Companies that start their business in Estonia may eventually run into the following challenges, which significantly affect their activities and therefore have to be dealt with.

Immediate issues

1. Payroll taxes.
2. HR-related issues.
3. Compliance with the company operation requirements and justification of its presence in Estonia.
4. Interaction with Estonian financial institutions.
5. Interaction with Estonian regulatory, supervisory and monitoring authorities.
6) Accounting principles and compliance with international standards.

When dealing with these issues, some difficulties may arise that shall be taken into account from the outset.

It's worth paying attention to

1. Payroll taxes.

At the beginning of 2021, the average monthly salary in Estonia is 1,538 EUR. This is a gross amount.

In 2021, the minimum tax-free amount in Estonia is from 0 to 500 EUR per month, depending on income.

A monthly salary of 1,538 EUR is subject to a tax of 809.29 EUR.

The average salary varies depending on the area of activity. If we consider IT companies and Fintech companies, the average monthly salary is ca. 2,761 EUR. Such salaries are subject to a tax of 1,564 EUR. In this case, the minimum tax-free amount is 0 EUR for such salaries.

2. In Estonia, HR-related issues have recently become of great importance.

The reason is that Fintech- and IT-related industries requiring skilled personnel are growing fast. In Estonia, all companies operating in these industries have an urgent need for specialists. The availability of qualified specialists in the country is very limited. It is difficult to engage qualified specialists from abroad due to visa and work permit related issues. There are no preferential terms or special provisions.

It should also be noted that a qualified worker shall have a good command of English and a desire and opportunity to learn Estonian, since it will be difficult to work in Estonian companies without knowing the language.

Contracts are made with employees according to the Estonian Employment Contracts Act, which is strictly socially oriented and mainly aimed at observing the rights of employees. In Estonia, there is an 8-hour working day and a guaranteed 24-day annual leave. In case of child care, a maternity leave of 18 months with pay or up to 3 years without pay is guaranteed. Overtimes are not encouraged, and employees usually do not work overtime.

3. Local banks have recently strengthened their requirements for Estonian companies and want them to operate in Estonia. To prove such operation, banks require that Estonian companies have an employee or employees in Estonia, an office and partners cooperating with the Estonian company in Estonia. These requirements make it difficult to operate for international Internet companies that only do business outside Estonia. Even if there are employees and an office in Estonia, local banks prefer to close accounts of such companies.

New Challenges which Technology companies will face in Estonia.

Tax authorities usually do not screen international companies for a place of business. Thus, companies cooperate with Estonian tax authorities in a friendly and open manner. However, it is hard to get a VAT number in Estonia, if the Estonian company has no turnover or its turnover in Estonia is too low (less than 40,000 EUR a year). If its turnover is mainly in the EU, tax authorities do not take this into account when deciding whether to submit a VAT number and often refuse to do so.

4. For an Estonian technology the majority owners and board members of which are not residents of Estonia, the most challenging issue is opening a bank account with one of the Estonian banks.

Currently, every bank is closely screening such new customers. Before deciding whether to open an account, banks, first of all, ask an Estonian company to prove that it is operating and managed from Estonia.

A rented office and local employees who get wages can serve as evidence. However, even if this is produced in evidence, banks may be wondering why a company has been established in Estonia, especially if it does not operate in Estonia. The justifications that Estonia has a favorable tax environment and conditions for business development are not accepted by banks.

Depending on business activities, banks may continuously monitor the company operations and request any documents on the transactions performed even if the company has an open account.

5. Interaction with Estonian regulatory, supervisory and monitoring authorities.

Technology companies the activities of which are related to the provision of financial services or online trading or merchandising services from Estonia, will eventually have to deal with organizations that monitor and audit such activities. When it is necessary to obtain permits or licenses for various types of activities, issuing authorities do not provide support to applying companies. Thus, in order to get a license or permit, companies request instructions or recommendations on how to follow the rules and the requirements of supervisory authorities. However, it is not common practice that supervisory authorities notify companies in advance of what they should or should not do in order to comply with the established rules and what the audit criteria and requirements would be. It often happens that audited companies are punished for not knowing such requirements.

Therefore, when applying for permits or licenses, companies should turn to the experts who will advise them on possible requirements and what should be immediately taken into account so as not to violate them.

New Challenges which Technology companies will face in Estonia.

6. Standard financial and tax statements of Estonian companies are very different from the standards used in other countries and the IAS/IFRS international reporting standards. Therefore, a company carrying out international activities shall have a specialist who can ‘convert’ statements of the Estonian company into international standards used in other countries and compliant with the IAS/IFRS standards.

This difference leads to non-uniform accounting procedures, particularly in relation to fixed assets, their write-downs and revaluation; profit and loss accounting; and fixed assets accounting.

In Estonia, all statements shall be drawn up and submitted in Estonian.

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