Estonia: Entering The Baltic Markets From The UK Or USA

The three Baltic countries, Estonia, Latvia and Lithuania, constitute a uniform entity. As foreign enterprises consider setting up businesses in Eastern Europe, the Baltic countries provide an opportunity to conquer new, emerging markets in countries rapidly preparing themselves to join the European Union.

When considering commencing business of any kind, one ought to strive for a suitable strategy, especially taking into consideration local laws and international conventions. All Baltic countries have effective tax conventions and Agreements Concerning the Promotion and Protection of Investments with the USA and the UK, which are based on the OECD models. The one exception is that Lithuania does not have a valid tax convention with the UK yet.

The following are possible solutions for establishing a US or UK enterprise in all of the Baltic States simultaneously.

First, it is recommended to consider whether the trading or other business activity of a foreign enterprise requires a permanent establishment in the particular Baltic country, as defined by the tax conventions. That is to say, does the foreign enterprise need to open an office or hire salesmen in the Baltic countries? According to the tax conventions, permanent establishment does not come about if, say, the foreign enterprise 1) is using facilities or maintaining a stock of goods or merchandise only for storage, display, delivery or for processing purposes 2) has a fixed place of business (representation office) in the respective Baltic country in order to provide the enterprise with goods, merchandise, information or other benefits. In general, the above-mentioned cases do not require registration of an entity in the Baltics. However, the creation of a fixed place of business may require registration of a representation office.

If the business in the Baltics is of such a scale that a permanent establishment is to be created in one of the Baltic countries, it is advisable to consider the option of establishing a subsidiary in Estonia, and representative offices in the other two countries. Although the representative offices are not legal entities and are not entitled to conduct business on their own name, they may act on behalf of the Estonian subsidiary or the mother company. One reason for establishing a subsidiary in Estonia in particular is that the new Estonian Income Tax Act (effective 01.01.2000) provides an exemption from profits not distributed as dividends, but left in the enterprise or invested. It is noteworthy to mention that the profits are tax free even if invested abroad, outside of the Baltics. A second reason for doing so is that Estonia is the only one of the three countries where representation offices are no longer recognised by law.

Another commonly exercised option is to establish a subsidiary in each of the countries. There are two alternatives for organising the ownership of these subsidiaries: the foreign enterprise directly owns all of the subsidiaries, or the foreign enterprise directly owns only one of the subsidiaries, and that subsidiary further establishes subsidiaries in the other countries. The last option may be simpler for accounting purposes for the foreign enterprise.

The alternative to establishing an enterprise is the acquisition of an existing enterprise. The acquisition of an enterprise may take place through acquisition of its shares or through acquisition of all or part of the business of the enterprise. However, neither solution permits the acquirer to avoid the liabilities of the enterprise to be acquired in any of the Baltic countries.

In either acquisition scenario, there are certain issues which especially need to be investigated in the course of legal due diligence work before the transaction may take place: 1) although the privatisation process in the Baltic countries is almost completed, the target enterprise may have long-term obligations arising under privatisation agreements; 2) if the target enterprise owns land or buildings, one must check whether the land and buildings have already been entered into the real estate register and whether they are free from the claims of pre-war owners; 3) due to the relatively small size of the markets in the Baltic countries, acquisitions that would be considered minor on an international scale can trigger local competition laws, and thus permits from the competition authorities may be required; 4) last but not least, possible environmental liability must be considered. Although environmental liability is not yet comprehensively regulated by law, it is receiving increasing attention from legislators.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.