For the last couple of years Estonia and especially Tallinn has been an actively discussed topic because of the growing businesses and many succeeding startups like Transfer Wise, Skype and Erply. Even though Estonia is becoming an important country businesswise, it has not been this way for a long time.
Since the Soviet Union era a lot has happened in the Northernmost Baltic country. The country itself has been through a heap of changes in just the last couple of years, tailing the changes in markets around the world. Despite its short history as an independent nation Estonia has a lot of success stories already and they have shown both skill and a sense for entrepreneurship. The people of Estonia have worked hard to reach the place where they are in global markets today. But let’s not forget that they also had a lot of help, still do, from other countries and international companies. Foreign investors have been vital for Estonia’s growth and they have succeeded very well in attracting more and more foreign investors and entrepreneurs with the digitalized services, in which Estonia is still a forerunner.
There are several reasons for starting a business in Estonia, you do not necessarily even need to be in the country yourself. Moving your business or opening a branch to Estonia gives you different advantages depending on what kind of field you are in. We will give you the main vantage points so that you can just go and do!
From Geography to Employee Rights
One of the many reasons a lot of companies have found the tiny Baltic country interesting business-wise is the location. Estonia’s location is perfect for firms who are reaching for the Nordic, Central-European and Russian markets. Because of its location by the Baltic Sea and neighbouring countries like Finland and Russia, which are both very different markets, the business environment is multicultural and influenced by many different nationalities.
The cheap workforce has been, and is, a major interest for Nordic countries to relocate some or all of their operations “over the bond” to Estonia from where it has trickled South to other parts of the Baltic. However, when a country’s economy is growing, so are the costs. In the (near?) future low-costs workforce will probably lose its purpose in pulling in firms from more expensive markets.
The reasons that were still obvious five years ago for relocating business operations to Estonia are not that relevant anymore. Location is losing its importance while digitalization makes it possible, and easier, to operate globally from any part of the world. More and more robots are used in all industries and cheap workforce is less required. But the fact still remains: Estonia is attracting more foreign business all the time while elsewhere things seem to be slowing down.
Covering the Cracks with Modern Technology
Estonia has taken giant-steps forwards business-wise and is still ahead of the curb in many aspects globally. The country’s main advantage point is that it is a small nation, but it has not yet built up a stable and solid bureaucracy system. Also the employee rights in Estonia are quite backwards when comparing to its other Eastern European equivalents. In fact, the goal seems to be to keep the public sector as small as possible. Still, Estonia has made sure to take part in the most important international coalitions in order to make itself a notable and trusted actor both on an economic and political level.
If there is something that Estonia is acquainted with on a global scale, it is IT and digitalization. The knowledge and experience in this field can be noticed in different areas of business in Estonia. The companies have adapted different technological solutions as part of their daily routines fast and have taken full advantage of the opportunities that they provide.
But it is not only businesses that are using digitalization to their benefit in Estonia. Modern technologies are also fluently used by the public sector. The Estonian government, for example, is nowadays using a great amount of modern digital technologies in their daily activities, such as the e- cabinet.
E-cabinet is a tool that the Estonian government uses to streamline their decision-making process. The database can be used by all government ministers in real time, so they do not miss any of the relevant information even if they cannot make it to the session itself. The results from the sessions can be emailed or even watched live and ministers can reveal their agenda on the platform and give comments during or even beforehand. The result of this all is a great amount of saved time and effort.
Administration has been made easy by modern technology also for Estonian citizens and companies. It is easy to contact the state authorities even if you are not an Estonian citizen or do not live in Estonia. In order to simplify things for businesses that want to access Estonian markets it is now possible to become an Estonian e-resident.
With the e-resident system an EU citizen can get different kinds of licenses to start a business in Estonia without ever even visiting the country. As an e-resident a person has a lot of possibilities that only citizens would have in other countries.
Basically what this means is that it is possible to establish a company online from anywhere in the world. The e-resident can also access banking services and online payment service providers (for example Paypal). Even if an EU citizen has never visited Estonia he or she is still a full owner of the company and there is no need for a local director, so it is possible for you to manage your business remotely. An e-resident can sign and authenticate documents online, encrypt and send documents securely without scanning or posting.
An e-resident will get access to a network of financial services, accountants, marketing specialists, payment providers, and other useful business services. As mentioned earlier the e-residents also get access to the government digital service. Getting insights in the activities of the public sector makes it easier to understand how to work and how to get the permissions you need when establishing a business.
As a foreign person wanting to do business in Estonia it is relatively easy to get access and insight to the things you need. Also the tax system is quite easy to understand and everything you need to know about it, you can access with your e-residency. And as every citizen in Estonia, the e-residents can make the tax declaration and pay their taxes online without sending paper versions of the declaration.
Taxation that encourages investments
Corporate taxation is quite easy to figure out for starting businesses. It is simple and for some companies there can be financial perks if you know what you are doing.
Comparing to other EU countries, especially the Nordic countries, the corporate tax is relatively low. But still, it is often cheaper and more profitable to do business in the Estonia for tax reasons. The Estonians however do not want to see it as a low tax system but as easy and simple system with a wide range of taxes.
Estonia has had flat rate taxes since 1994. The biggest reason for the flat rate taxation is to keep the system simple and transparent. The purpose of this was to be able to control inflation. It was also meant to save a lot of resources and money in regards to administration.
The corporate income tax also has a flat rate, which is 20 % since 2000. For the first years the percentage was 26 but right now it is as low as 20 %. Even if the percentage is low it is not the only reason why the corporate income tax is worth considering about. The big difference is the time of the tax payment.
In Estonia the income tax is always 20 %, no matter how big the income is or what kind of income is in question. The biggest difference is still the corporate tax. In Estonia companies do not pay tax as soon as they get profit. As long as there is no distribution of that profit there is no need to pay tax. The tax needs to be paid when it is distributed as profit. As long as the company does not give out any of its profits to its owners that profit is tax free and the company can reinvest the money without losing any of it. This gives companies that are based in Estonia a big advantage. As an example a new startup does not need to pay much tax if they just want to reinvest their profit for the first years without taking out any of it. This helps businesses to grow faster and gives them a chance to use all their assets for expanding. In the long term the tax that companies pay will be bigger since they got a chance to invest and therefor grow.
The earlier reasons are enough for some but surely there are a lot more things that the Estonian business environment can offer. The bottom line is that doing business in Estonia is relatively easy and profitable for the aforementioned reasons, and because you are surrounded by people who know how to make your business modern by digitalizing it.