Why Estonia and why now?

 

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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.

Estonia – Europe’s most entrepreneurial economy?

According to the World Economic Forum and Global Entrepreneurship Europe’s Hidden Entrepreneurs Report (December 2016), Estonia has been ranked first in regards to the number of startups per capita from 2011 through 2015. This country of 1.3 million people has maintained consistent growth in many ways since its independence in 1991, with one exception in 2009 after the financial crisis. The secret to success might lie in the country’s approach to entrepreneurship and to the idea that less bureaucracy is better. In Estonia, it takes approximately 15 minutes to set up a company whereas, in the neighboring country, Finland, the process could take months. This is just one of the innovative approaches Estonia took to encourage high rates of entrepreneurship.

At the national level, Estonian schools have adopted entrepreneurship education at all earlier levels by introducing students to a program called “I am an Entrepreneur”. Originally, this program was launched by the energy company, Eesti Energia in cooperation with the Estonian Chamber of Commerce. It targets 13–19-year-olds and aims to bridge the gap between entrepreneurship education in the formal education system with the non-formal education system. There are more than 200 organizations and more than 70 mentors involved in the program.

In January 2017 Estonia launched a startup visa program to lure even more startups and employers to this growing startup hub. During the first month of the program over 50 applications were received. The reason for the program’s success lies in part with Estonia’s reputation for innovation, not only in technology development but innovation in how the government passes rules and regulations to allow businesses and entrepreneurship to thrive.

One of the success stories is TransferWise. In 2010 two Estonian friends, Kristo Käärmann and Taavet Hinrikus were living in the UK, but from time to time were forced to make cross-border money transfers. Käärmann was transferring money from Estonia to the UK and Hinrikus transferring money from the UK to Estonia to pay his mortgage and paying huge transfer costs. The potential for cheaper service in the currency swap industry was discovered when the two friends started to pay each other’s costs and TransferWise was born. Today this currency swap service company is worth more than one billion dollars, which is a huge milestone for any tech startup company. The company has attracted investments from Sir Richard Branson, which gave TransferWise even more credibility as a company.

TransferWise is openly fighting to bring transparency to forex transfers around the world and has been said to be taking “a machete to the hefty fees that banks levy to send money across borders”. According to TransferWise Future of Finance Report, the financial markets will look very different within a few years. Just in the past five years, the financial technology start-up companies have been innovating the finance sector. Cutting the traditional bank’s service fees and providing better service has been shaking the banking sector and the future looks bright for the financial technology, or simply just fintech, sector. The Guardian has called TransferWise the “Robin Hood” of currency trade – not many companies that have emerged from an old Soviet country have questioned the hundred years old banking sector.

TransferWise is not the first multimillion dollar company started in Estonia. The instant message and video call service provider Skype was developed in Estonia and the now Microsoft-owned company’s back-end development office is still situated in the capital of Estonia. Skype’s story isn’t that different from that of TransferWise. There was a clear demand for phone calls over IP and Skype answered that demand.

The success of innovative technological solutions in Estonia might lie in its history. Until 1991, Estonia was part of the Soviet Union where resources were scarce or unavailable. One of the investors in Skype, Steve Juvertson, was wondering how such a small group of people could build something so fast when it would take Microsoft much longer to develop products. Jurvetson said “I had the impression that maybe coming out of a time of Soviet occupation, when computers were underpowered, you had to know how to really program, effectively, parsimoniously, being very elegant in sculpting the programming code to be tight, effective, and fast. [That’s] not like Microsoft, which has a very lazy programming environment, where programs are created that have memory leaks and all sorts of problems, that crash all the time and no one really cares – because it’s Microsoft!”.

Even the Europe’s Hidden Entrepreneurs report says that “Aside from structural economic factors, the country has other drivers of entrepreneurship. First, Estonia has a long-standing history and culture of self-reliance and persistence, stemming from living in the shadow of large, sometimes even hostile neighbors. As a result, Estonian entrepreneurs pride themselves on the ability to be persistent and inventive, whatever the conditions. Second, in the last decade, Estonia has seen a number of success stories which has elevated entrepreneurship visibly in the public eye. […] Third, Estonia is a very small country, which means that entrepreneurs with ambitious goals are forced to think internationally from the start.”

The Estonian technology reputation has not gone unnoticed as more and more startups emerge from Estonia. However, even though Estonia has been proliferating startups there is an issue that Estonian companies have faced. Lower salaries in Estonia have not attracted the skilled ICT developers to meet the demand. The Nordic countries offer higher salaries to skilled programmers. To overcome the challenge of attracting talent from outside of the borders, the government has set in motion the Estonian Entrepreneurship Growth Strategy 2014 – 2020, a plan to address the shortage in these skills by offering education in targeted fields.

Reference:

Startup Estonia     Hidden Entrepreneurs      Growth Strategy    TransferWise     Skype 

Why is it smart to do business in Tallinn?

