facts for business in estonia

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Guide to doing business

and investing in EstoniaFebruary 2011 Edition

p cw


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1 Guide to doing business and investing in Estonia PwC

Contents

Partner foreword

Office location in Estonia

1. Country Profile and Investment Climate

1.1 Introduction

1.2 Government structure

1.3 Legal system

1.4 People

1.5 Economy

1.6 Foreign trade

1.7 Further reading

2. Business Environment

2.1 Business climate

2.2 Free trade zones

2.3 International agreements

2.4 Legal environment

2.5 Regulations for business

2.6 Property market

3. Foreign Investment and Privatisation

4. Banking, Finance and Insurance

4.1 Banking system

4.2 Foreign currency market and foreign

currencyrules

4.3 Specialised financial institutions

4.4 Investment institutions

4.5 Capital markets

5 Importing and Exporting

5.1 Trends in customs policy

5.2 Importrestrictions

5.3 Customs duties

5.4 Temporary import relief

5.5 Documentation and procedures

5.6Warehousing and storage

5.7 Re-exports

3

4

5

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13

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6. Business entities

6.1 Legal framework

6.2 Choice of entity and business forms

6.3 Private limited company (O) and

public limited company (AS)

6.4 Partnerships and jointventures

6.5 Branches

6.6 Representative offices

6.7 Sole proprietorship

7. Labour relations and social security

7.1 Labour market

7.2 Labour relations

7.3 Working conditions

7.4 Social security system

7.5 Foreign personnel

8. Accounting and audit requirements

8.1 Accounting

8.2 Chart of accounts

8.3 Auditrequirements

9. Tax Systemand Administration

9.1 Tax system

9.2 Directand indirecttax burden

9.3 Principal taxes

9.4 Legislative framework

9.5 Tax treaties

9.6 Tax returns and payments

9.7 Assessments

9.8 Appeals

9.9 Withholding taxes

9.10 Tax audits

9.11 Penalties

9.12 Advance clarifications

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10. Taxation of Corporations

10.1 Corporate tax system

10.2 Incentives

10.3 Taxable income

10.4 Deductibilityof expenses

10.5 Related partytransactions

10.6 Foreign exchange

10.7 Tax computations

10.8 Other taxes

10.9 Branch versus subsidiary

10.10 Holding companies

11. Taxation of Individuals

11.1 Territoriality and residence

11.2 Taxable income

11.3 Non-taxable income

11.4 Deductions

11.5 Taxation of non-residents

11.6 Tax compliance

12. Value Added Tax(VAT)

12.1 Introduction

12.2 Scope of VAT

12.3 Zero-rating

12.4 Exemptsupplies

12.5 Taxable amount

12.6 Non-deductible input VAT

12.7 VAT incentives12.8 Simplification measures

12.9 VAT compliance

31

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37

13. PricewaterhouseCoopers in Estonia

13.1 Assurance Services

13.2 Tax Services

13.3 Advisory Services

Appendixes

Appendix A - Tips for business visitors

Appendix B Tax rates

AppendixC - Withholding taxes

Appendix D- Setting up in Estonia a

checklist

Appendix E - Acquiring a business

enterprise a checklist

Appendix F - Useful sources of

information

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Partner foreword

We welcome the opportunity through this Guide toprovide relevant information for doing business andinvesting in Estonia.

Estonia is a small country located at the heart of theBaltic Sea Region - Europe's fast growing market of morethan 90 million people. Attractive location between Eastand West, an excellentbusiness environment, stablegovernment and liberal economic policy, moderate costs

and the ease of doing business have already attractednumerous international companies to Estonia. Estoniawas ranked 24th out of 183 countries (and 2nd amongst 27countries of Central & Eastern Europe) in the Ease ofDoing Business index by The World Bank Group.

This Guide has been prepared for the assistance of thoseinterested in doing business in Estonia. It does not coverexhaustively the subjects ittreats, butis intended toanswer some of the important, broad questions that mayarise. When specific problems occur in practice, it willoften be necessary to refer to the laws, regulations anddecisions of the country and to obtain appropriate

accounting and legal advice. The material contained inthis Guide reflects the situation as of February 2010.

If you need additional information on doing business inEstonia, please do not hesitate to contact us in our officein Tallinn or through your nearestPricewaterhouseCoopers office.

Ago ViluCountry Managing Partner


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Office location in Estonia

The PricewaterhouseCoopers officein Estonia is locatedat the following address:

Prnumnt1510141 Tallinn

Tel. +372 614 1800Fax. +372 614 1900www.pwc.ee


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1 Country Profile and Investment Climate

Investor considerations:

A small Nordic country, having close economic ties with Scandinavia and Western Europe A favourable geographic location on the Baltic Sea, a region of intense economic activities and growth potential with good access to

Russia, the CEE countries andthe EU region Member of both the EU and NATO starting fromspring 2004 Member ofWTO Estonia will be part of the Euro zone starting from1 J anuary 2011

1.1 IntroductionThe Republic of Estonia is situated in Northern Europe alongthe Baltic Sea. Finland lies to the north of Estonia, across theGulf of Finland. Sweden is the western neighbour across theBaltic Sea. Estonia borders Russia in the east, with St.Petersburg approximately 200 kilometres across the north-eastern border. In the south Estonia borders Latvia. Estoniahas approximately 1.3 million inhabitants.

Tallinn, the capital of Estonia, lies on the Baltic Sea coast, onlyabout 60 kilometres (40 miles) south of Helsinki, across theGulf of Finland. The population of Tallinn is approximately 400thousand. Other bigger cities are Tartu, Narva and Prnu.

The territory of Estonia covers 45 thousand square kilometres(17 thousand square miles). Estonia is a lowland country withaverage elevation of about 50 meters (160 feet) and aconsiderable partof the territory covered with wetlands.

The highest point, Suur Munamgi, is only 318m (1,043 feet)above sea level. More than 1,500 offshore islands make up 9percent of the countrys total territory. The largest of theislands are Saaremaa andHiiumaa. Estonia is a country ofnumerous lakes, the largest of which are Lake Peipsi and LakeVrtsjrv.

Estonia has a temperate maritime climate. The Baltic Sea hasa strong influence on local weather, especially in the coastal

regions. Temperature ranges from-7C (19F) average daily inJ anuary to 17C (63F) average daily in J uly. Total rainfall isbetween 500 and700 millimetres (20 to 28 inches) a year.

There may be permanent snowcover fromDecember to Marchand the sea may be iced over duringthese months.

History

Estonians have been living in this territory since approximately2500 B.C., making them among the longestsettled of theEuropean peoples. Due to Estonia's strategic location as a linkbetween East and West, it has been conquered numeroustimes, and underforeign rule for several centuries.

At the beginning of the 13th

century, Estonia was conquered bythe Teutonic knights whose castles still dotthe countryside. By1285, Tallinn was a member of the Hanseatic League. Duringthe Middle Ages, the Hanseatic League, which combined 70

Baltic Sea cities, formed one of the mostpowerful trading blocs

in the world. The German merchantfamilies, which settledhere, dominated trading activities and successive generationsof Germans builttheir manor houses across the country.

Germans were only the first among successive waves ofconquerors. Danes, Swedes, Poles and Russians all sweptacross Estonia, setting up successive regimes, fortifying theirtowns andcastles, and shipping their goods through Estonianports.

In the late 19th century a powerful Estonian nationalistmovement arose andon February 24, 1918, Estonia declaredits independence fromRussia. The period of independencewas brief and Estonia was forcibly annexed by the SovietUnion in 1940. In 1991, Estonia regained its independence,having managed to break free fromthe Soviet Union withoutany acts of violence. Estonia became a member of NATO on29 March 2004 and joined the European Union on 1 May 2004.

1.2 Government structureThe highest authority of national legislation in Estonia is theConstitution of the Republic of Estonia (Eesti Vabariigiphiseadus). The constitution was adopted by a referendumand came into effecton 29J une 1992, after Estonia hadregained its independence.

Any other legislative acts mustbe in conformity with theConstitution as well as with the generally recognized principlesand rules of international law which are an inseparable partofthe Estonian legal system.

The Parliament

According to the Constitution, Estonia is an independentandsovereign democratic republic wherein the supreme power ofstate is vested in the people. The people exercise theirsupreme power of state through the election of the Estonianparliament (Riigikogu).

Ordinaryelections of the 101 members of the unicameral

Parliament are held every fouryears. All citizens over 18 yearsof age have the right to vote.


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The Parliament is Estonias highest legislative authority and itis vested with the rightto adopt laws.

