SETTING UP A BUSINESS IN ESTONIA

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2 SETTING UP A BUSINESS IN ESTONIA An overview of the process of starting a new business and taxation in Estonia Introduction Aivar Pilv Law Office was founded in Since its foundation until today the law office has expanded and developed remarkably. Today Aivar Pilv Law Office is situated in Tallinn and in Tartu. Since December 2002 we belong to the international law offices chain TAGLaw ( which guarantees the availability of legal assistance to our clients through reliable partners in different parts of the world. On 3rd October 2012 Aivar Pilv Law Office with other reputable law offices from Baltic States established new co-operation network by signing a cooperation agreement with Law Firm Fogels Vitols & Paipa from Latvia and Law Firm Balciunas & Grajauskas from Lithuania. All three law firms are known on their domestic markets as strong practitioners of civil, commercial and corporate law. The aim of the co-operation is to provide first of all the business clients with high quality and reliable legal aid in all three Baltic States. In addition, we have trustworthy cooperation partners in the neighbouring countries of Estonia, both in Scandinavia and the Baltic States. The main aim of our activity is to render high-quality legal assistance on an internationally recognized level, which can be characterized by flexible and client-oriented service. We have a professional team, which allows us to render to our clients many sided and high-quality legal assistance. We have gained experiences in different fields of law but are first of all known for our litigation, tax, corporate/commercial and real estate law practices. The Aivar Pilv Law Office has over 20 year experience in assisting its Clients in setting up companies in Estonia as well as advising on any taxation issues. If you are planning on setting up a company in Estonia, Aivar Pilv Law Office and its team of attorneys will be more than glad to assist you. Please contact Aivar Pilv Law Office at info@apilv.ee for more information.

3 Country overview Estonia is ranked at 13 in the 2013 Index of Economic Freedom and it has improved its overall score as compared to Probably one of the foundations of Estonia s economy is undoubtedly its tax system, which features flat tax rates and low indirect taxation. In 2011 Estonia adopted the use of the euro, becoming the first country in the Baltic States to meet all the criteria of the EU for the adoption of euro. Applicable law: Commercial Code, Taxation Act, Income Tax Act, Value Added Tax Act, Social Tax Act, Unemployment Insurance Payment Act. Forms of legal entity When deciding to do business in Estonia, the first order of business is to decide on the legal form of the company. Under Commercial Code the following entities may be established (i) sole proprietorship, (ii) general partnership, (iii) limited partnership, (iv) limited liability company and (v) public liability company. Additionally one may establish non-profit organizations and foundations. Since the private limited company and public limited company are the most popular, then their establishment is described below.

4 Private Limited Company Requirement of share: must be at least 2500 EUR. NB! A private limited company may be established without paying the share capital, if all founders are natural persons. Founder: may be either a natural person or a legal person or a combination of them. Documents needed for establishment: The memorandum of association, which sets out the name of the company, its office, names of founders, the share capital and number of shares etc. NB! The working language of the commercial register is Estonian, which means that all documents must be in Estonian or accompanied by a certified translation copy. The articles of association must be concluded as well. Articles shall again among other things set out the name of the company, the share capital, the procedure for payment of shares, the formation of legal reserve and the management body. NB! When using the expedited procedure for registering a private limited company, then the articles of association are standard and developed by the Ministry of Justice. However, the expedited procedure is only available, if the founders have an Estonian ID card and ability to use the electronic commercial registry. Share capital: The share capital can be either monetary or non-monetary. If the articles of association specifically do not foresee the payment by nonmonetary contribution, then the payment must be in monetary value. It is also possible to establish a private limited company without making a contribution for the share capital. The founders must bear in mind that they cannot take out profits (dividends) before the share capital has been paid. Registration in the registry: After drafting the necessary documents, then a petition to the Commercial Register shall be made. The petition to enter a company in to the commercial register must be submitted not later than one year after conclusion of the memorandum or association. The petition shall be notarized. The private limited company is entered into the registry within five working days from the date of ruling on entry.

