Estonia - a secure environment for investment

Baltic Commercial Law Office

Since regaining independence in 1991, Estonia has become one of the most successful of the former eastern block countries, as regards making the transition to a free market economy. Offering a liberal trade and investment atmosphere, a sound monetary system, and a stable currency pegged to the DM, Estonia's flat tax rates, geographical position and highly skilled, well-educated labour force, have all helped contribute to an unusually high per capita rate of direct and indirect foreign investment.

Ancient economic strengths

Estonia's success in the post-Soviet era reinforces its historical importance as a transit point between East and West. Since 1224, when it was first invaded by Denmark, Estonia's landlords have included Germany, Sweden and Russia. All have sought to control trade through its geographically important local position. Each year the revenue from goods shipped through Estonia to destinations in Russia, Asia, Scandinavia, and Eastern and Western Europe accounted for ten per cent of Estonia's Gross Domestic Product (GDP).

With its convenient geographical location, giving easy access to the rich Northern European markets, and the huge potential markets of Russia and the Commonwealth Institute of States (CIS), Estonia is an excellent base for transit between East and West.

Fast track to the European Union

The signing of free trade and European (associate membership) agreements between Estonia and the European Union (EU) has been particularly significant for companies from outside the EU. Based in Estonia, they now have tariff free access to the entire European customs area - yet with far lower start-up and operating costs than in EU member states. One such company is Singapore's Tolaram Group, which has bought textile and paper mills in Estonia for export production.

Other free trade agreements also give Estonian-based companies unhindered access to significant regional markets - such as the free trade treaty (which now includes agricultural products) with the other Baltic states and the Ukraine, which has a market of 52 million.

Estonia has set 2002 as the year for full membership to the European Community (EC).

Foreign investment

Foreign Direct Investment (FDI) into Estonia is governed by the 1991 Law on Foreign Investments. This legislation allows foreign investors the same rights enjoyed by local businesses. These include the right to buy land, and significantly, unrestricted profit repatriation.

Protection of foreign investments is guaranteed by the State. In addition, Estonia has signed bilateral agreements with many countries to protect and promote foreign investments (it currently has trade agreements with Austria, Belgium, China, the Czech Republic, Denmark, Finland, France, Germany, Israel, Latvia, Lithuania, Luxembourg, Netherlands, Norway, Poland, Sweden, Switzerland, the Ukraine, the United Kingdom and the USA).

From 1996, the total amount of foregone investment in Estonia was close to one billion US dollars. This translates into one of the highest levels of FDI per capita in Central and Eastern Europe. Over 10,200 Estonian firms are wholly or partly based on foreign capital. Forty-three per cent has been invested in manufacturing, 26 per cent in wholesale and retail trade, and 14 per cent in transport and communications. The leading investor countries are Finland (33 per cent), Sweden (22 per cent), USA (eight per cent), Russia (five per cent) and Denmark (four per cent).

No licences are required for carrying out foreign investments in Estonia.

Estonian stock market

Like all emerging markets, the Tallinn Stock Exchange (TSE) has lost much of its value since record highs in the summer of 1997. That the TSE faired better than most is a tribute to Estonia's comparatively mature banking sector. Unlike its Baltic sisters, Latvia and Lithuania, who have suffered debilitating banking crises in the past, Estonia's financial institutions remain strong and well-regulated. The Estonian currency, the kroon, is tied to the DM at a rate of eight to one. This arrangement continues to work well. Devaluing or floating of the kroon is unlikely in the foreseeable future.

Investment taxation

On 1 January 1998 many changes and amendments of Estonian Income Tax Law were enforced. One of the amendments considered Estonia's State regional policy. According to the amendment, the investments made into the machinery equipment, as well as into the buildings of the plant, are considered to be tax free in the area(s) adopted by the Government's resolution.

Non-residents taxation

The Law of Amendments to the Income Tax Law establishes taxation of the dividends expatriated from Estonia and income of non-residents derived in Estonia. Pursuant to the Law, a non-resident has to pay an income tax rate of 26 per cent from the dividends paid to the non-resident.