A distinction is made between ordinary laws which are passedbya simple majority of votes in the Parliament, andconstitutional laws, the adoption and amendmentof whichrequires a vote bythe majority of all members of theParliament.

In addition, the Parliament has the right to ratifyand withdrawfrominternational treaties and decide on governmentloans.

Pursuant to the Constitutionthe Republic of Estonia is not toenter into international treaties which are in conflict with theConstitution.

If laws or other legislation in Estonia are in conflict withinternational treaties ratified by the Parliament, the provisionsof the international treaty shall apply.

The President

The President of the Republic is elected for five years bytheParliament or, underspecific circumstances, by an electoralbody consisting of the members of the Parliament and

representatives of local government. The Presidentof theRepublic of Estonia is the formal head of state and thecommander-in-chief of the Estonian Defence Forces.

The laws passed bythe Parliament are presented to thePresidentof the Republic for proclamation. The President hasa right to veto with respect to the laws passed bytheParliament pursuant to which he/she may return the actto theParliament.

If the Parliament does not thereafter amend the law, thePresident of the Republic can proclaim the law or has the rightto propose that the Supreme Court declare the lawunconstitutional. If the Supreme Court finds that the lawis in

conformity with the Constitution, then the Presidentof theRepublic proclaims the law.

The Government

Under certain conditions otherstate organs may also exerciselegislative power. The Government of the Republic (VabariigiValitsus) andthe ministers carry out the legislative function byusing the rightto pass regulations on the basis of and for theimplementation of laws (so called intra legem regulations).

If the Parliament is unable to convene in a situation ofemergency, the Presidentof the Republic may, in matters ofurgentstate need, issue decrees which have the force of law.

As a member of EU since 1 May 2004, Estonia is bound by EUlaw. The Ministryof J ustice is responsible for the coordinationof the harmonization of Estonian lawand EU law, makingsuggestions about harmonizing Estonian legal acts with EUlegal acts and giving the ministries and other institutions adviceaboutthe EU legal systemand the principles of legislation.

Local Government Councils

Local Government Councils are regional representative andlegislative bodies, elected bythe residents of a ruralmunicipality or city for the period of three years.All permanent residents (including citizens and non-citizens) of

at least18 years of age are eligible to vote. Local executivepower is vested in local governments that resolve local issuesand have local budgets to fulfil their duties.

1.3 Legal systemLike all continental European legal systems, the Estonian legalsystemis founded upon the principle of the priority oflegislative acts as a source of law and their precedence overany othersources, such as judicial practice, doctrine orcustom.

Courts

Estonia has a three-level courtsystem, where:(i) county courts and administrative courts adjudicate

matters in the first instance;(ii) appeals against decisions of courts of first instance

are heard bycourts of second instance and;(iii) the Supreme Court is the court of the highest

instance.

County courts as courts of first instance hear all civil, criminaland misdemeanor matters. The decisions of county courts canbe appealed to the courts of appeal (also calledcircuit courts),beingthe courts of second instance. Administrative courts hearadministrative matters as courts of first instance.

The decisions of county and administrative courts are reviewedbycourts of appeal in the second instance byway of appealproceedings on the basis of an appeal, an appeal against aruling, or a protest.

The Supreme Courtis the courtof the highest instance, whichreviews decisions by way of cassation proceedings, i.e. theparties to the proceedings have the right to appeal to theSupreme Court against the decisions of the courts of appeal. Amatter is accepted for proceedings in the Supreme Courtif thestatements presented in the appeal show an opinion that theappeals court applied incorrectly, or materiallyviolated aprocedural rule that may involve an incorrectjudicial decision.

The Supreme Courtis also the constitutional review court.

1.4 PeopleThe total population of Estonia is around 1.3 million people. Asin other countries in the region, the population growth rate hasbeen verymodest recently. Average life expectancy was 74years in 2008; 69 years for men and 79 years for women. Thepopulation densityis approximately 30 inhabitants per squarekm. Around two-thirds of the population is urban, and one-thirdrural. 69% of the population is of Estonian ethnicity. Thesecond largest ethnic group is Russian, formingapproximately26% of the population. 2% of the population has Ukrainianroots, and Belarussians and Finns each make up

approximately 1% of the population.

The official language is Estonian. More than one million peoplespeak Estonian, which belongs to the Finno-Baltic groupof theFinno-Ugric language family. Estonian is closely related toFinnish (the similarity is comparable to that between Italian andSpanish), while Hungarian is a more distantrelative. Estonianuses the Latin alphabet. As a majority of the Estonian businesscommunity is internationally oriented, English is understoodand spoken fluently by a large number of businesspeople.Furthermore, many Estonians speak Russian and, especiallyin Northern Estonia, Finnish, among other foreign languages.

Overall, most Estonians are not religious. There is a tolerance

toward all religions and in general religious beliefs do not affectbusiness activities in Estonia. Formally, Estonians arepredominantly Lutherans, butreligion does nothave any


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considerable impact on dailylife. There are small RussianOrthodox, Baptist and other communities across the country.Estonia has been reforming its education systemsinceregainingindependence in the beginning of 1990s. The currentsystemconsists of compulsory basic education, followed byupper-secondary education, at either a general high school ora vocational school. The general education process then offershigher education at university or at an applied higher educationinstitution, and the vocational process offers post-secondaryeducation at a technical school. The reformed educationalsystem does, however, provide for movementbetween the

general and vocational processes. Education is mostlyprovided in Estonian, but in some schools Russian is the basiclanguage. State and municipal education establishments aremostly free of charge. There are 34 institutions of highereducation in Estonia, including the renowned University of

Tartu, Tallinn University of Technology, and other universities.The studyprograms of the bigger universities tend to beinternationally accredited. Some universities have programs inthe English language.

1.5 EconomyAfter regaining independence from the Soviet Union, Estoniahas been among the most advanced emergingmarkets inCentral and Eastern Europe, mostly thanks to the success ofits socio-economic reforms over the lastfifteen years. Estoniahas a liberal market-based economy. The government haspursued nearly balanced budgets and low public debt.

Oil shale-based energyproduction, telecommunications and IT

products, textiles, chemical products, banking, food andfishing, timber and wood products, shipbuilding, electronics,transportation and various services remain key sectors of theEstonian economy. Estonia produces nearly all of the energyneeded forthe country, supplying over 90% of its electricityneeds with locally mined oil shale. Alternative energy sourcessuch as wood, peat, and biomass contribute approximately15% of primary energy production.

Key economic indicators over the period 2003-2009 aresummarised in the table below:

Key economic indicators 2003-2009

2003 2004 2005 2006 2007 2008 2009

GDP

In current prices (EUR billion) 8.72 9.69 11.18 13.23 15.63 16.07 13.73

Real growth (%) 7.6 7.2 9.4 10 7.2 -3.6 -14.1

Prices

Consumer price index (%) 1.3 3.0 4.1 4.4 6.6 10.4 -1.1

Estoniankroon real effective exchange rate index(REER) (%) 1.7 1.3 1.1 0.4 2.9 4.7 1.6

Labour market and w ages

Unemployment rate (%) 10.0 9.7 7.9 5.9 4.7 5.5 13.8Average monthly gross wages and salaries (EUR) 430 466 516 601 725 825 784

General go vernment budget

Revenue (EUR billion) 3.18 3.45 3.94 4.83 5.84 5.96 5.99

Expenditure (EUR billion) 3.04 3.29 3.76 4.50 5.43 6.41 6.23

Balance (+/-) (EUR billion) 0.15 0.16 0.18 0.33 0.41 -0.44 -0.24

Foreign trade (special tr ade system)

Exports (EUR billion) 4.00 4.77 6.20 7.72 8.03 8.47 6.47

Imports (EUR billion) 5.72 6.70 8.23 10.71 11.44 10.90 7.26

Balance of payments

Current account balance (EUR billion) -0.99 -1.10 -1.12 -2.05 -2.72 -1.57 0.63Current account balance/GDP (%) -11.3 -11.3 -10.0 -15.5 -17.4 -9.8 4.6

Foreign direct investment inflow(EUR billion) 0.82 0.77 2.31 1.43 1.99 1.18 1.21

Foreign directinvestmentoutflow(EUR billion) -0.14 -0.22 -0.56 -0.88 -1.28 -0.76 -1.11

International i nvestment posi tion (at end o f year)

International investment position (EUR billion) -5.74 -8.37 -9.53 -9.89 -11.64 -12.66 -11.20

Direct investment in E stonia (EUR billion) 5.55 7.37 9.56 9.64 11.41 11.87 11.28

Gross external debt (EUR billion) 5.60 7.46 9.67 12.94 17.35 19.04 17.39

N/A information is not available yet

Source: Bank of Estonia, Statistical Office of Estonia, Ministry of Finance


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Transport and telecommunications are well developed inEstonia. An efficientroad network covers the whole of Estonia,though the quality of some secondaryroads remains belowwestern standards. There is a well-developed rail connectionbetween Estonia and Russia. In combination with the well-located ice-free ports in the northern part of the country (thePort of Muuga near Tallinn being the largest), Estonia hasserved as a major transit corridor between theWestand East.Estonia is connected to the international flight network via itsinternational airport in Tallinn, servingdirectflights tonumerous European cities.

