Doing Business in Estonia

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Felix Hunt
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1 SIMPLIFYING MATTERS Doing Business in Estonia 13 October 2016

2 Estonia as a Location EU free movement of: goods services capital people In Euro zone since 2011 Company residence determined according to the place of establishment

3 Business and Financial Services Sustainable, high-quality, competitive costs and low risk solutions for BPO, IT and financial services shared service centres, customer and technical support centres Estonia is the emerging Nordic location and an excellent gateway between Northern, Western and Eastern Europe and Russia 55% of the workforce are fluent in one or more foreign languages Top language skills: Russian, English, Finnish, German, Swedish Latent talent pool of 14,000 technical IT professionals and 32,000 financial services professionals Examples of companies having a shared service centre or a BPO in Estonia: Statoil, AGA (Linde Group), Stora Enso, Transcom, Arvato (Bertelsmann) 02/11/2016 The Baltic Sea Region Law Firm 3

4 Company Establishment and Licencing Main forms of business entities: Public Limited Liability Company (AS): minimum capital of EUR 25,000; Private Limited Liability Company (OÜ): minimum capital of EUR 2,500. Company registration typically takes several days (preparation, collection, notarisation of documents, opening a bank account) Also possible to register an OÜ in a few hours with an ID card Most financial and insurance activities subject to licencing Open Commercial Register, public Annual Accounts 02/11/2016 The Baltic Sea Region Law Firm 4

5 E-Residency Digitally sign documents and contracts Verify authenticity of signed documents Encrypt and transmit documents securely Establish a company online, administer the company from anywhere in the world. Conduct e-banking and remote money transfers, access online payment service providers File taxes online

6 Taxation Unique CIT system, where CIT obligation is deferred (indefinitely) until the moment of profit distribution. Estonian participation exemption applies to most dividends from foreign subsidiaries. Business related, arm s length expenses such as loan interest, service payments, etc. are not subject to CIT Transfer pricing regulation mainly follows the OECD guidelines No thin capitalisation rules VAT regulation in Estonia is mostly in accordance with Directive 2006/112/EC Standard VAT rate is 20% 56 Double Tax Treaties, 8 more in the pipeline

7 Taxable Non-Resident Income Employment and management income Business income Income from sale of immovable, capital gain on sale of shares in a real estate company and income from sale of a registered movable Income from rent of immovable and registered movable located in EST Royalties Interest substantially in excess of market value Liquidation proceeds

8 Offshore Issues Less than 1/3 of effective tax on Estonian resident natural person s business income Not considered offshore: over 50% income from economic activity, exchange of information btw tax authorities. Service provided to Estonian resident taxed in Estonia (as well as most other payments) No free flow of dividend received from offshore

9 Estonia as a Holding Company Location Redistribution of profit: dividends from foreign subsidiaries can pass through without taxation in Estonia Capital gains earned by holding company are not separately taxed Lending is non-taxable as long as it is arm s length and compatible with business logic Outbound arm s length interest is not subject to CIT No withholding tax on licence fees paid to EU countries or Switzerland provided that the 25% participation rule is fulfilled Income derived from services rendered is not subject to CIT VAT is fully deductible provided that the holding company generates taxable supply

10 Estonia as a Group Treasury or Trading Company Location Lending is made simple by the fact that Estonia is in the euro zone and there are no thin capitalisation rules Inbound interest is tax neutral, irrespective of source or rate Arm s length outbound loan interest is not subject to CIT 20% CIT payable on dividend distribution may be decreased by the amount of tax withheld in another country from income (e.g. interest income) There is no withholding tax on licence fees paid to EU countries or Switzerland provided that the 25% participation rule is fulfilled Service payments are generally not subject to CIT As a rule, financial services are exempt from VAT

11 Estonia as a Property SPV Location Income tax on capital gains: Share deals: generally, capital gains derived by non-resident from the sale of shares of an Estonian company are not taxable in Estonia, except gain from sales of shares in real estate company Asset deals: capital gains derived by Estonian company are not separately taxed Business-related, arm s length expenses such as loan interest, service payments, etc., are not subject to CIT There is no withholding tax on licence fees paid to EU countries or Switzerland provided that the 25% participation rule is fulfilled Recovery of VAT on services received presupposes that the services are used for the purpose of generating taxable supply. Sale of new building is subject to VAT. Sale of plots of land and used buildings, rent and lease of immovable and financial services are mostly VAT exempt, and thus input VAT deduction is often limited. But there is option to tax transactions with immovable and financial services.

12 Tax Rates 20% corporate income tax on distributed profit (calculated as20/80 of the net amount) 20% personal income tax (flat rate) 20% value added tax (reduced rate of VAT is 9%) 32,5% social tax (paid by employer) 2,4% unemployment insurance premium(0,8% paid by employer, 1,6% paid by employee) 2% mandatory funded pension payment (paid by employee)

13 Advantages and Challenges Simple flat rate system No taxation of undistributed profits No taxation of flow-through dividends No WHT on dividends, interests and royalties* No exit taxes No thin capitalisation and CFC rules Efficient compliance (cheap, quick, easy) Growing treaty network Low taxation of property Secure and modern banking facilities and e-governance Cooperative and accessible authorities Effective tax rate higher than in neighbouring countries No double tax treaty with Russia High employment taxes (ca 70% on top of net salary) Young legal system and insufficient court practice Lack of tax incentives for R&D companies or start-ups

14 Conclusion Very favourable jurisdiction for companies and groups oriented to growth and investments Thus, the system generally prefers long-term strategic investments rather than short-term financial investments For significant transactions and/or structural changes, it is highly recommendable to consult with a legal adviser

15 Elvira Tulvik T: M: /11/2016 The Baltic Sea Region Law Firm 15

G E N C S V A L T E R S L A W F I R M B A L T I C T A X C A R D 2 0 1 5

G E N C S V A L T E R S L A W F I R M B A L T I C T A X C A R D 2 0 1 5 CORPORATE INCOME TAX IN BALTICS Corporate Income Tax Rates in Baltics Country Standard rate Decreased rate Transfer of loses to next periods Latvia 15% 11% microenterprises Unlimited Lithuania 15% Estonia