The Law of Amendments to the Income Tax Law also provides some other new sources of taxable income. Beginning in 1998, the revenue gained as a result of the sale of securities, issued by companies registered in Estonia by non-residents, is considered to be taxable income of a non-resident. The same applies to remuneration paid by a company registered in Estonia to the members of its Management Board and/or Supervisory Council.

The imposition of a 15 per cent tax to the services offered by offshore companies to Estonian companies was initially planned in the Law of Amendments to the Income Tax Law. However, this principle was not adopted by Parliament.

Establishing a company

On 1 September 1995 the Estonian Commercial Code providing the principles of founding and operating different forms of companies was enacted. This legislation brought Estonian commercial laws into full accordance with that of the EU.

The Commercial Code serves the same purpose as the British Company Law, but in its content it is more similar to German business legislation. The Commercial Code provides for six types of businesses (entrepreneurs), five types of business associations, and an individual private entrepreneur.

An individual private entrepreneur is a physical entity engaged in business. They are subject to the regulations applicable to all entrepreneurs, regardless of whether they are registered or not. If the entrepreneur is not registered, they may conduct business only under their personal name. An individual private entrepreneur's liability is unlimited.

1. General partnership (full partnership) is a business association where two or more partners act under a common business name and are responsible for the partnership's liabilities with all of their property. A partner may be a physical or legal entity. The state or local governments may not be partners. A new partner may be accepted only with the consent of all partners.

2. Limited partnership is a business association where two or more persons act under a common business name. At least one of them (full partner) is fully responsible for the partnership's liabilities with all his/her property, and at least one of them (limited partner) is responsible for the partnership's liabilities to the extent of his/her share. The Law forbids the issue of securities for limited shares of a Limited Partnership.

3. Private Limited Liability Company is a business association that has share capital divided into shares. Private Limited Liability Company is responsible for its liabilities with all its property. The minimum required share capital is 40 000 kroons (one DEM = eight Estonian kroon, EEK). To establish a Private Limited Liability Company, the founders must sign the Memorandum of Association, which is valid until the company is registered, adopt the Articles of Association, and nominate the Board of Directors and the members of the Supervisory Council.

4. Joint Stock Company (Corporation) is a business association that has share capital divided into shares. The transfer of shares in Joint Stock Companies is unrestricted. As with the Private Limited Liability Company, the shareholders of the Joint Stock Company are responsible for the Company's liabilities with their share capital. When a share is transferred an agreement is normally drafted, specifying the transfer of title and other material terms and conditions. To exercise shareholder's rights, the person acquiring shares must be registered in the Company's share register as the owner of the shares. The minimum share capital of a Joint Stock Company is ten times larger than that of the Limited Liability Company - 400,000 kroons.

5. Co-operative Association is a business association with three or more members, founded with a goal to support its members' households or activities by the members' joint activities. Co-operative Associations can be consumers' co-operatives; collective industrial undertakings; savings and loan associations; co-operative banks; or insurance associations. The property of a Co-operative Association is formed from its members' investments and other contributions, return from economic activities, subsidies from the state and local governments, and other income.

Travelling to Estonia on business

New visa rules were recently adopted by the Estonian Ministry of Foreign Affairs. According to these rules, a foreigner may choose between seven different types of visas. The principles of a new type of visa - a business visa - were also introduced in these rules. This was based on advice from foreign experts and World Trade Organisation (WTO) documents. It was proposed by foreign advisors, the Estonian Ministry of Economy, and the Foreign Investment Agency, that a US L-1 type business visa model shall be used.

Estonia online

Estonia has embraced the world wide web faster and to a far greater extent than the other Baltic states and much of Eastern Europe.

In 1997 Estonia had the eighth fastest growing online community in the world. According to a leading Baltic telecommunications company, Estonian Internet usage has grown by over 300 per cent each year since 1995. This trend is projected to continue into the next century.

More information on Estonia is available via the Internet at the following addresses:

Top | Estonia