Winter is coming and the Northerners get to enjoy the Autumn colors while, slowly but surely, the year 2016 is nearing its finale. How do you see yourself and your company next year at this very same time? Wise decisions are valuable and important as is the location of your company. Ever had any thoughts that business functions do not go smoothly enough, the digital environment is ancient and progress seems to move at snail’s pace? But future is now, so all that must be frustrating. We should know since we (authors) are located in Tallinn, one of the most, or maybe even the most digitally developed country in the world.

What is it then that makes Estonia so advanced, tech-savvy and business friendly? The tiny North European country has learned hard lessons from its neighbors, the economy has not suffered from Brexit and the important indicators, such as GDP and unemployment rate, among many others are rather splendid compared to most of Europe. Actually Brexit has so far meant great success for Estonia’s interests and business world, for example, citizenship applications from Britain to Estonia increased tenfold compared to the previous year. This is the result of the unique system where anyone can apply for a digital e-citizenship of Estonia, even if they have never been anywhere near the country. With the e-residency, people all over the world are able to use Estonia’s digital services, which cover for example bank services. Most of Europe is feeling the heat about the recent Brexit vote and watching the island kingdom with binoculars wondering, waiting what will happen next, while Estonia keeps being one step ahead in the digitalization race.

Trendiest word ever, digitalization, has been repeated as the most essential development in the future, for example, in Finland, but still, the reactions have been far from the theories. Estonia, on the other hand, has been taking big steps and going forward much faster than any of its neighbors. This makes sense in a way because Tallinn has been a hub for business and start-ups since as early as the Hanseatic period, for hundreds of years. The banal Soviet decades are long gone but not forgotten.

Here is the thing: there really is no magic behind of the Estonian success. That is why it is time to make a short list of the key points why business is booming in Estonia and what to expect when trying to make a living in the Pearl of Baltics.

1) Strength in innovativeness

One can be surprised to see how well new things are being adapted in Estonia. It is as if there is no middle man slowing things down like in many other Western countries. Yes, Estonia is an Ex-Soviet satellite state but surpassing that fact they have been able to balance themselves without mental devastation, instead thriving with adaptability and resilience. These abilities are in high demand everywhere nowadays. Comparing present day Estonia to the 90’s version can help you to realize that change is always possible, and also inevitable. It is all about how we adapt to it and take our chances.

There are those who stick to the old and do not want to believe that the world is changing. Well, it never stopped changing but the nature of things is now faster than perhaps ever. Global market and the total adolescence of the concept of work might be a nightmare to those who fear regeneration and future itself. In Estonia, the future has been seen as it should be: full of opportunities waiting to be seized.

For example, the digitalization innovations, such as e-residency, do not get any faster and easier for you for doing real business in Estonia! There is already over ten thousand e-residents and a lot of them have never even touched the Estonian soil. The system is globally unique. You see, this is the innovativeness; Estonian companies get more customers and grow faster than ever because of this and all the other amazing digital applications. The next level of internationalization has already seen daylight in the most advanced digital society in the world. Others might want to take a leaf out of their book and follow.

2) Cost-effectiveness

Seriously though, where else do you get to see things running so smoothly as in Estonia? They started from the bottom 25 years ago when entering the world of independent and free nations. Celebrating its 25th year of complete freedom it is a must to raise a toast for Estonia at this point – Terviseks!

Since 1991 the economy has been steadily growing with praise from the economic world. A liberal economy policy is one key to growth, not to mention the low-tax system and the 1/3 labor costs that companies face here compared to those of, for example, Finland or Sweden. This has not been unrecognized by the world’s biggest trading and banking organizations, such as the World Band and the World Economic Forum, that praise Estonia as an astonishingly great place for business. The small country has made its mark and showed to the giants that the nation in white, black and blue is the one to look up to.

3) Digitalization

Want to open a bank account in Estonia without actually being there physically? Possible, and so is visiting Estonian library to read today’s paper among many other benefits when you get yourself an e-residency. Voting is also possible online and this e-Voting concept has been estimated to be 16 times cheaper compared to the traditional way of voting.

While the vast majority of the nations are still considering the possibilities and the hazards of digitalization, in Estonia it is a whole different story. You can never become successful if your way of surviving is all about imitating the ones you look up to. By the time you get to their level they will already have moved on to bigger things. Hard work, research, and can-do-attitude will eventually play out fine for you. A point has been reached where Estonia is the forerunner in the digitalization. Identity, health, education, social services, you name it. What will you be a forerunner in?

This digitalization aspect is also the key point when considering a country to do business in. Things actually work with digital solutions and less paperwork means more action and time to concentrate on whatever you consider relevant. Fast, reliable, digital, paperless and less bureaucracy. Is this not the way you have always wanted to see the world go round since the first days of the internet?