1.6 Foreign tradeIn 2009, the exportof goods totalled EUR 6.5 billion and totalimports amounted to EUR 7.3 billion. Estonian foreign trade ismainly based on strong economic ties with Finland, Sweden,Russia, Latvia, Lithuania and Germany, as well as with othercountries.

The main export goods are machinery and equipment, woodand paper products, textiles, food products, and metals and

chemical products. Estonia also exports approximately 1.5billion kilowatt hours of electricity annually. The share of EUcountries accounted for69% and that of CIS countries 12% oftotal exports in 2009.

Estonian Exports and Imports by Commodity Groups, 2009

% of % of

EUR million Exports total Imports total

Machinery and transportation related equipment 1,681 26% 1,840 25%

Consumer goods 1,078 17% 1,151 16%

Fuels, oils and related materials 1,056 16% 1,392 19%

Raw materials (excl. fuel and food related) 500 8% 217 3%

Food and related products 481 7% 665 9%

Chemicals and related products 420 6% 897 12%

Other 1,259 19% 1096 15%

Total 6,475 100% 7,257 100%

Source: Statistical Office of Estonia

The main imported goods are machinery and equipment, fueland otherchemical products, textiles, food products, andmeans of transport. Estonia imports 200million kilowatt hoursof electricity annually. In total imports, the share of EUcountries was 80% andthat of CIS countries 10% in 2009.

1.7 Further readingSome general tips for business visitors on visas, currency andpublic holidays can be found in Appendix B. For furtherbackground reading on Estonia, the web pages referred tobelow contain some very reliable material.

General information about Estonia:http://www.visitestonia.com/

Statistical information about Estonia:http://www.stat.ee?lang=en

Background on the investment climate in Estonia:http://www.investinestonia.com/

Information aboutforeign trade: http://www.estoniantrade.ee

Information about the Estonian language:http://www.einst.ee/publications/language/

Information about the capital city Tallinn:http://www.tourism.tallinn.ee/eng


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2 Business Environment


Estonian lawis harmonised with EU law The workforce is highly educated and motivated A relatively good and rapidly-developing production infrastructure (ports, roads, telecommunications, warehouse facilities) Highly-developedelectronic communications: good access to internet, digital signatures, ID cards, web based projects

2.1 Business climate

Overall, the business climate in Estonia is characterised byfree business and trade in alignment with EU practices. Manycompanies are subsidiaries of European, particularlyScandinavian, firms.

There are no significant service or industrysectors where amonopoly has beencreated, exceptfor some importantinfrastructure services (railways, ports, the national airline,power stations andenergy transmission) that are provided byfully or partially state-owned companies or groups whicheffectively enjoy a monopoly. However, large stakes in some ofthose companies may be sold to strategic investors in thefuture.

Throughout the period of regained independence, the

economic and fiscal policyof the government has mostly beenaimed at achieving long-term economic growth.

In the shorter terman important goal is the transition to theEuro. The main shortterm task of the government is tomanage a compromise between economic growth and socialbenefits.

Most investment and business is concentrated in Tallinn andits surrounding areas and the governments efforts to promoteregional development have generallybeen in vain.

The government has voiced its concern for small enterprisesand export industries as well as foragriculture. In this respect

the most important action taken on the part of government wasan alignment of policies, institutions and standards with EUnorms, to enable participation in financing fromEU structuralfunds. This has facilitated standards closer to the westernEuropean level, though there is still much to achieve.

2.2 Free trade zonesThere are 3 free trade zones established under separateorders of the Estonian Government: at Muuga portinnorthwesternEstonia, at Sillame in the northeast and Valga inthe southeast (see also chapter 5.6). The Valga free tradezone has notbeen particularly active for some time. Accordingto these orders the zones are established until 31 March 2011.

2.3 International agreementsEstonia is a member of the WTO and the EU. Foreigninvestments are protected by internal law and internationalagreements. Estonia has concluded treaties for the protectionof investments with several countries including the U.S.,Germany, France, Finland, Sweden, Norway, and Switzerland.Currently Estonia has 44 double taxation treaties in force.

2.4 Legal environmentEstonia has systematically reformed its legal systemsince the1990s with the top policy priority being facilitating enterprise.

Legislators and governments have always displayed the clearwill to make the business environment attractive in order tobenefit fromtax revenues and the jobs created by attractingforeign investors.

The Estonian legal environment favours entrepreneurship andthe entrepreneurial mindset. Foreign investors have equalrights and obligations with local entrepreneurs. All foreigninvestors may establish a company andconduct business inEstonia in the same way as local investors; no restrictionsapply.

2.5 Regulations for businessCompetition policyThe primary rules of Estonian competition law were enacted inthe Estonian Competition Act, in force from1 October 2001.

The aim of the Competition Actis safeguarding competition inthe interest of free enterprise in the extraction of naturalresources, manufacture of goods, provision of services andsale and purchase of products and services and the preclusionand elimination of the prevention, limitation or restriction ofcompetition in other economic activities. Estonian competitionpolicyis generally in line with EU competition principles.

The Estonian Competition Authority is the responsible body forsupervisory and regulatoryactivities in this area. In thebeginning of 2008 the former Competition Board, the Energy


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Market Inspectorate, Railways Inspectorate and some of theCommunications Boards functions were merged into theEstonian Competition Authority to strengthen state supervisionandmake better use of existing resources.

Price controls

The Estonian Competition Act provides a general rule underwhich agreements between concerted practices and decisionsby associations of undertakings which directly or indirectly fixprices or anyother trading conditions, including prices ofgoods, tariffs, fees, mark-ups, discounts, rebates, basic fees,premiums, additional fees, interest rates, rent or leasepayments applicable to third parties are prohibited. Thisprinciple is applied in conformity with the EuropeanCommission Notice on Vertical Restraints (2000/C 291/01)which prohibits the establishment of a fixed resale price.However, the provision of a list of recommended prices ormaximumprices by the supplier to the buyer is notconsideredin itself a violation of price controls regulation.

Consumer protection

The principal legal acts regulating consumer protection are theConsumer Protection Act, the Trading Act, the Advertising Actand the Law of Obligations Act. The protection of the legitimaterights of consumers and developmentand the implementationof consumer policy in accordance with the provisions of UNGuidelines, the Consumer Protection Act and of EuropeanUnion consumer policyis vested mainly in the EstonianConsumer Protection Board (CPB).

The three most important functions of the CPB are tosupervise the consumer market, settle consumer complaintsand inform and advise consumers. The CPB constitutes aninexpensive alternative to the civil courts, and the decisions ofthe Board serve as guidelines for trade enterprises. The Boardis entitled to impose fines and prescriptive orders in case of

violation of the Consumer Protection Act and otherregulations.Together with other state and local government institutions theBoard also monitors the following fields: product safety,misleading advertising, consumer contracts, public services,product labelling etc.

Patents, trademarks, copyrights

The principal Estonian laws governing intellectual property arethe CopyrightAct, the Patents Act, the Trademark Act, theUtility Models Act, the Industrial Design Protection Act and theGeographical Indication Protection Act. Business names andtrade secrets are protected under the Commercial Code andthe Competition Act. Estonia has been a member of the WIPO

(World Intellectual PropertyOrganization) since 1994, and alsoa signatoryto several international treaties, including the Parisand Berne Conventions, the Geneva Act of the HagueAgreementand the Madrid Protocol.

Patents

Inventions in any field of technology are entitled to patentprotection provided they meetthe criteria set forth in the PatentAct. An invention may be in the formof a device, process ormaterial, including biological material, or a combinationthereof. An invention is patentable if it is new, involves aninventive step and is capable of industrial application. Thecreator of a patented invention has a moral right of authorship.

This right is inalienable and extends for an indefinite term.Creators also have the economic right to receive fair proceeds

fromprofits made on the invention. Economic rights aretransferable and inheritable.

An invention is granted patentprotection upon its registrationin the State Register of Patents. The owner of the patent hasexclusive rights to the patented inventions throughoutthevalidity of the patent term (20 years). The right to apply for andhold a patent is, as a general rule, vested in the author of theinvention and the authors legal successors. Patentapplications are filed with the Patent Office and an applicablestate fee is paid. The Patent Office will then conductan

investigation to determine whether the invention meets thecriteria and eitherissues a patentor rejects the application.

