Business law in Estonia

11 Mar 2025 --
0 Comments

Business Law in Estonia is governed by a modern, transparent, and efficient legal framework that aligns with European Union standards, as Estonia is a member of the EU. Estonia's legal system is based on civil law principles, and the country has developed a robust business environment that encourages entrepreneurship, foreign investment, and digital innovation. The Estonian government offers a range of incentives to foreign investors, and its legal system provides clear regulations for business formation, operations, taxation, and intellectual property.

1. Legal Framework

The legal framework for business law in Estonia is based on several key laws and regulations, which are designed to support both local and international business activities. The principal sources of business law include:

The Constitution of Estonia: Guarantees the right to establish and run businesses and provides basic protection for private property.
The Commercial Code (1995): Governs business operations, company formation, corporate governance, and commercial contracts.
The Income Tax Act: Governs corporate and personal income tax in Estonia.
The Employment Contracts Act: Regulates employment relationships, wages, termination of employment, and labor conditions.
The Commercial Pledge Act: Regulates pledging of assets for securing loans.
The Intellectual Property Act: Provides protection for trademarks, patents, copyrights, and other intellectual property rights.

2. Types of Business Entities

Estonia offers a variety of business structures that can be established by both local and foreign entrepreneurs:

a. Sole Proprietorship (Füüsilisest Isikust Ettevõtja - FIE)

Liability: The owner is personally liable for all business debts and obligations.
Capital: No minimum capital requirement.
Registration: A sole proprietorship must be registered with the Estonian Business Register.
Taxation: Income is taxed as personal income tax (20%).

b. Private Limited Company (OÜ - Osaühing)

Liability: Shareholders' liability is limited to the amount of their contributions to the company's capital.
Capital: The minimum capital requirement for an OÜ is €2,500 (though this can be deferred if the capital is not yet paid in full at the time of registration).
Registration: The company must be registered with the Estonian Business Register.
Taxation: The corporate income tax rate for OÜ is 20% on distributed profits. Estonia has a unique zero percent corporate tax on retained earnings, meaning profits reinvested in the company are not taxed until distributed as dividends.

c. Public Limited Company (AS - Aktsiaselts)

Liability: Shareholders have limited liability, and their liability is limited to the amount of their contributions to the company.
Capital: The minimum capital required is €25,000.
Registration: Like the OÜ, the AS must be registered with the Estonian Business Register.
Taxation: Similar to the OÜ, corporate income tax is 20% on distributed profits, and reinvested profits are tax-deferred.

d. Branch of a Foreign Company

Liability: The foreign parent company is liable for the operations and obligations of its branch in Estonia.
Registration: A branch of a foreign company must be registered with the Estonian Business Register.
Taxation: The tax treatment of a foreign branch follows the same rules as an Estonian company. Profits from the branch are subject to Estonian corporate tax when distributed.

e. Partnerships (Usaldusühing and Täisühing)

Liability: In a general partnership (Täisühing), all partners have unlimited liability, while in a limited partnership (Usaldusühing), there are both general and limited partners with different levels of liability.
Registration: Partnerships are also registered with the Estonian Business Register.
Taxation: Similar tax treatment to corporations, with corporate tax on distributed profits.

3. Business Registration and Licensing

The process of establishing a business in Estonia is streamlined, and many procedures can be done online through the e-Business Register.

Steps to Establish a Business:

Choose a Business Name: Verify that the business name is unique by checking the Estonian Business Register.
Prepare Incorporation Documents: These include the Articles of Association, which outline the company’s structure, objectives, and shareholder information.
Register the Company: Companies can be registered online through the e-Business Register, a digital platform that simplifies the registration process for Estonian residents and foreign nationals alike.
Obtain a Tax Identification Number (TIN): All businesses must apply for a tax number from the Estonian Tax and Customs Board (ETCB).
Register for VAT (if applicable): Companies with an annual turnover above €40,000 are required to register for Value Added Tax (VAT).
Obtain Licenses: Depending on the type of business, additional licenses may be required (e.g., for financial services, gambling, etc.).

