The freest post-Soviet economy

On many occasions, when we hear of Eastern Europe, the first thought that comes to mind is the memory of the Soviet bloc that ruled the region with an iron fist during almost the entire 20th century. The communist model, exported by Russia to all its neighboring countries, left profound consequences in the region after its fall in 1991. 

But precisely many post-Soviet countries learned the hard way that statist policies simply don’t work. So, when everything goes wrong, you must develop new strategies in order to secure stability, keep the economy growing, and, in general, ensure a good investment and business environment. 

Countries such as Latvia, Lithuania, and Estonia who endured communism, took this pretty seriously, making a 180° turn in their way of conceiving the economy.

And the poster boy for this post-communist extreme makeover is Estonia. Always a relatively unknown country due to its difficult language, small size, and extreme location, its name quickly stopped being recognized as one of the smallest members of the Iron Curtain to one of the freest economies in the world with some of the best tax optimization opportunities available in the EU.

It is one of the most prolific and free countries in Europe and the entire world. It is a technology powerhouse developing an entire online infrastructure that is, simply, one of a kind. The most valuable resource of this is undoubtedly the E-Residence program. 

At present, this small country is one of the most balanced and free economies, making it open and friendly to foreign investors and entrepreneurs, according to several of the most renowned economic studies on the planet. A stable and profitable tax system, with 0% income tax for the company until it distributes profits and a good number of grants for new enterprises, made Estonia an absolute “must watch” when the time of planning your next investment comes. A lot of economic studies around the world recognize Estonian capacity to produce great profits and incomes out of the companies that put their trust in this small nation. 

And that’s why, in Mundo, we can help you with varied services in Estonia:

-We can help you incorporate a company, which can be an overall solid strategy for tax optimization.

-We can help you acquire a crypto license in Estonia, one of the most renowned crypto licensing jurisdictions and we can help you open a bank account in another EU jurisdiction or outside the EU for your crypto business.

-And, also, we can help you acquire the e-Residency in Estonia, which is one of the most sought-after jurisdictions for crypto entrepreneurs and IT startups.

Estonia is one of the countries to analyze when a person wants to study the most dramatic transitions from one political model to another. Just as its neighbors from Eastern Europe, its economy went through serious difficulties after the Soviet collapse, mainly because 92% of Estonian international business was conducted with Russia.

So, what makes Estonia one of the most modern and most competitive states in the world? After the Soviet collapse, they quickly understood the need for private enterprises and the attraction of foreign capital as the only possible ways for the country to overcome its crisis and move towards a positive and developing economy. 

In this way, the Republic of Estonia was able to leave behind its chaotic end of the 20th century and become one of the most attractive countries for living, settling, and foreign investment. By 2004, it was a member of NATO and the EU, a member of the Organization for Economic Cooperation and Development (OECD) by 2010. It adopted the euro as its official currency in January 2011.

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Estonian Economy

What do we look for when we want a business partner or the perfect investment destination? Confidence, transparency, and, of course, the capacity to show great stability and gaining profits. Estonia offers this and much more to foreign capital holders. Their 10th place on the 2020 Index of Economic Freedom supports this.

Unlike many other countries in Europe, they were able to see that high taxes and strong state intervention on business were not the way to success. Thus, they liberalized their economy to become a huge partner to European and world-class investors.

The Estonian economy is based on EU trade, foreign investment, an important commitment to technology, which places it as one of the most advanced countries in terms of ICT (information and communication technologies).

Like a domino effect, Estonia's high online presence has allowed it to be in the sights of large technology companies and facilitate the creation of many such companies within the country, the most famous case being Skype, which still maintains its operations in Estonia.

This high online presence directly influences the ability to catch foreign capital’s attention. Who wouldn't want to be able to start a business in an investor-friendly country without the need to be permanently in that country? 