Trademarks

The Trademark Actdefined trademarks and service marks assigns used to distinguish the goods and services of a particularperson fromsimilar types of goods and services offered byotherpersons. Trademarks are entitled to protection if they areregistered in the Estonian Register of Trade and ServiceMarks, with theWIPO or the EU Office for Harmonisation in theInternal Market. To register a trademarkon the EstonianRegister of Trade and Service Marks, an application is filedwith the Estonian Patent Office and the applicable state fee is

paid. The Patent Office will review the application and issue adecision granting or denying the application. The termofprotection for registered trademarks lasts for 10 years and isrenewable for further 10-yearperiods.

Copyrights

Copyright protection extends to any original works in therealms of literature, art or science that are expressed in anobjective formand are perceived and reproduced in this formeither directly or bymeans of technical devices. A copyrighttoa work arises automatically upon the creation of the work;neither publication of the work nor registration of a copyrightisnecessary.

Estonian copyrightlawprovides forboth moral and economicrights. Protection of moral rights is perpetual while economicrights are subject to protection for 70 years fromthe authorsdeath.

Anti-dumping

Estonia applies EU trade policy such as anti-dumping or anti-subsidy measures. The EU import regime applies to Estonia.

As stated in the law, dumping is the exportation of goods by aforeign exporterto Estonian customs territory for freecirculation of those goods, belowtheir normal value according

to the Customs Code. The anti-dumping measures arecustoms taxes applicable with the rate ascertained byinvestigative procedure for reducing damage to Estonianindustry resulting from the import of goods at dumping prices.

While the European Union has a rather liberal foreign tradepolicy, some products need import licenses. There are somerestrictions, especially on farm products, following theimplementation of the CAP (Common Agricultural Policy): theapplication of compensations on importandexport of farmproducts, aimed at favouring the developmentof agriculturewithin the EU, implies a certain number of control andregulation systems for goods entering the EU territory.


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Acquisitions

The two main types of acquisitions are acquisition by way ofbusiness (asset) purchase, and acquisition by way of sharepurchase. The actual type of acquisition depends on theintentions of the parties, e.g. whether the investor is interestedin whole or partof the business of the target company, andwhatare the outstanding liabilities of the target company, etc.

Transfer of business and shares

Transfer of business

The Estonian Commercial Code defines business as aneconomic entity through which the company is operating. Onecompany can have several enterprises, e.g. structural entitieslike production plants, retail stores, etc.

A transfer of business enterprise is usually undertaken whenthe buyer is notinterested in some parts or liabilities of thecompany.

In practice, the investor is mostly interested in certain assets,rights and goodwill of the target company and negotiates theprice accordingly.

Nevertheless, under the Commercial Code, upon transfer ofassets that forma business enterprise, obligations related tothe assets sold are also transferred to the buyer.

As a result, the buyer of the assets will be jointly and severallyliable for the enterprise-related obligations of the seller whichare created before the transfer of the enterprise and the duedate of which falls within5 years after the transfer of assets.

A similar regulation is included in Estonian labour lawfor theprotection of employees in case of a business transfer.

There is no statutory requirement regarding the form of the

asset purchase. However, if particular assets involved requirea particular formof contract (e.g. transfer of real estate mustbe notarised), the entire purchase agreement needs to be inthe same form, unless the particular assets (such as realestate) are transferred separately fromthe rest of assets.

Alternatively, the acquisition may be performed by differenttransactions in different forms.

It should also be noted that public permits and licenses cannotbe transferred upon sale of the business enterprise and mustbe obtained by the acquiring company separately.

Transfer of shares

If the shares in a company are acquired, the buyer acquires allrights and obligations as a shareholder of the company.

The assets and liabilities of the company will not be modified,i.e. no pick and chooselike in the transfer of business.

In the case of a private limited company(O), the acquisitionof shares generally requires a notarised share transferagreement, unless the shares of an O are registered in theEstonian Central Register of Securities. In the latter case thetransfer of shares may be made on the basis of a simplewritten contract. In the case of a public limited company(AS),a written share transfer agreementis sufficient.

The parties are free to determine the date when the title to theshares is transferred, but for the purposes of the targetcompany (i.e. with regard to the rightto vote, right to dividends,etc.), the shares are deemed to be transferred as of the entryof the transfer into the list of shareholders (O) or into theshare ledger (AS).

If the buyer is not an existing shareholder of the targetcompanyand does not acquire a 100% shareholding in thetarget company, the othershareholders of the private limitedcompany (O) have a preemptive rightto purchase theshares, unless the articles of association of the target companysay otherwise.

In the case of a public limited company(AS), the shareholdershave the pre-emptive rightonly if it is prescribed in the articlesof association.

It shouldalso be noted that transfer of majority shareholding,or acquisition of control over the companybysome othermeans, may be (if the sales in Estonia of the target companyand the sales in Estonia of the buyer exceed a certainthreshold) considered as a merger forthe purposes ofEstonian competition law.

Thus, acquisition by way of share purchase may be subject tomerger control but the acquisition byway of business (asset)purchase is not.

The legal aspects of acquisitions in Estonia are not verydifferent fromcountries in the European Union and there areno special restrictions on foreign capital.

2.6 Property marketAlthough there is currently a recession in the Estonian propertymarket, it was booming until 2008, resulting in themodernisation of manyexisting production and servicefacilities, office spaces and residential buildings as well as inthe construction of plenty of new ones.

Many foreign-owned construction and propertymanagementcompanies operate in Estonia along with local competitors.There is a large supply of various office spaces in all the majorcities.


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3 Foreign Investment and Privatisation

As the governmentreformpolicy has remained relativelyconsistentand liberal, the priorities being price liberalisation,fastprivatisation, effective and up to date legislation andastable currency, Estonia has attracted one of the highest levelsof foreign direct investment per capita in comparison with othertransition economies. The overall government attitude is verywelcoming toward foreign capital, especiallyinto sectors thatare export oriented, innovative and support regionaldevelopment.


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4 Banking, Finance and Insurance


The largest banks are subsidiaries andaffiliates of Scandinavian bankinggroups A wide range of financial services is available to both local and foreign customers Estonia will expectedly become partof the Euro zone starting from1 J anuary 2011

4.1 Banking systemThe Bank of Estonia (Eesti Pank) is the independent centralbank. The core tasks of the Bank are to participate in Estonianeconomic policy via implementing independent monetarypolicy, consulting the governmentand performing internationalco-operation. Eesti Pank is also responsible forsupervisingfinancial stability via forming the financial sector policy andmaintaining reliable and well-functioning paymentsystems.Eesti Pank is responsible for the circulation of cash in Estonia.

The developments in the banking sector since Estoniaregained independence have been rapid, along with the trend

of welcomingforeign capital. The banking sector has gonethrough major restructuring as a resultof privatisation,consolidation andbankruptcy in late 1990s, following a

relatively stable period in the 2000s. The banking sector isdominated by two major commercial banks, Swedbank andSEB, owned bySwedish banking groups. These two bankscontrol approximately 70% of the financial services market.

The thirdlargest bank is an affiliate of the Finnish Nordeagroup and the fourth largest bank is an affiliate of the DanishDanske Bank. There are no state-owned commercial banks orother credit institutions.

Market share of banks by total assets as of 30.06.2010

EUR million Total assets Market share

Swedbank 9.6 48%

SEB Pank 4.2 21%

Nordea Pank 2.7 13%

Sampo Pank 1.9 9%

Eesti Krediidipank 0.3 2%

DnB Nord 0.3 2%

UniCredit 0.3 1%

Handelsbanken 0.2 1%

Big Bank 0.2 1%

Other 0.4 2%Total 20.2 100%

Source: Estonian BankingAssociation

Estonian banks offer a full range of services. There is nodifferentiation between local and foreign businessmen andentities, which can generally access the same range ofbanking services in Estonia as they do in Western Europeancountries.

Estonian banking has achieved significant success in thedevelopmentof electronic transaction systems. The number of

internet clients is growing continuously. Active co-operationbetween major banks and mobile operators has also led toinnovative solutions forcustomers. Debit and credit cards arewidely used in everyday transactions.

4.2 Foreign currency market andforeign currency rules

The Estonian kroon is declared to be the sole tender incirculationin Estonia. The kroon is fixed to the Euro at the rateEEK 15.6466 =EUR 1. The kroon-Euro exchange rate hasremained unchanged over 12 years (previously the kroon wasfixed to the German Mark). The Estonian kroon is freelyconvertible to other foreign currencies.


