Entering the Estonian Market
The Republic of Estonia is playing an increasingly impressive role in the European economy. The relatively small nation of 1.3 million may be tucked in the northeast corner of the continent, but its membership of key global institutions underlines its drive into the economic mainstream.
Estonia has been in the European Union since 2004, the Schengen Area since 2007 and became a member of the Eurozone in 2011. In addition, Estonia has membership of the United Nations, World Bank and World Trade Organization, International Monetary Fund, the North Atlantic Treaty Organization and the Organization for Economic Co-operation and Development,
Estonia has a varied range of exports – including refined petroleum, wood and paper products, metals and chemicals – which contributed towards a Gross Domestic Product of US$36.4 billion in 2021. Estonia is outside the world’s top 50 economies. However, per capita GDP of over US$27,000 places the population comfortably in the top 40.
Estonia has a forward-looking, innovative and modern market-led economy, with an open-minded attitude towards Foreign Direct Investment. In the 20 years up to 2021, FDI in Estonia averaged over US$260 million per year.
These are among the attractions for foreign companies looking to make the enterprising move into Estonia’s economy. They have the option of opening a private limited liability company as an osaühing, or OÜ, operating under the Companies Act, regulated by the Commercial Code.
Expanding into Estonia
Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and residence permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination and severance? Drawing up an expansion blueprint is not enough. Your business plan will have to answer all these questions.
Estonia generally welcomes foreign investment. But there are always issues surrounding compliance with the relevant legislation. In Estonia this revolves around the Employment Contracts Act and other statutes – plus European Union Directives also come into play.
There are other issues, too. Where will you find manufacturers, offices and distributors?
There is a simple and effective alternative – by partnering a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs. This way companies can plot a time-efficient and cost-effective path to locating and employing staff in Estonia. Here we set out some of the necessary steps.
Estonia Business Facts
- Capital – Tallinn
- Population – 1.32 million
- Regions – North, South, East, West and Tallinn region
- Official languages – Estonian
- Economy – 36.4 billion US dollars, outside the world’s top 50
- Leading sectors by GDP – 62.69% service industry, 22.65% manufacturing, 2.17% agriculture, plus public administration, defense industries, education services, health and social work services
- Main exports include – Machinery and equipment, phone devices, wood, paper, textiles, furniture, metals and chemical products, shale tar oil
- Main imports include – Refined petroleum, vehicles, medicines, broadcasting equipment
- Main trading partners – European Union members, primarily Finland, Germany, Latvia plus non-EU Russia and China
- Government – Parliamentary republic, unitary state
- Currency – Euro
Advantages and Challenges of the Estonian Market
Advantages of expanding into the Estonian market include:
- Taxation: Comparatively low rates for personal and corporate liability. Organization for Economic Cooperation and Development ranked Estonia No. 1 globally for tax competitiveness in 2021
- Trading: Membership of the European Union (EU) and the Eurozone simplifies business interaction
- Energy: Self-sufficient due to oil shale reserves
- Growth: Development of high value-added areas such as Information Technology and electronics
- Attitude: Open and innovation-based outlook attracts international corporations such as Ericsson and ABB, while the R&D for Skype was completed in Estonia
Challenges of expanding into the Estonian market include:
- Risks: Relatively small economy susceptible to outside influences
- Labor: Declining population and workforce leading to skills shortage in some sectors
- Logistics: Restricted land links with the rest of the EU
- Politics: Potential tensions between Estonians and ethnic Russians in the east region, who make up 25% of the population
Limited Company / Subsidiary or Branch in Estonia?
Foreign companies establishing a legal entity in Estonia usually choose a private limited liability company, known locally as an osaühing, or OÜ andoperating under the Companies Act, regulated by the Commercial Code. This is the ideal format for Small and Medium Enterprises (SMEs) and start-ups as a means to establishing a foothold in the economy.
The private limited company has minimum share capital of €2,500 (US$2,700), and a management board who are not necessarily shareholders. The shareholders are liable only to the level of their contribution in shares and the parent company is free from responsibilities for the subsidiary’s debts or liabilities. The parent company owns the majority of the share capital.
Another option for foreign companies is to open a branch, known as an eesti filial, but this not a separate legal entity under the Commercial Code and the parent company remains liable for its debts and any legal issues.