The business sectors in this Baltic country include primarily engineering, telecommunications, textiles and wood products, and computer technologies. For years, the government and its economic organization have been committed to a market economy, giving space to economic ties and treaties with many countries in the region. Finland, Sweden, Germany, and, in special terms, Russia, are its main trading partners.

In addition to the aforementioned, Estonia's economic policies have resulted in the small nation having the lowest debt-to-GDP ratio in the entire European Union, undoubtedly a significant improvement in comparison to the mid-1990s. This is also a country quite open to foreign investment and labor, modifying its immigration laws to make it simpler and faster to hire highly qualified personnel for the different economic activities and boost productivity growth and efficiency in fulfilling objectives.

Commitment to technology and "e-Residency"

Within its great commitment to be constantly at the forefront of technology, Estonia has experienced a series of events and moments that make it an exciting case study for those who study the modern state’s evolution. Obtaining new technologies, and even more, constantly investing in them, places this small country as one of the great world leaders in the field, with an enviable internet connection, access to a variety of powerful telecommunication networks, and as a huge attraction for IT companies from all over the world.

However, this technological innovation’s most distinctive element is undoubtedly the birth of the so-called "Electronic Residence" or "e-Residence.” This is a government-issued document that gives its bearer the ability to fully access the small country’s digital infrastructure, whether it is for consulting government websites, or starting businesses and companies online.

However, this ID or identification card is not a document that grants Estonian citizenship. It cannot be used as a passport, nor does it provide the social benefits that an Estonian citizen enjoys. Yet it does facilitate the entry of foreign capital into the country to an enormous extent by promoting the most varied businesses. 

What is the major attraction of this document? To obtain it, or use it, the applicant doesn’t need to enter or be in Estonia. From a series of requirements, whoever has a business and sees Estonia as the opportunity to grow, can apply for an E-Residence. This document, among others, offers the following benefits:

• Signing of digital documents
• Establishment of Estonian companies
• Access to government infrastructure
• Online and remote tax declaration

This electronic residency is one of the government’s measures to generate incentives and attractions for foreign investment to boost the national economy’s growth.

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Investment climate

Estonia’s demographic situation, a small country with just over 1 million total inhabitants, is quite interesting. Therefore, the small number of people limits the amount of skilled labor for the different economic tasks, so the government through different policies has promoted plans and programs that facilitate the hiring of foreign personnel and capital investment.

A good climate for business is the key to Estonia’s economic success. Economic reports such as the 2020 Index of Economic Freedom and the 2020 Doing Business Report recognize the country's facilities for starting a business, as well as the conditions, laws, and policies that are conducive to its growth.

One of the most impressive Estonian policies to promote foreign capital investment is the implementation of “Free Zones,” which can be defined as economic areas located in a specific geographical location that can allow goods to be processed and stocked and where enterprises are not required to pay customs or certain taxes. Goods brought to the free zone for later re-export are not subject to VAT, excise, or customs duties. Also, the Estonian specialty (no tax on reinvested profits) is available in free trade zones as well. There are 3 of these so-called “Free Zones”:

1)The Muuga Harbor: This is an extensive free zone that grants more flexible customs procedures for companies rendering transit and distribution services. Simplified customs procedures, easy transfer of ownership rights, and value-added operations allowed in the zone are designed to foster the development of distribution centers. No import VAT is applied to goods that are imported only temporarily to be processed and exported in due time from Estonia.

This free zone also provides great communications routes on land and the sea, and the entire complex was designed for warehousing and distribution facilities.

2)The Paldiski Free Trade Zone: It was established as a free zone back in 2011, and has the particularity of being 100% privately owned. Owners of companies investing in the transportation of goods and vehicles benefit from several privileges such as the option of keeping their vehicles in the Paldiski Port without being required to pay customs duties and with reimbursement when filing for VAT.