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Estonia will expectedly become partof the Euro zone startingfrom 1 J anuary 2011. EU finance ministers adopted the finaldecision on Estonias accession to the Euro area in J uly 2010.

The exchange rate was fixed at 1 EUR =15.6466 EEK by theunanimous vote of the euro area finance ministers andEstonias finance minister.

4.3 Specialised financial

institutionsEstonian commercial banks are the largest providers of leasingand factoringservices, with the Swedbank groupbeing adefinite market leader. The services provided are becomingmore sophisticated anddiverse while the clients are alsobecoming more aware of the services on offer. The sector hasbeen growing extensively as a result of the decline in interestrates and the increase in customers welfare. The range ofpotential leasing objects has grown to include anything frombikes, home furniture and travelling arrangements up to realestate, personal vehicles, trucks and farming equipment.

The factoring services include domestic factoring, exportfactoring, invoice factoring as well as tax factoring. There arealso options to finance VAT returns. For internationalcompanies, the available factoring services include thehandling of the entire accounts receivable portfolio of localcompanies.

The Estonian insurance markethas similarly gone through amajorconsolidation over the years since independence andhas reached stability. A wide choice of insurance services isavailable from Estonian insurance companies as well as frominternational service providers.

4.4 Investment institutionsInvestment funds provide a wide range of different investmentoptions. There are four types of investment funds allowed inEstonia. Contractual investmentand investmentfunds foundedas a joint-stock companyare the main types of funds used forinvestmentpurposes. The majority of Estonian investmentfunds are managed by Estonian commercial banks.Operations of mandatory andvoluntary pension funds build onthe pension reformthat was gradually implemented by 2003.

Contributions into the pension fund are compulsory for youngpeople. Others may voluntarily join the systembut they cannotcancel the contract afterwards. The contribution to themandatory pension fundis calculated as 2% of the salary towhich the state add 4% of the individuals salary (the statecontribution has however been currently temporarily halted dueto the difficulties in financing the systemunder the economicrecession and is envisaged to be compensated retroactively).Overall. mandatory pension funds have become popularamong individuals. Voluntary pension funds offer asidepension, andalso traditional insurance services as for example

life insurance. There is a tax incentive according to whichindividuals can make contributions up to 15% of their salarythat are considered to be exempt fromincome tax.

Venture capital facilities have become more and moreaccessible. In addition to expandingsmall and mediumenterprises, it has become easier to gain access to financingthrough EBRD and other developmentprograms.Nevertheless, the amount of venture capital committed toEstonia is still relativelysmall when comparedto developedcountries and some CEE countries. The capital is usually offoreign origin although many local brokerage and investmentbankingunits are also involved in directinvestment activity byproviding companies with private equityfinance.

4.5 Capital marketsAll Estonian share companies securities are registered in theEstonian Central Security Depositoryincludingshares, bonds,subscription rights, investmentfund units, derivatives anddepository receipts. Transactions with securities can be madeusing over-the-counter systems or on the regulated market.

The regulated stock marketoperates in the context of a cross-Baltic stock exchange maintained by the NASDAQ OMXGroup that coordinates the trading process and imposesregulations. Investors can enjoysimplified access and

minimised investmentbarriers when operating on Estonian,Latvian and Lithuanian markets. Overall, the Baltic stockmarkets have similarmarketpractices and rules for all threeBaltic countries, with common market information and tradingsystems.


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5 Importing and Exporting


All customs clearance procedures are carried through electronically. Common customs tariff duties are applicable to all goods imported into the EU. Large importers may apply for deferred taxation. VAT is not imposed on the import of goods subjectto immediate tax warehousing on the condition that the recipient of the imported

goods is the keeper of the tax warehouse. Exporters and importers must have EORI registration.

5.1 Trends in customs policyEstonia joined the European Union (EU) on 1 May 2004. Sincethen Estonia has implemented common customs regulation.Intra-Union deliveries to and fromEstonia do not qualify asimports or exports.All customs clearance procedures are carried outelectronically. It is possible to declare the goods in writtendeclaration if risk managementconditions have been fulfilled.Starting from1 J anuary 2008 all enterprises taking partin theinternational deliverychain and which are in contactwithcustoms procedures in everyday business may apply forauthorised economic operator authorisation (AEO). There aretwo types of authorisations: customs simplifications andsecurity and safety. The companies may apply for either orboth authorisations.

5.2 Import restrictionsThere is no banned list in Estonia, but some goods (e.g. drugs,militaryequipment, cultural objects, hazardous waste, CITESgoods) need specific permission for importation which is givenby the authorities concerned.Some quotas for certain types of goods are imposed bythe EUand are applied to all member states. The quotas enable theimportation of duty-free goods or goods at a lower rate, untilthe quotas are filled.

5.3 Customs dutiesCommon customs tariff duties are generallyapplicable to allgoods imported into the EU. However, in certaincircumstances, such duties are notapplied.

The customs duty rates are based on value and dependent onthe type of goods and the country of origin. Imports fromEFTAcountries, Switzerland, and EU candidate or associatedcountries are generally free of duty. The duty rate usually staysbetween zero and 10%. Additional rates are usually levied as aresult of anti-dumping cases.Estonia's membership in the EU implies that all aspects ofcustoms duties are decided bythe common customs tariff --

TARIC. Customs duties on imports and exports and charges

having an equivalenteffect are prohibited between member

states.In TARIC all measures relating to tariffs, commercial andagricultural legislation are integrated. This database giveseconomic operators a clear view of measures to be undertakenwhen importing or exporting goods. The TARIC does notcontain information relating to national levies as rates of VATand excises.Valuation rules are based on the WTO Customs ValuationAgreement transposed onto the applicable EuropeanCommunity legislation.

The customs value usually includes the charges for goods,transportation, insurance and other services provided forimporting the goods into the EU.Usually the import taxes should be paidat the pointof entry.Large importers may apply for deferred taxation.

5.4 Temporary import reliefUnder the temporary admission procedure, non-Communitygoods intended for re-export may be used in the customsterritoryof the Community, with total or partial relief fromimportduties, and without being subject to any of the following:

othercharges as provided forunder the other relevantprovisions in force;

commercial policymeasures, insofar as theydo notprohibitthe entry or exit of goods into or fromthe customs territoryof the Community.

VAT is not imposed on the import of goods subjecttoimmediate tax warehousing on the condition that the recipientof the imported goods is the keeper of the tax warehouse.

The import of goods specified in Chapter 1 of CouncilRegulation 918/83/EEC and goods with customs preferencesspecified in Title 6 of the Community Customs Code is notsubject to VAT under the conditions prescribed for entitlementto customs duty relief.VAT is notimposed on the import of goods upon the placing ofnon-Community goods under the customs procedure ofrelease for free circulation, provided that the followingconditions are met:

the importer of the goods is an Estoniantaxable person;


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immediately after the goods have been imported, they aretransported, in the same condition, to another memberstate where such goods will be received bya taxableperson or a taxable person with limited liability of the othermember state;

intra-Community supply is created as a result of thetransport of the goods to another member state;

upon importation of the goods, the importer confirms theintention to transport the goods to another member statewhere such goods will be received bya taxable person or ataxable person with limited liability registered by the other

memberstate and, after the goods have been transported,provides the customs authoritywith documentation of proofof the intra-Community supplyof the goods;

a security is provided in order to guarantee theperformance of the tax liability which may arise as a resultof the failure to perform the tax obligation provided in thissubsection. The security is given, released, used andcalculated pursuant to the procedure provided by thecustoms rules.

VAT is not imposed on the importof the following goods:

books, periodicals or other electronic media sentto librariesor to research, developmentor educational institutions;

confiscated counterfeit clothes and footwear transferred tostate or local government health care or social welfareinstitutions pursuant to law.

5.5 Documentation andproceduresStarting from1 J uly2009 any economic operator establishedin the EU needs to have an EORI number. Economic operatorsestablished outside the EU have to be assigned an EORInumber if they lodge a customs declaration, an Entry or an Exit

Summary Declaration.

An special authorisation from the customs authorities isrequired for the following:

the use of the inward- or outward-processing procedure,the temporary admission procedure or the end-useprocedure.

the operation of storage facilities forthe temporarystorageor customs warehousing of goods, except where thestorage facility operator is the customs authorityitself.

The conditions under which the use of one or more of theprocedures referred to above or of the operation of storagefacilities is permitted is set out in the authorisation.

The authorisation will be effective fromthe date of issue and isusually at a fixed date. No special charges are applied.

