 in Estonia scored a 43.9% turnout - about 17.1% higher than during the previous election, and slightly above the European average of 42.94%. Six seats were up for the taking in this election: two of them were won by the Estonian Centre Party. The Estonian Reform Party, the Union of Pro Patria and Res Publica, the Social Democratic Party and an independent candidate Indrek Tarand (who gathered the support of 102,460 voters, only 1,046 votes less than the winner of the election) all won one seat each. The success of independent candidates has been attributed both to general disillusionment with major parties and the use of closed lists which rendered voters incapable of casting a vote for specific candidates in party lists.

On 1st January 2011 Estonia adopted the Euro. The enlargement of the eurozone, although limited, was hailed as a good sign in a period of global financial crisis and instability of the euro. To cope with the crisis and its financial targets, the government cut public service salaries; the only opposition, in the absence of organised unions, came from Estonian teachers, whose salary cuts were therefore limited.

Estonian euro coins entered circulation on 1 January 2011. Estonia is the fifth of ten states that joined the EU in 2004, and the first ex-Soviet republic, to join the eurozone. Of the ten new member states, Estonia was the first to unveil its design. It originally planned to adopt the euro on 1 January 2007; however, it did not formally apply when Slovenia did, and officially changed its target date to 1 January 2008, and later, to 1 January 2011. On 12 May 2010 the European Commission announced that Estonia had met all criteria to join the eurozone. On 8 June 2010, the EU finance ministers agreed that Estonia would be able to join the euro on 1 January 2011. On 13 July 2010, Estonia received the final approval from the ECOFIN to adopt the euro as from 1 January 2011. On the same date the exchange rate at which the kroon would be exchanged for the euro (€1 = 15.6466 krooni) was also announced. On 20 July 2010, mass production of Estonian euro coins began in the mint of Finland.

Being a member of the eurozone, NATO and the EU, Estonia is the most integrated into Western European organizations of all Nordic states

WHY CHOOSE ESTONIA WHEN STARTING A BUSINESS?

The fact that there is no corporate income tax on undistributed profits is an incentive for new businesses to reinvest. Start-up and development grants are available through Enterprise Estonia in conjunction with funding available through the EU. Grants of up to EEK100,000 (EUR15,600) are available and the business must contribute 20% of the total investment. For larger businesses (e.g. with more potential in the export market), grants of up to EEK500,000 (EUR32,050) are available, with the business contribution set at 35% (down from 50% previously). A decision will generally be made within 10 to 20 days, depending on whether the grant applied for is a start-up or development funding. For the former, the grant is available for businesses less than 12 months old: for the latter, the grant is available for businesses that have been active for up to 36 months.

Training vouchers of up to EEK15,000 (EUR960) per head are available for small businesses.

The Estonian government, under the auspices of the Estonian Tax & Customs Board, has established three Free Zones at Muuga Harbour (part of the Port of Tallinn), Sillamδe Port and Valga, which are regarded as being outside the remit of the Customs area for purposes of import and export duties. VAT and excise duties do not have to be paid on goods brought in for later re-export.

Investment in the telecoms sector facilitated by joint business ventures has boosted telecommunications infrastructure and coverage in Estonia, although the sector has traditionally been dominated by four operators: EMT (owned by Eesti Telekom), Elisa, Tele2 and Bravocom. In terms of fixed line telephony, in 2009 there were estimated to be 492,800 lines in use, and in terms of mobile telephones, approximately 2.72m were in use in the same year. 

Internet penetration is good in Estonia, with schools and libraries able to readily access the Internet, and a largely
online-savvy population; approximately 880,100 Internet users were counted in the country in 2008.
According to EU estimates, more than half of households in Estonia have cable television; this market is dominated by
the providers STV and Starman. The switchover date from analogue to digital terrestrial TV in Estonia has been brought
forward to June 2010 (it was February 2012 previously), with several free channels launched in 2008 in order to attract
subscribers.

