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 Population: 2.06 million GDP (2011): $26.141 billion

Lithuania Population: 3.2 million 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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