Except where otherwise provided forin the customs legislation,the authorisation mentioned above is granted only to thefollowing persons:

persons who are established in the customs territoryof theCommunity;

persons who provide the necessary assurance of theproper conduct of operations and, in cases where acustoms debt or other charges may be incurredfor goodsplaced under a special procedure, provide a guaranteerequired;

in the case of the temporary admission or inward-processingprocedure, the person who uses the goods orarranges for their use or who carries out processingoperations on the goods or arranges forthem to be carriedout, respectively.

5.6 Warehousing and storageUnder a storage procedure, non-Community goods may bestored in the customs territory of the Communitywithout beingsubjectto any of the following:

import duties; othercharges as provided forunderother relevant

provisions in force; commercial policymeasures, insofar as theydo notprohibit

the entry or exit of goods into or fromthe customs territoryof the Community.

Communitygoods may be placed under the customswarehousing or free-zone procedure in accordance with thecustoms legislation or Communitylegislation governingspecific fields, or in order to benefit froma decision grantingrepaymentor remission of import duties.Generally there is no limit to the length of time goods mayremain under a storage procedure.

5.7 Re-exportsNon-Communitygoods destined to leave the customs territoryof the Community are subjectto a re-export notification to belodged at the relevant customs office and with the exitformalities. The re-export notification should meet therequirements for customs clearance documentation.

The re-export procedure is notapplied for:

goods placed under the external transitprocedure whichonly pass through the customs territory of the Community;

goods trans-shipped within, or directly re-exported from, afree zone;

goods under the temporary storage procedure which aredirectly re-exported from an authorised temporary storagefacility.


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6 Business entities


A foreign investor may operate through the following corporate forms thatshould be registered within the commercial register: apublic limited company, a private limited company, a general partnership, a limited partnership, a commercial association or abranch.

The private limited company and public limited company are the most commonly used forms of entities for doing business inEstonia due to their most essential characteristic the limitation of the shareholders liability.

Business units like permanentestablishments or representative offices are not registered with the commercial register. A PE shouldbe registered in the register of Estonian Tax and Customs Authorities. As a general rule, Estonian legislation does not recognize theconcept of a representative office. However, the branch mustbe registered in the commercial register.

The estimated minimumcost of setting up a branch or subsidiaryin Estonia may range between EUR 2,000 to EUR 4,000(excluding a minimumcompulsory share capital).

Establishing a companyin Estonia may take up to a couple of weeks. Foreign investors may also buy ready-made companies (in

this way, these procedures might take onlya fewdays upon receiving all the relevantinformation/documents).

6.1 Legal frameworkThe legal environment for business entities in Estonia is mostlyregulated by the Commercial Code (riseadustik) whichentered into force on 1 September 1995.

The passive legal capacity of an entity commences as of itsentry in the commercial register and terminates as of itsdeletion fromthe commercial register.

Every entity must have a business name which is entered inthe commercial register and under which the undertakingoperates.

The business name always contains the appendage referringto the legal formof the entity. A business name may not bemisleading with regard to the legal form, area or scope ofactivity of the undertakingnorcontraryto good morals.

When starting operations in Estonia, it should be keptin mindthat there are certain areas of activity for which a license isrequired or in which only a particular type of entity mayoperate, as well as areas of activity in which operation is

prohibited by law.

There may also be special requirements deriving from the lawwith respectto the obligations of companies which aredependent on the area of business of the company (e.g.banking, investment, sale of fuel or alcohol etc.).

As a general rule, entities aresubject to accountingobligationsand need to submit financial reports to the commercial register.An audit of the financial reports may be required depending onthe legal formand the amountof share capital of the entity.

Entities may merge, divide or be transformed only in the casesand pursuant to the procedure provided bylaw. In the cases

provided by law, the permission of a competent agencyisrequired for merger, division or transformation.

6.2 Choice of entity and businessforms

The Commercial Code provides for five types of businessentities: general partnership (tishing), limited partnership(usaldushing), private limited company (osahing), publiclimited company (aktsiaselts) and commercial association(tulundushistu).

Of the five types of entities regulated underthe CommercialCode, the private limited company andpublic limited companyare the mostcommonly used forms of entity for doingbusiness. This is due to their most essential characteristic the limitation of the shareholders liability.

Consequently the main emphasis of this chapter is on thesetwo forms of business, and the central aspects of theiroperation are presented in the form of a comparison. However,at first, a short overviewof the other business entities isprovided.

6.3 Private limited company (O)and public limited company (AS)Private limited companies andpublic limited companies haveshare capital dividedinto private limited company shares andpublic limited company shares, and the shareholders are notpersonally liable forthe obligations of the companies thecompanies are liable for the performance of their obligationswith all of their assets.

Limitedcompanies are established by concluding notarizedcertified foundation agreements and adopting articles ofassociation.

As of 1 J anuary 2007 private limited companies may also beestablished with an expedited procedure. In such cases all the


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necessary documents are presented to the commercialregister electronically and authenticated with digital signatures.

Even though the number of shareholders is unlimited by lawinboth cases, the private limited company is suited fora moreclosed circle of contributors.

Accordingly safeguards enabling respective control areprovided by law, including rights of pre-emption in case of thesale of shares to non-shareholders, and even the possibility ofprescribing (in the articles of association) that a resolution of

the partners is required to transfer a share or a part thereof toa third party.

The shares of a public limited company are freely transferable,but shareholders may establish pre-emptive rights in thearticles of association.

As for the minimum share capital, it is EEK 400,000 (EUR25,565) in the case of a public limited companyand EEK40,000 (EUR 2,556) in the case of a private limited company.In certain fields of activity (e.g. banking, insurance companiesetc.) the laws may provide forhigher share capitalrequirements.

In a public limited company each share grants one vote at theshareholders' general meeting. In a private limited companyeach shareholder holds one share and each EEK 100 of theshare generally gives one vote at the meeting of shareholders.

The shares of a public limited company must be registered inthe Estonian Central Register of Securities (CRS).

The shares of a private limited company can be registered inthe CRS if desired. If the shares of the private limited companyare not registered in the CRS, the share register is kept by thecompanys management board.

Transactions for transferring and pledging the shares of private

limited companies mustbe notarized, unless the shares areregistered in the CRS.

Thus registration of the shares of a private limited company inthe CRS is advisable if numerous transactions with the sharesare anticipated. There are no similarrequirements as to theform of transactions with shares of public limited companies.

Transfers as well as pledges of public limited company sharesare registered in the CRS.

Corporate governance

The management structure of the public limited companyconsists of three layers, the shareholders general meeting, the

supervisory board and the managementboard, whereas themanagementstructure of the private limited company usuallylacks the layer of supervisory board.

However, a private limited company musthave a supervisoryboard if its share capital exceeds EEK 400,000 and themanagement board of the private limited company has lessthan three members, or if it is prescribed bythe articles ofassociation of the private limited company.

The management board, the members of which are electedbythe supervisory board, is a directing bodyof the limitedcompany which represents and directs the company, whereasthe supervisory board plans the activities and organizes themanagementof the company as well as supervising the

activities of the managementboard.

For the management board, consent of the supervisory boardis required forconclusion of transactions which are beyond thescope of everyday economic activities. Where the companylacks a supervisory board, these rights and obligations areexercised by the meetingof the shareholders.

The shareholders general meeting is the highest managementbody of a public limited company whereas the respective bodyof a private limited companyis called the meeting ofshareholders.

These management bodies are vested with powers to take themost crucial decisions fromthe perspective of the companysdevelopment division of dividends, approval of financialreports, election and recallingof the members of thesupervisory board, etc.

Liability

A member of the management board is expected to performhis or herduties with due diligence. Management boardmembers shall be jointly and severally liable for damagewrongfully caused to the company, unless they prove that theyhave acted with due diligence. The same applies with respectto the supervisory board members.

Generally, the liability of shareholders for the limitedcompanys obligations is limited to their payments into thecompanys share capital.

However, shareholders are held liable for any damagewrongfully caused to a public limited company, anothershareholder or third persons.

6.4 Partnerships and joint-ventures

General partnership a company in which two or morepartners operate under a common business name and aresolely liable for the obligations of the general partnership withall of their assets.

Limited partnership a company in which two or more personsoperate under a common business name, and at leastone ofthe persons (general partner) is liable for the obligations of thelimited partnership with all of the general partners assets, andat leastone of the persons (limited partner) is liable for theobligations of the limited partnership to the extentof the limitedpartners contribution.

Commercial association a company forwhich the purpose is

to supportand promote the economic interests of its membersthrough joint economic activityin which the membersparticipate as consumers or users of other benefits, suppliers,through work contribution, through the use of services or in anyother similar manner.