4. Taxation in Estonia

Estonia has a highly competitive tax regime that encourages entrepreneurship and foreign investment. Key elements of the Estonian tax system include:

a. Corporate Income Tax

The corporate income tax rate in Estonia is 20% on distributed profits. However, retained earnings (profits reinvested in the business) are not subject to taxation, which provides an incentive for businesses to reinvest in growth.

b. Value Added Tax (VAT)

The standard VAT rate is 20% on goods and services.
A reduced rate of 9% applies to certain goods and services, such as books, medicines, and certain hotel accommodations.
Businesses with an annual turnover exceeding €40,000 must register for VAT.

c. Personal Income Tax

The personal income tax rate in Estonia is a flat 20% on all individual income, including salaries, dividends, and capital gains.
The tax system is progressive for specific allowances and deductions.

d. Social Security Contributions

Employers and employees are required to contribute to social security, including pension insurance, health insurance, and unemployment insurance.
The employer's contribution is 33% of the employee's gross salary, which includes pensions, health insurance, and unemployment insurance.
The employee's contribution is around 1.6% for unemployment insurance and 2% for the pension system.

e. Withholding Tax

Estonia imposes withholding taxes on dividends, interest, and royalties paid to foreign entities. The standard withholding tax rate is 20%, but it can be reduced under tax treaties.

5. Labor Law in Estonia

Labor law in Estonia is governed by the Employment Contracts Act and provides a balance between protecting workers' rights and fostering a flexible labor market.

a. Employment Contracts

Written contracts are required for all employees, outlining the terms of employment, including job duties, compensation, and work hours.
Both fixed-term and indefinite-term contracts are allowed.
A trial period of up to 4 months is permitted.

b. Working Hours

The standard working week in Estonia is 40 hours, typically with 8-hour workdays.
Overtime is permitted but must be compensated at 1.5 times the normal wage rate.

c. Leave Entitlements

Annual Leave: Employees are entitled to 28 calendar days of paid vacation each year.
Sick Leave: Employees are entitled to sick leave, with compensation paid by the employer for up to 2 days, and after that, the health insurance fund pays the remainder.
Parental Leave: Maternity leave is 140 calendar days, and paternity leave is 30 days.

d. Termination of Employment

Employers must provide notice before terminating an employee, and severance pay may be required, especially for terminations without cause.
Employees can be terminated for various reasons, including performance issues, company restructuring, or redundancy.

6. Intellectual Property (IP) Law

Estonia has strong intellectual property protections in line with EU standards. The key areas of IP law in Estonia include:

a. Trademarks

Trademarks must be registered with the Estonian Patent Office and can be protected for 10 years, with the option to renew indefinitely.

b. Patents

Patents are granted for inventions that are new, inventive, and useful. Protection lasts for 20 years from the filing date.

c. Copyright

d. Industrial Designs

Industrial designs are registered with the Estonian Patent Office and can be protected for 25 years.

7. Foreign Investment and Incentives

Estonia actively encourages foreign direct investment (FDI) through various incentives, including:

No Corporate Tax on Retained Earnings: Estonia's tax policy of not taxing retained earnings makes it an attractive destination for businesses that plan to reinvest profits.
E-residency: Estonia offers an e-residency program, allowing entrepreneurs from anywhere in the world to establish and run a business in Estonia entirely online.
Access to EU Market: As an EU member state, Estonia provides businesses access to the European Union's single market and its free movement of goods, services, and capital.
Investment Support: The Enterprise Estonia (EAS) offers support and grants for foreign investors in specific sectors like technology, manufacturing, and energy.

8. Dispute Resolution

Estonian law provides several methods for resolving business disputes:

Courts: The Estonian courts have a well-established commercial court system for resolving business-related disputes.
Arbitration: Estonia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that international arbitration decisions are enforceable in Estonia.
Mediation: Businesses can also use mediation as an alternative dispute resolution (ADR) mechanism.

Conclusion

Estonia offers a modern, efficient, and transparent business environment that is attractive for both local and foreign entrepreneurs. With its streamlined business registration process, competitive tax

regime, and a focus on digital solutions (including e-residency), Estonia is a leading destination for businesses in the European Union. Entrepreneurs should seek legal advice to ensure compliance with the relevant regulations when establishing and operating a business in Estonia.

RELATED Blog

Your Message

0 comments

Load more comments