Eesti Pank, or the Bank of Estonia, is the country’s central bank, and is responsible for monetary policy and for issuing the Estonian currency. Foreign-owned banks play a key role in the banking system in Estonia, with Swedbank-owned Hansabank dominating, and SEB Eesti άhispank (owned by the Swedish SEB group) following behind. Nordea and Sampo (Danske Bank) are also major players in the banking sector. Other smaller operators include Krediidipank, DnBNord, Handelsbanken, Δripank, and Balti Investeeringute Grupi Pank.

Advantages of the Jurisdiction of Estonia

The following are the advantages of starting a Business in Estonia:

  • Low cost of the procedure in comparison with other European countries and moderate tax policy.
  • Estonia is opened to businessmen from other countries, their investments into the home country economy are welcomed.
  • In Estonia foreign physical and juridical persons can register a joint stock company or a restricted liability company.
  • If you buy an Estonian company and become a trustee with the signature authorization then you are able to open a bank account not only in Estonian banks but also in the banks of any country.
  • Foreign founders of an Estonian company can easily acquire movable and immovable property. There is an obvious advantage in of obtaining the residence permit through the Estonian company registration.
  • In view of the fact that Estonia levies corporative tax only on appropriated profit and doesn’t deduct taxes from dividends paid off abroad, where the shareholder-non-resident is a company holding no less than 25% shares, and in view of the expansion of the network of the agreements in the taxation sphere; Estonia became a jurisdiction of special interest for holding companies.
  • The dividends shared by the Estonian home-companies in Latvia and Lithuania are totally exempt from tax deduction.
  • Interest payments of the Lithuanian companies in favour of the Estonian companies are also released from the tax by a deduction.
  • Estonian companies can be used profitably in commerce in the sphere of transfer pricing and in cases when direct trade with offshore juridical persons is limited.
  • Free Zones come under the control of the Estonian Tax & Customs Board. The exemption from excise duties and VAT in Free Zones is legislated by the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act (effective April 1, 2003).

Placing an order for the formation of a company

The Incorporation of Estonian off-shore companies is governed by the Commercial and Company Law. The formation of an Estonian International Business Company can take place by using an order form which can be provided by the Registry Agent.

You can also buy a ready-made company from the list available. A ready-made company normally has an open configuration (its directors are not yet appointed and the shares are not yet issued). Therefore the final configuration of a shelf company is made at a later stage.

In additions you are not obliged to prepare or file any financial accounts but it is    recommended by practice to prepare or file them in your office.

The Registry Agent will check the name availability of the company (whether there is no company under such name already). In Estonia the law requires that all financial service providers know the identity of their client so the actual contact details must be indicated at the Registry Agent.   This information remains confidential.

Requirements for the Registration of a Public and Public Limited Company

  • Director: Minimum of one Director. Corporations are permitted.
  • Secretary: A secretary is not required.
  • Shareholder: Minimum of one shareholder. Corporations are permitted.
  • Shareholders and Directors may be the same.
  • Shares & Capital: In Estonia, a private limited company must have at least 40,000 EEK worth of company shares, with a minimum nominal value of 100 EEK, but they must be held at the registered office. A public limited company  has a minimum of 400,000 EEK with a minimum par value of 10 EEK per share.
  • Name of the Company: Must end with one of the following suffixes: Limited or Ltd, Corporation or Corp, Incorporated or Inc, Societe Anonyme or S.A., Sociedad Anonima or S.A., Besioten Vennootshcap or B.V, Gesellschaft mit Beschrankter Haftung or Gmbh, Naamloze Vennootschap or NV.
  • Company must have a registered office and a registered agent in Estonia.
  • At least half the members of the Board of Management must be resident in Estonia.
  • Audit accounts are required.

Documents required registering the company:

  • Notarized copy of your Passport.
  • Notarized Copy of utility bill for address verification less than 3 months old
  • Application documents.

When all the details are confirmed and the payment for the relevant fees received, the Registry Agent will prepare the Memorandum and the Article of Association of the new Company. These will be filed with the Registry of Companies in Estonia. There is no need to sign any statutory info, the initial company formation documents are prepared and signed on your behalf by the Registered Agent always under the procedures set by the Estonian Commercial and Company Law. The Registered agent will file the corporate documents of the company, will pay the applicable registration fees and arrange for the documents to be submitted to the Estonia Registrar of companies for registration. All the relevant documents will be kept in the Registered Agents office.