A commercial association is liable for its obligations with all ofits assets. Members of a commercial association are notpersonally liable forthe obligations of the association.However, the articles of association may prescribe that themembers are solely liable forthe obligations of the associationwith all of their assets, or liable to a certain extent.

6.5 Branches


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Anotherway for a foreign company to permanently offer goodsor services in its own name in Estonia is to establish a branch(filiaal). The business name of the branch of a foreigncompany consists of the business name of the company andthe words Eesti filiaal (Estonian branch). The branch mustberegistered in the Estonian Commercial Registry throughsubmission of an application and certain requireddocumentation.

Certain entities such as foreign banks or insurance companieslocated in non-EU states mustalso obtain a required license.

Banks and insurance companies from EU member states mustsimply notifythe Estonian Financial Supervision Authority thatthey intend to commence activities in Estonia.

It should be considered that a branch is not a legal person andthe foreign enterprise is liable for obligations arising fromtheactivities of the branch. The foreign enterprise is also liable toappoint one or more directors that are accountable to theforeign enterprise. At leastone director must be resident in anEU state or Switzerland.

6.6 Representative officesAs a general rule, Estonian legislation does not recognize arepresentative office.

6.7 Sole proprietorshipIn addition to the possibility of establishing a business entity, itis possible foranynatural person to conduct business as asole proprietor. Generally, a sole proprietor is entered in thecommercial register only at his or her request.

If, however, a sole proprietor is obliged to register with the Taxand Customs Board as a taxpayer pursuantto the Value

Added Tax Act, he orshe also has to be enteredin thecommercial register. Other cases in which a sole proprietor isentered in the commercial register may be provided by law.


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7 Labour relations and social security


The new Employment Contract Law with significant changes became effective from1 J uly 2009. Trade unions and employers generally have a cooperative relationship; it is unusual in Estonia to strike. Social securitycontributions (34.4%) calculated from the gross employmentincome are payable by the employer. Employees do not make any personal social tax contributions. Employees part of unemploymentinsurance contributions and

compulsory accumulative pension contributions are withheld fromthe gross income by the employer. Citizens of the European Union, European Economic Area and Switzerland do not need a separate permit to work in Estonia. A foreigner may work in Estonia as a member of the management bodyof a legal entity registered in Estonia, in order to fulfill

management and supervision functions, for upto six months a year withouta work permit or a residence permit for the purpose ofemployment, and without being registered with the Citizenship and Migration Board under short-term employmentprovided theyhave a legal basis for residing in Estonia.

7.1 Labour marketEstonias population of working age is just belowone million,with approximately 600 thousand in employment. There aremore than 350 thousand inactive people. The term inactivecovers people who do not wish to or are not able to work(source: www.stat.ee).

Based on recent surveys the unemployment rate hasincreased substantially within the lastyear (according to thestatistics of the Estonian Unemployment Insurance Fund therewere officially 92 thousand people registered as unemployed inDecember 2009) and it is likely that in the lightof the recentconvulsions in the world economy, the rate will continue toincrease.

7.2 Labour relations

Employer/employee relations

Regulations regarding employmentand labour issues are setforth in the Estonian Employment Contracts Act (EestiVabariigi tlepingu seadus).

Work relations are also dealtwith in the Law of ObligationsAct, the Individual Labour Dispute Resolution Act(Individuaalse tvaidluse lahendamise seadus), and theOccupational Health and Safety Act (Ttervishoiu jatohutuse seadus).

Estonian employmentlaw recognizes the following centralprinciples as a basis for employmentrelationships:

any person has the right to freely choose his or her fieldofactivity, profession and place of work.

employers and employees may freely join unions andassociations;

working conditions shall be under state supervision.However, the state shall regulate employmentrelationsonly as far as necessary to guarantee the collaboration

between the subjects of employment relationships as wellas for the protection of the interests of the employees asthe economicallyweaker party;

in employment relationships, stability should be striven for,and the employees have a right to remuneration andholidays;

in the case of conflict between the provisions applicabletowards the employment relationship, the provisions morefavorable for the employee shouldbe applied. The grantingof illegal non-work-related advantages or imposing suchrestrictions is prohibited.

The new Employment Contract Actwas introduced inDecember 2008 and became effective from1 J uly 2009. Themain targets established by the new EmploymentContract Actare as follows:

To harmonize labor legislation with private lawprinciplesand to bring the legal environment up to date (the currentlaw has been in effectsince 1 J uly 1992.);

To increase the flexibility of employmentrelationships(including simplifying the commencement, amendment andtermination of employmentcontracts, clarifying thelimitations for night-shifts andweekend work, updating thescale of redundancypayments and a timeframe for making

available redundancy notifications, clarifying the disputeprocess for redundancy decisions, etc.); To abolish effective formal regulations and to reduce

administrative burdens (reducing the liability to collect,retain and transmit employmentrelated information etc.).

Trade unions and collective agreements

Trade unions are visible generally in transportation, healthservices and the processing industry. However, the level ofactivity is significantly lower than in western Europeancountries. Membership in a union is notcompulsory.

A collective agreementis a voluntary agreementconcluded

between employees or a union or federation of employees,and an employer or an association or federation of employers,and also state agencies or local governments, which regulatelabor relations between employers and employees.


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Collective agreements should be registered in a databasemaintained bythe Ministryof Social Affairs. There are nostandard collective agreements available, but the followingitems should be stated within a collective agreement:

wage conditions; working conditions; working and rest time conditions; conditions for suspension, amendmentand termination of

an employmentcontract, and the rules for calculating thecontinuous length of employment with the same employer;

conditions and procedure for lay-off of employees andguarantees in the event of lay-off;

conditions for occupational health and safety; conditions for vocational training, in-service training and re-

training, and assistance to the unemployed; guarantees and compensation the parties consider

necessary; procedures for monitoring the performance of the collective

agreementand providing necessary information; procedures for amendmentand extension of the collective

agreement, and forentry into a new collective agreement; additional liability for non-performance of the collective

agreement; the procedure for submittingdemands of employees and

employers in the event of a collective labor dispute; the terms which regulate other relations between the

parties to the collective agreement.

7.3 Working conditions

Salaries and wages

All rules regarding remuneration for employees working underan employmentcontract are set forth in the EmploymentContracts Act. Employmentcontracts must specify theemployee s wage rate, additional payments if any, method for

calculation of the remuneration andprocedures for payingremuneration. For 2009, the legally established minimumwageis EEK 4,350 (EUR 278). It is the employers obligation tocalculate and withhold all payroll taxes.

Employment contracts

Employmentcontracts must contain certain mandatory terms.Certain basic information aboutthe parties, the employee's jobtitle, the nature of assignments, working time, length of annualvacations and additional vacations if any, work location,contract termif applicable and wage conditions shouldbeindicated in the employmentcontract.

A natural person of eighteen years or over who has an activelegal capacity or restricted active legal capacity may be anemployee. As for the employmentof minors, there are legalrestrictions towards the conclusion of an employmentcontractwith them as well as towards the nature of the work that maybe performed by minors and their workingconditions.

Citizens of foreign states and stateless persons who reside inEstonia permanently have rights pertaining to employmentequal to those of Estonian citizens unless otherwise prescribedby law.

The employment contract must be concluded in writing. An oralemploymentcontractmay be entered into onlyfor employment

for a term of less than two weeks.

Employers bear administrative liability for formalizingemployment contracts.

An employmentcontractprescribes a probationaryperiod inorder to confirm that the employee has the necessary health,abilities, suitable social skills and professional skills to performthe work agreed on in the employment contract. A probationaryperiod may not exceed fourmonths, but a shorter period or noprobationary period may be agreed upon.

An employment contract is entered into foran unspecified termor a fixed term, whether the term of a contract is fixed byaspecific date or bycompletion of the work, but for no longerthan five years.

Working hours

The Employment Contract Act presumes that a full-timeemployee works 40 hours during a 7-days period, 8 hours perday.

The hours of part-time employees are agreed between theemployer and employee; overtime is normally permitted uponan agreementbetween the employer and employee.

Certainlimits must be observed when working overtime; totalworking time may generally not exceed an average of 48 hoursper week over a four-month period.

Details regarding the work regime, such as the startand end ofthe work day, time for meals and other breaks, may bedetermined by internal work procedures, collective agreementor work contract.

An employee is entitled to annual paidleave in the amountof28 calendar days.

Paid holidays

There are ten legally-imposed holidays in Estonia. These are:1 J anuary NewYears Day; 24 February IndependenceDay; Good Friday; Easter Sunday; 1 May May Day;

Pentecost; 23J une Victory Day; 24 J une Midsummer Day;20 August - Re-Independence Day; 25 December ChristmasDay; 26 December Boxing Day. Employers are required togrant employees paid leave in the amountof three hours on awork day preceding the New Year s Day, Independence Day,VictoryDay and Christmas Day. Work on public holidays hasto be compensated at a double rate.

