Republic of Estonia is an independent state in the Northern Europe. It is bordered to the north by Finland across the Baltic Sea, to the west by Sweden, to the south by Latvia and to the east by the Russia.
Estonia is the northernmost of the three Baltic States. The national language – Estonian – is not related to Latvian, Lithuanian or Russian languages, but is part of the Finnish-Hungarian family. The world media is describing Estonia as Nordic country, emphasizing the economic, political and cultural similarities to Scandinavia.
Estonians have been living on the Eastern shore of the Baltic Sea since 2,500 B.C., which makes them the longest settled of the European peoples . Due to strategic location as a link between the East and the West, the Estonia has been at various times under Danish, German, Swedish and Russian rule. In 1991, Estonians regained their independence and peacefully broke away from the Soviet Union.
On January 1st, 2011 Estonia joined euro area, having become the one of only two countries in EU that actually meets Maastricht debt and deficit rules, but with willingness to meet NATO’s target for defense spending of 2% of GDP, Estonia beats the other country (Luxembourg) easily. As the Economist recently stated: ‘for a country that emerged battered and blinking from Soviet occupation not quite 20 years ago, being the only country to meet the main rules of the continent’s main clubs, is a triumph’.
Since the re-establishment of independence Estonia has been one of the fastest growing countries in Europe. The GDP in Estonia expanded 8.5% in the first quarter of 2011 over the previous year, being the fastest growing country in EU. Key figures from last decade:
Numerous foreign companies have found Estonia to be a highly attractive location. Estonian attractiveness and success are based on the zero corporate tax, flat-rate income tax, free trade regime, balanced budget, very low public debt, competitive commercial banking sector, innovative e-Services, institutional flexibility and liable legal system. Estonia placed 11th in relation to GDP during 2007-2011, receiving foreign direct investments of US$ 1034 per capita . The economist ranked Estonia at 21st place for its economic environment.
Former executive director of Merrill Lynch, Joakim Helenius, believes Estonia is transforming itself in few years into an economic powerhouse along the lines of Luxembourg and Hong Kong 8
Strategic reasons why to invest in or through Estonia
Ideal geographic location: close integration with Scandinavian countries, proximity to Russia and good connection with Central Europe
Economic and political policies have been focused on Western Europe ever since Estonia regained its independence in 1991. Accession to the EU and membership in NATO during 2004 marked a historical turning point for Estonia. The signing of the accession treaty with EU and euro area can be seen as confirmation of Estonia’s functioning market economy, far-reaching compliance with the EU legal portfolio and the ability to cope with competitive pressure and market forces within the Union. As the CEO of largest independent oil products terminal operator, Vopak E.O.S. Ltd, Arnout Lugtmeijer has stated: ‘Estonia has chosen the best part from European system and brought in the best legislation and technology’.
Safety – reliable financial system thanks to flexible government policy, transparent regulation and strong links to Scandinavian banks
Putting it in Moody’s words9 : ‘in our view, Estonia’s institutions have demonstrated exceptional flexibility and determination over the past two years. The country’s commitment to euro adoption is a good example of its institutional strength, particularly as it met the necessary targets under especially difficult circumstances. The government’s creditworthiness is boosted by very low debt ratios and a neutral debt trajectory, and we expect its prudent fiscal policy to constrain the budget deficit and limit the rise in debt ratios that is occurring in most EU countries’.
Risk of political instability in Estonia is very low. The government doesn’t meddle, there’s very little bureaucracy. Ministers and other decision makers are highly accessible and problems can be addressed directly and quickly.
Estonia has seven banks as well as branch offices of ten foreign banks. The major commercial banks are Finnish Nordea Bank, Swedish Swedbank and SEB Bank.
Trustworthy legal system – laws straightforward and are easy for business to follow, foreign investors and domestic investors are treated equally
Bo Henriksson (ABB)
Estonia implemented a law on foreign investment in 1991, which established simple and non-discriminating registration procedures for companies. A foreign company can own up to 100% of the share capital of an Estonian company.
There are no restrictions for foreigners on the repatriation of after-tax profits, dividends or proceeds on the sale or liquidation of an investment.
The Estonian legal system follows the Continental European tradition, i.e. with a conventional differentiation between private law and public law. The influence of other legal systems is reflected in the recognition of Supreme Court decisions and the special status of international contracts as well as the generally accepted principles of international law. Since its accession in 2004, the body of EU law has also been part of the Estonian legal system.
Estonian arbitration law, which is defined in the code of civil procedure, implements the UNCITRAL model law on international commercial arbitration. The New York Accord on the recognition and enforcement of foreign arbitration was ratified in 1993 and all foreign arbitration decisions are executable in Estonia. The arbitration institution in Estonia was established in 1991.
Cutting edge infrastructure and E-conomic e-nvironment – everything what could be electronic, is developed, implemented, acknowledged and adapted with eagerness in e-form
The Estonian telecommunications sector is one of the most developed in Europe. It is the country, which could be called the homeland of Skype and Hotmail. The Internet and the new e-economy are equally being embraced by the commercial, governmental and financial sectors of Estonia. For example the world record of setting up a new company is four minutes and it was done in Estonia using the country’s high-tech ID-card system . The Estonian Digital Signatures Act entered into force already more than a decade ago (15/12/2000) and grants similar legal value to digital and handwritten signatures. Estonia attracted a lot of attention in 2005 when it carried out its first round of internet-based voting in the local government elections of 2005 and in 2007 became the first country in the world to feature e-voting in parliamentary elections. Even NATO cyber security center is located in Tallinn.
Easy-to-understand taxation system – no corporate tax on reinvested profits
Unique taxation system was implemented in 2000 and has withstood a decade of cataclysmic economic and structural changes. Companies in Estonia can benefit from following taxation rules:
- Resident legal entities and non-resident entities with a branch office in Estonia are subject to a so-called “reverse corporate income tax“. Taxes are only charged on profits when they are distributed (dividends, concealed distributions of profit) and on the use of income for non-business purposes (entertainment expenses, gifts, donations).
- Flat and single income tax rate (21%) scheme, covering natural persons and legal entities. Legal entities are taxed only for distributed profits and for use of income for non-business purposes.
- VAT is charged at a rate of 20% on the net value of a good or service. Certain goods and services (medicine, books, newspapers, hotel accommodations) are taxed at a reduced rate of 9%. The EU value-added tax (VAT) scheme took effect on 1 January 2010. Among others, it simplifies VAT reimbursements within EU.
- All taxes are declared via the e-Tax Board, which makes paying taxes transparent and very simple.
- There is no tax on the transfer of real estate in Estonia. Property owners are required to pay a tax, which is charged at 0.01% to 0.25% of the real estate value.
- There are no additional tax incentives for investors.
Labor – A healthy mixture of younger and more mature experienced professionals who are well educated, skilled, multilingual and cost on average 1/3 of Scandinavian labor prices
Putting it in Bo Henrikssons (ABB) words: ‘in Estonia you can find an ample supply of in-depth specialists, highly productive labor force with competitive costs, eagerness to learn and a good work ethic – Estonians don’t talk that much, they just do.
Social security contributions are paid in full by the employer, and equal 33% of compensation. This payment covers the legally required health insurance (13%) as well as pension insurance (20%).
1Estonian Chamber of Commerce and Industry, http://www.koda.ee/en/history-2
5Eurostat, http://www.enisa.europa.eu/act/sr/files/country-reports/Estonia.pdf, p21