Corporate documents of a Public and Public Limited Company

  • Original certification of incorporation of IBC
  • Memorandum and article of Association
  • First minutes and Corporate Resolutions containing the appointment of directors, allocation of shares, share certificates, copies of the Registry of Directors and the Registry of shareholders need them.
  • Share transfer forms, trust declarations, appointments of representative (power of attorney) and the Corporate  Seal.
  • Estonia’s five major cargo ports - and Tallinn especially - are key players in trade in the Baltic Sea region, and in trade between Russia and Western Europe. Exports in 2009 totaled around USD9.08bn, and imports totaled around USD9.78bn in the same year. There are two Free Zone ports:
  • Muuga Harbour (part of the Port of Tallinn) offers simplified customs procedures and easy transfer of ownership rights. Value-added operations are permitted to foster the development of distribution centres. There is no import  VAT on goods in transit, i.e. temporarily imported to be processed and then exported from Estonia.
  • Sillamδe Port offers tax and duties exemption, as well as corporate income tax exemption on retained profits, for value-added distribution and manufacturing in the region.

Investment in the telecoms sector facilitated by joint business ventures has boosted telecommunications infrastructure and coverage in Estonia, although the sector has traditionally been dominated by four operators: EMT (owned by Eesti Telekom), Elisa, Tele2 and Bravocom. In terms of fixed line telephony, in 2009 there were estimated to be 492,800 lines in use, and in terms of mobile telephones, approximately 2.72m were in use in the same year.

Internet penetration is good in Estonia, with schools and libraries able to readily access the Internet, and a largely online-savvy population; approximately 880,100 Internet users were counted in the country in 2008.

According to EU estimates, more than half of households in Estonia have cable television; this market is dominated by the providers STV and Starman. The switchover date from analogue to digital terrestrial TV in Estonia has been brought forward to June 2010 (it was February 2012 previously), with several free channels launched in 2008 in order to attract subscribers.

The corporate income tax rate is 21% on gross distributed profits and 21/79 on net dividends; this will be reduced to 18% (18/82) by 2012. There is no corporate income tax on undistributed profits. Companies operating in the three Free Zones at Muuga Harbour (part of the Port of Tallinn), Sillamδe Port and Valga can benefit from tax and customs duty exemptions on goods imported, processed within those zones, and then exported from Estonia. Businesses can also benefit from a number of start-up and development grants available through Enterprise Estonia in conjunction with funding available through the EU. 

GENERAL OVERVIEW

Location

North Eastern Baltic.

Time zone

GMT + 2 hours during British Summer Time; GMT +3 hours remainder of the year.

Population

1.324.000.

Capital

Tallin.

Airport(s)

Tallin Ulemiste.

Language

Estonian, Russian, Swedish, Latvian, Finnish.

Currency

Estonian Kroon. Euro as of 2011.

Political system

Parliamentary Republic.

International dialling code

+372.

Legal system

Based on civil law.

Centre’s expertise

Industry, agriculture.

TAX

Personal income tax

21%.

Corporate income tax

no tax on undistributed profits, 21/79 on distributed profits and dividend.

Exchange restrictions

None.

Tax treaties

Yes.

SHARE CAPITAL

Permitted currencies

EEK.

Minimum authorised capital

400,000 EEK - AS, 40,000 EEK - OU.

Minimum share issue

1.

TYPE OF ENTITY

Shelf companies

AS. OU.

Timescale for new entities

3-4 weeks.

Incorporation fees

€1200 - OU, €1700 - AS (nominees not included).

Annual fees

Varies.

DIRECTORS

Minimum number

3.

Residency requirements

Some EU residency requirements exists for the management board membership.

Corporate directors

Allowed.

Meetings/frequency

Yearly.

SHAREHOLDERS

Disclosure

Varies.

Bearer shares

No.

Minimum number

1.

Public share registry

Exists for AS.

Meetings / frequency

Yearly.

ACCOUNTS

Annual return

Required.

Audit requirements

For AS and for OU with over 400,000 EEK capital.

OTHER

Registered office

50€ / month.

Domicile issues

Company naming restrictions

Yes

Excellence

We pursue excellence in everything we do