Equal opportunities

According to prohibition on discrimination against employeesan employer cannot discriminate against a potential or existingemployee on any of the following grounds: sex, race, religion,age, disability and sexual orientation.

Termination of employment

Bases for the termination of an employment contract areprovided in the Employment Contracts Act.

An employmentcontractmay be terminated upon agreementbetween the parties at any time.

The contractmayalso be terminated by several other means,including termination on the initiative of the employee and onthe initiative of the employer.


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7.4 Social security systemThe social protection systemis made up of two pillars: thesocial security systemthat comprises pension insurance,health insurance, child benefits, unemploymentbenefits andfuneral grants; and the social welfare pillar that consists ofsocial assistance cash benefits and social services.In the Estonian context, no distinction is made between socialinsurance and social security, which are covered bythe sameterm in the Estonian language. The pensionand health

insurance schemes are contributory social security schemesthatare financed principallybythe social tax.The Estonian social taxof 33% (comprising 20% socialsecuritycontributions and 13% health insurance contributions)must be paid by employers fromgross salary. Currently,employees are not required to make any personal social taxcontributions.

The Estonian pension systemis divided into three differentpillars:

First pillar: state pensions. The state pension insuranceguarantees an income for people when they retire or in theeventof their becomingincapacitated or losing theirprovider. State pensions are paid out fromthe social taxcalculated on salaries.

Second pillar: the compulsory accumulative pensionscheme. Residentemployees born after December 31,1982 were obliged to join the compulsory accumulativepension scheme and make contributions at 2% of theirgross salary. To this amountthe state then added 4% ofthe 33% social tax calculated on the employers salary. Forresidentemployees born before 1983 joining thecompulsory accumulative pension scheme was voluntary,but after joining, it became compulsory and employeeswere not subsequently allowed to leave the scheme.

Third pillar: supplementary funded pensions.Supplementary funded pensions are additional voluntarypensions which enable an individual to save more thanprovided for by the state and maintain their standard ofliving during retirement.

The government sets specific rules for the three-pillar system:administering the 1st pillar, guaranteeing the 2nd pillarandproviding a supervision and regulation systemfor both the 2ndand 3rd pillars.

Employers make contributions (through the national social tax)to the 1stpillar. Employees make mandatory payments into the2nd pillar and are free to choose whether or not to contribute tothe 3rd pillar.

However, on 14 May 2009, the Estonian Parliament adopted

the proposal of the Government which generally suspendedthe contributions to the 2nd pillar from1 J une 2009 to 31December 2010. Under the adoptedlaw amendment, statecontributions (4%) are temporarilysuspended for the periodfrom1 J une 2009to 31 December 2010. However, upon thevoluntary application the employee may continue (2%)contributions from 1 J anuary 2010 and state will continue itscontributions at 2% rate from1 J anuary 2011. Withoutsuch anapplication, all contributions will be fully suspendedfor theperiod from1 J une 2009 to 31 December 2010 and in 2011therates of contributions will be 1% for the employee and 2% forthe state.

The standard systemof contributions (2%+4%) is expected to

be fully restored from2012. Exceptionally, the persons born onand before 1954 are upon their application entitled to continuewith the standard systemof contributions also in 2010 and2011.

Under Estonian unemploymentinsurance legislation theunemploymentinsurance contributions must be paidboth bythe employer and the employee (again by withholding).

As a resultof risingunemploymentlevels, the EstonianParliament decided to increase the maximumrates forunemployment insurance contributions which the Governmentmay apply.

Thus, the newmaximumrates of unemployment insurance

contributions are 2.8 % for employees and 1.4 % foremployers. The Estonian Government decided on 2 J uly 2009to apply these newmaximumrates allowed under lawfrom1August 2009.

For income tax purposes, the employees unemploymentcontribution is deductible from the residentindividuals taxableincome. Unemploymentinsurance contribution does notapplyto the remuneration paid to the members of the ManagementBoard, members of the Supervisory Board and to theprocurators.

EC regulation 1408/71 may make it possible foremployeesassigned to Estonia fromanother EU Member State, EEA

country or Switzerland to remain covered by their homecountry social security system. In order to remain covered bythe social security systemof his/her home country, theemployee has to apply fora certificate of social securitycoverage (e.g. E101) to be issued bythe social securityauthorities of his home country before moving to Estonia.

Besides the EC regulation, Estonia has concluded socialsecurity treaties with Ukraine and Canada which includesimilarprovisions of social security coverage for assignedemployees.

7.5 Foreign personnel

Living conditions

Real estate

In Estonia, the real estate market is well established and thereexistno restrictions on buying or renting a flator a house. Forseveral reasons prices have been falling recently and Estoniacould be described as a buyers' market.

Current offers fromthe Estonian real estate marketareavailable on the following web pages: www.kv.ee,www.city24.ee, www.ekspresskinnisvara.ee orhttp://kinnisvara.soov.ee/otsi.kinnisvara .

In practice, itmay be advisable to get in touch with one of theleading real estate companies in Estonia, which are involvedwith house-hunting services as their main business.

Education

With respect to education please note that the majority ofEstonian schools are teaching in Estonian or in Russianlanguage, but it is possible to find a private teacher or Englishspeaking school (see for example the following web-page:http://www.ise.edu.ee/index.htm).

Health care


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An individual insured in another EU member state (i.e. a holderof the European health insurance card or its replacementcertificate) will receive all necessary health care while stayingtemporarily in Estonia. This insurance covers all medicaltreatment similarlyavailable to locals. However, it is advisableto have an additional private medical insurance in order toextend the security coverage.

Restrictions on employment

There are no additional restrictions on the number of foreignemployees on payroll or on the time period they may beemployed in Estonia.

Fiscal registration number

When moving to Estonia an individual does not needaseparate fiscal registration the data logging formalitiesdescribed belowin sub-points are sufficient for the fiscalauthorities.

Residence permit

The Citizen of European Union Actprescribes the terms forsettling in Estonia of citizens of member states of theEuropean Union and the European Economic Area and theSwiss Confederation (hereinafter EU citizens) and their familymembers who are citizens of third countries and theprocedures necessary for it.

Generally, an EU citizen who has resided in Estoniapermanently for 5 successive years on the basis of the right oftemporary residence will obtain the rightof permanentresidence.

The residence permits to the thirdcountry nationals andpersons with undetermined citizenship are issued under theForeigners Act. Residence permit may be temporary (validityperiod up to five years) or long-term. Temporaryresidencepermitmay be issued to a foreigner:

- married to a person with permanent residence in Estonia;- for settling down with a close relative permanently residing inEstonia;- for working;- for studies at an Estonian educational institution;- for business;- whose permanent legal income ensures his/ her subsistencein Estonia;- whose application for residence permitis based on aninternational agreement.

Temporary residence permitfor employment

A residence permit for employmentgrants a foreigner the rightto stay in Estonia for the purpose of employment according tothe conditions determined bythe residence permit. The

number of foreigners who can settle in Estonia is limited. Theannual immigration quota is the quota for foreignersimmigrating to Estonia which can not exceed 0.1 per centofthe permanent population of Estonia annually. The immigrationquota does not applyto the following:

foreigners who are ethnic Estonians; citizens of the European Union, the United States of

America, Norway, Iceland, Switzerland and J apan; foreigners who apply fora residence permit for

employmentas a scientist.

A residence permit for employment is generally issued for aforeigner with the consent of the Estonian UnemploymentInsurance Fund, public competition and fulfilling the salarycriterion. A foreigner can be granted a residence permit foremploymentif an open competition has been carried out tostaff the post and if, within 3 weeks, ithas not been possible torecruitanybody through the state employmentmediationservice.

A foreigner must have the qualifications, education, health,work experience, special skills and knowledge required for the

job. The Estonian Unemployment Insurance Fund has to give

its consentbefore a foreigner can be employed (moreinformation: www.tootukassa.ee). The consent is valid for 2months.

A residence permit is issued only if the wages of a foreignerensure his/her subsistence in Estonia. An employer must pay aforeigner a salary which is at leastequal to the product of therecent average yearly wages in Estonia published by theStatistical Office of Estonia and the coefficient 1.24. Theamountof the remuneration paid to a foreigner must be in linewith the latest data published by the Statistical Office, valid atthe moment of starting the processing of an application for atemporaryresidence permit.

However, a foreigner may be granted a residence permit foremploymentwithout the consent of the Es

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