5 Public Limited Company A public limited company is a company which has share capital divided into public limited company shares. A shareholder shall not be personally liable for the obligations of the public limited company. A public limited company shall be liable for performance of its obligations with all of its assets. Requirement of share: Share capital shall be at least euros. Founder: A public limited company may be founded by one or several persons. A founder may be a natural person or a legal person a combination of them. Documents needed for establishment: The memorandum of association, which sets out the business name, registered office and address of the public limited company being founded, the names and residences or registered offices of the founders, the proposed amount of share capital, the number of shares and the division of shares among the founders etc. NB! The memorandum of association and the articles of association approved thereby shall be notarized and signed by all founders. The articles of association must be concluded as well. Articles shall again among other things set out the name of the company, the amount of share capital in case of shares with nominal value, the nominal values of the shares, in case of shares without nominal value, the number of the shares, class of shares, the procedure for payment of shares, the formation of legal reserve and the management body and supervisory board etc. NB! Articles of association may include other terms when so prescribed by the Commercial Code. Share capital: The share capital can be either monetary or non-monetary. If the articles of association specifically do not foresee the payment by nonmonetary contribution, then the payment must be in monetary value.

6 Public Limited Company Upon foundation, the founders shall open a bank account in the name of the public limited company being founded into which monetary contributions shall be paid. The valuation method of a non-monetary contribution shall be prescribed in the articles of association. NB! The share capital must be paid in full, prior to submitting the petition to register the public limited company. Registration in the registry: In order to enter a public limited company in the commercial register, the management board shall submit a petition, which must be signed by all members of the management board. The following shall be appended to the petition: the memorandum of association, the articles of association, a bank notice concerning the payment of share capital, upon payment of a non-monetary contribution, the agreement for transfer of the contribution to the public limited company, the documents certifying the value of the contribution. The petition to enter a company in to the commercial register must be submitted not later than one year after conclusion of the memorandum or association. The petition as well as memorandum of association and articles of association shall be notarized. The public limited company is entered into the registry within five working days from the date of ruling on entry. Applicable state fees: In order to register a private limited company or a public limited company in the commercial registry, a state fee in the amount of 140,00 euros shall be paid. If the expedited period is used then the state fee is 185,34 euros. In order to amend an existing registry entry the state fee is in the amount of 17,89 euros. Entering a restructuring into the commercial registry, a fee of 127,82 euros is payable.

7 TAXATION IN ESTONIA Corporate taxation After the corporation is registered in the Estonian Commercial registry, the company needs to register itself as a taxable person with the Estonian Tax and Customs Board (hereinafter Board) when (i) it has employees and makes income tax taxable payments and (ii) has taxable supply and needs to declare and pay VAT. Taxable period: The taxable period is a calendar month. Each month on the 10 th the income tax, social security and unemployment insurance payment are due. NB! Even if the corporation does not have employees, once registered as VAT liable person, the corporation has the obligation to submit income tax declarations. Each month on the 20 th the VAT declaration is due. Penalties for late payments: The interest rate of 0,06% per day is payable if the payable tax has not been paid on time. NB! The interest is not considered as cost which is allowed to be deducted from business income, hence the income tax of 21% is payable from the amount of the interest. Suggestion: Submitting the tax declaration though e-tax and customs will ease the day-today accounting. For that the person liable for accounting needs an Estonian ID-card. The Income Tax Act lists exclusively the taxable events for resident legal persons. Dividends: A resident company shall pay income tax on profit distributed as dividends or other profit distributions upon payment thereof in monetary or non-monetary form. Income tax is not charged on profit distributed by way of a bonus issue. Income tax is charged at 21% of the gross amount of the profit distribution or 21/79 of the net amount.

8 Taxation in Estonia Corporate taxation / Value Added Tax (VAT) Fringe benefits: The employer has to pay income tax from the fringe benefits afforded to its employees. Fringe benefits are goods, services, remuneration in kind or monetarily appraisable benefits which are given to a person in connection with his/her employment. Fringe benefits are: covering of housing expenses, use of employer s vehicle, payment of insurance premiums, compensation for use of private vehicle, etc. NB! Social tax of 33% is also payable from fringe benefits Gifts, advertising: The legal person is also liable to pay income tax if the gifts, it provides for advertising purposes, exceeds 10 EUR in value (excluding VAT). Value Added Tax (VAT) Registration: According to the VAT Act, when the taxable supply of the corporation in one calendar year exceeds EUR, then registration is mandatory. If the taxable supply does not exceed EUR within one year, but the corporation would like to deduct input VAT, then voluntary registration for VAT liable person is also possible. NB! One may add VAT to the rental of real estate (except for dwellings) if the corporation notifies the Board in advance. Tax rates: The standard rate of VAT is 20%. A reduced rate of 9% is applicable to items like books, accommodation, medicinal products and periodicals. 0% VAT is applicable for exports, goods purchased on board a vessel navigating the international waters or on aircraft operating international flights, goods supplied to the members of the armed forces of NATO. If the place of supply of services is not Estonia, then they are also taxed with the 0% rated VAT. According to the VAT Act there are several services which are exempted from the VAT. For example postal services, health care services, social services funded by the local government s budget, education, insurance, rental of real estate etc.