3)The Sillämae Free Trade Zone: This is a Free Zone of control type 1, which makes it possible to transfer ownership of goods with 0% VAT rate and to perform storage of cargo transshipped in transit through Estonia with no taxes and duties having to be paid. According to the Law of the Estonian Republic no customs duties, excise taxes or VAT are applicable to the goods declared as transit and stored within the Free Zone for 3 years.

This is a huge and significant point: Several countries in Europe and worldwide are used to raise taxes and duties on foreign products. This is the case of the US, China, France, Spain, the UK, and many others.

Estonia, for its part, understood that in order to maintain a high level of investment, as well as to generate a higher level of confidence, it was necessary to offer business incentives. Judging by its economic indexes, as well as excellent evaluations at an international level, these incentives have paid off.

Estonia presents an interesting variety of grants for start-ups, seeking to stimulate the attention of foreign investors. The start-up grant aims to support the creation of enterprises that have a lot of development potential, and thereby expand regional entrepreneurship and the number of exporters. Companies that receive the grant are obliged to meet certain goals, such as creating new jobs and increase sales revenue.

The maximum amount of the grant is €15,000. The share of grants in the cost of a project is a maximum of 80%, meaning self-financing must be at least 20%. The conditions for applying for each grant vary depending on which grant is required. According to Estonian regulations, to apply for a start-up grant, the business must not have been in existence for up to 24 months, while for a development grant, it must be active for more than 36 months.

Tax Policies in Estonia

While granting facilities for the establishment of companies, this small northeastern European country’s tax policy is also quite friendly to foreign investment and capital inflows, while protecting itself from being considered a tax haven.

As for taxes that concern companies and investors, two can be pointed out: 

• Corporate Income Tax: This is a tribute located at 20% on all profits and benefits of the companies, but it is only charged when these benefits are distributed among the company’s shareholders, and it is exempted when the same are reinvested, seeking to increase the productive capacity. The 0% CIT policy seeks to keep a large investment machine that continues to direct funds to Estonia. This exemption covers both active and passive (e.g. dividends, interest, royalties) types of income. It also covers capital gains from the sale of all types of assets, including shares, securities, and immovable property. This tax regime is available to Estonian resident companies and permanent establishments (PEs) of non-resident companies that are registered in Estonia.

From 2018 onwards, a lower CIT at the rate of 14% for those companies making regular profit distributions is available. The payment of dividends in the amount that is below or equal to the extent of taxed dividends paid during the three preceding years will be taxed with a rate of 14%

• Property or real estate tax: Estonia imposes a rate varying between 0.1% and 2.5% for the tax on a property, depending on what is determined by local authorities and the land’s value. This country incurs in a rather peculiar practice for collecting this type of tax. The Estonian tax regime exempts from tax payment the constructions and investments made on that land or property in question to guarantee the necessary and safe investment on the owned land, limiting the tax’s payment to the physical space on which it is invested.
• Value-added Tax: Estonia has a standard VAT rate of 20%, with a reduced rate of 9% for books and learning materials, medicines, and medical equipment, and in some cases, as low as 0%, which applies to exports, intra-community supply of goods, international passenger services, goods and services supplied on board of ships and airplane, delivery of goods, services for diplomatic and consular missions, international organizations, institutions of the European Union and NATO, goods located in free zones, services supplied to other countries, cross-border services.

To ensure an attractive investment opportunity for foreign capital, Estonia has made sure to avoid double taxation with almost all countries with which it does business. Fifty-nine states have signed double taxation treaties with Estonia. Investors residing in another country and doing business on Estonian territory may be entitled to exemption/reduction from taxation of income and property according to provisions of the respective deals, based on agreements reached between Estonia and other jurisdictions.

Estonia is a friendly country open to savings and foreign investment. The Estonian economic miracle is one to admire, especially when compared to other struggling economies worldwide. Their low corruption figures, the international recognition of its business model, and the great profits generated year to year make this ex-Soviet Republic an excellent destiny for foreign investment and brand-new companies. In Mundo, we can help you with the best services available in this country.

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