9 Taxation in Estonia Personal taxation / Local taxes Personal taxation Taxable rate: Income tax rate is 21%. Starting from 2015 the income tax rate will be 20%. The income tax is to be withheld by the legal person (i.e. company) that makes the payment to a natural person. On the basis of a single written application of the taxpayer (i.e. the natural person), one-twelfth of the basic exemption shall be deducted each calendar month. In 2013 the exemption to be deducted from the salary is 144 EUR per month. Tax declarations: a resident natural person is required to submit an income tax return not later than 31 March each year. NB! Tax declarations can be filed through the e-tax and customs board. However, that presumes that the natural person is in possession of an Estonian ID card. A person is considered as a resident for the purposes of taxation, if he/she spends more than 183 days per 12 month period in Estonia unless a doubletaxation avoidance treaty specifies otherwise. Local taxes In addition to the taxes outlined above, it is important to bear in mind, that the place of establishment of the corporation will also affect the taxes applicable. In Estonia each local government (i.e. county or city) may establish its own taxes. The most common tax, established by local governments, affecting corporations is the advertising tax.

10 Law office team Tallinn office Vabaduse väljak Tallinn, Estonia Switchboard: Fax: info@apilv.ee VABADUSE VÄLJAK Vabaduse väljak Team JAANI KIRIK Aivar Pilv attorney-at-law, managing partner (aivar@apilv.ee) Ilmar-Erik Aavakivi attorney-at-law, partner (iea@apilv.ee) Pirkka-Marja Põldvere attorney-at-law, partner (pirkka@apilv.ee) Britta Oltjer attorney-at-law, partner (britta@apilv.ee) Jaak Siim attorney-at-law, partner (jaak@apilv.ee) Merilin Valdmaa attorney-at-law (merilin@apilv.ee) Hetti Lump attorney-at-law (hetti@apilv.ee) Kairi Tuulmägi attorney-at-law (kairi.tuulmagi@apilv.ee) Vadim Filimonov attorney-at-law (vadim.filimonov@apilv.ee) Merit Helm attorney-at-law (merit@apilv.ee)* Marko Pikani attorney (marko.pikani@apilv.ee) Marko Pilv attorney (marko.pilv@apilv.ee) Anneli Aab attorney (anneli.aab@apilv.ee) Epp Lumiste attorney (epp.lumiste@apilv.ee) Vitali Denikin attorney (vitali.denikin@apilv.ee) Marina Pilv Kairi Napritson Helen Paumets Anneli Uus Aleksandr Tsemin Elin Uusväli Iris Kumari Irina Meldjuk manager of administration and finance (marina@apilv.ee) assistent (kairi@apilv.ee) assistant (helen.paumets@apilv.ee) assistant (anneli.uus@apilv.ee) assistant (aleksandr@apilv.ee) office manager (elin@apilv.ee)* assistant (iris.kumari@apilv.ee)* assistant (irina.meldjuk@apilv.ee)* * on maternity leave

11 Law office team Tartu office TASKU CENTER Turu 2 (Tasku Center) Tartu, Eesti Switchboard: Fax: tartu@apilv.ee Team Urmas Kõrgesaar Tambet Laasik Häli Jürimäe Karin Ploom Leeles Pärlin Riina Kerm Katrin Nooska attorney-at-law, partner (urmas@apilv.ee) attorney-at-law (tambet@apilv.ee) attorney (hali@apilv.ee) attorney (karin@apilv.ee)* assistant (leeles@apilv.ee) assistant (riina@apilv.ee) assistant (katrin@apilv.ee)* * on maternity leave

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