Country report Estonia

Economic overview

With a GDP estimated at just over € 27 billion in 2020, Estonia’s economy is the third smallest economy in the European Union, after Malta and Cyprus.

The overall figure for 2020 was less serious than the forecasts that the Estonian government and the European Commission had made in the spring (assuming a collapse of more than 7%) and then in the autumn of 2020 (with an expected decrease of 4.5 % -4.9%). This is because the contractions of the second and fourth quarters, marked by the first and second Covid waves and by the restrictions to contain the infections, were quite limited. Several factors contributed to this. A generally good management of the virus by the Estonian health authorities which made it possible to impose mild restrictions on personal freedoms and economic activities, an effective intervention by the Government which launched stimulus measures to support businesses and families and a positive reaction from some economic sectors to the crisis, such as the construction and ICT sector.

In foreign trade, the decrease in imports (-5.9% compared to 2019) greater than that of exports (-0.5% compared to 2019) made it possible to halve the deficit (-846.2 million Euro, -50.8% compared to 2019).

As for the other economic indicators, unemployment stood at 6.8% at the end of 2020. Inflation on an annual basis was negative at -0.4%. While the unemployment rate rose in the spring, and then stabilized at the end of the year, deflation remained largely constant throughout 2020 reflecting a significant drop in prices related to fuels and consumer products.

Main sector of industry

Agriculture. About 57% of the land area of ​​Estonia is cultivated and agriculture, together with livestock, constitutes the main activity of the primary sector, up to now carried out by state or collective farms, fully mechanized. Mainly cereals (barley, oats, wheat) and potatoes are produced. The livestock consists of cattle, pigs and poultry. On the other hand, fishing activity is modest. The exploitation of the forests, which cover about 1/5 of the national territory, feeds the activity of numerous sawmills and therefore of the furniture, paper and matchstick industries.

Mineral resources and industry. The subsoil of the north-eastern regions supplies oil shale, from which oil and methane are obtained, produced in the Kohtla-Järve plants and from there sent by special pipelines to Tallinn and St. Petersburg. In the surroundings of Tallinn phosphorites are extracted from which superphosphates are obtained, with special plants, while there are numerous deposits of peat, used as fuel in hundreds of small power plants on farms. Other industries present on the Estonian territory are electromechanical, chemical, textile (clothing), food and leather (shoe factories).

Communications. Communications are generally facilitated by the lack of real morphological obstacles. The railway network extends for approximately 1,030 km, the road network for approximately 16,500 km. Tallinn, the main port of the country, monopolizes merchant traffic with the new Nomme Tallinn plants. The city is also home to an airport, which ensures connections with the islands and neighboring countries.

Taxation for businesses in Estonia

The value added tax is 20%, while it is 9% or even 0% according to the provisions of art. 15 of the Added Tax Act.

This tax system offers a further important advantage relating to real estate and landed properties, since there is no tax in the first case, while in the second case there is a tax rate between 0.1 and 2.5 %.

Finally, the benefits of the Estonian tax system are also reflected in the limited cost of workers: € 430 per month is the minimum wage required by law.

Income tax for legal entities

Resident companies are taxed on worldwide source income while non-resident companies are taxed only on income deriving from Estonian sources. This rule applies to both resident companies and permanent establishments of foreign companies.

The legislation governing the taxation of legal persons is contained in the “Law on Income Tax” (Tulumaksuseadus) of 15 December 1999 according to which from 1 January 2000 Estonian companies are no longer subject to income tax, but exclusively to tax on the distribution of profits. Therefore, the moment of taxation is identified in the phase in which dividends are distributed. It follows that a profitable company that does not make any distribution will not be subject to taxation.

If the sums distributed to shareholders derive from dividends that the company has received from investee companies or from one of its permanent establishments located abroad, that disbursement of sums is exempt from taxation.

The tax base of this tax also includes the following types of wealth: fringe benefits, donations, entertainment expenses, expenses not related to the activity, transfer price adjustments.

The tax rate in force is 20/80, or 25%.

Value added tax

All subjects, natural or legal persons, public and institutional bodies that supply goods and services or that import goods and services from foreign countries are considered taxable persons. The tax base is represented by the total of the agreed fees for all the sales of goods and for all the services rendered. As far as imports are concerned, however, the tax base is represented by the value of the goods also including import taxes.

The standard rate is 20% but there are also reduced rates.

The VAT rate is zero for:

  • exports;
  • intra-community purchases;
  • ships and aircraft used on international lines, equipment, spare parts and fuel used in such ships or aircraft and for the repair, maintenance, charter and lease of the establishment or usufruct of such ships or aircraft;
  • goods and services provided to passengers for consumption on board ships and aircraft moving on international routes; the provision of port services to meet the direct needs of ships sailing in international waters and the provision of navigation services and airport services to meet the direct needs of aircraft used largely on international routes;
  • goods transferred and transported to another Member State to a diplomatic representative, consular agent (except honorary consul), a representative or representation of a special mission or an international or consular organization of a foreign State, a special mission or a Community institution or NATO member state intended either for the use of the forces of other NATO member states or accompanying civilian personnel, or for the provision of related canteens, when such forces are intended for the common defense effort;
  • non-Community goods placed in a free zone or free warehouse under customs procedures;
  • Community goods placed under the tax warehousing procedure.

Investing in Estonia

The advantages for an investor in Estonia are represented by:

  • high level of technical knowledge on the part of the working-age population
  • excellence of research and technological innovation in the field of ICT (Skype, for example, was conceived and developed by Estonian IT experts), by the absence of linguistic obstacles (English is widespread)
  • ease and low costs for setting up a “start-up” of a company thanks to current legislation and, indeed, the high computerization of the Estonian economic system
  • low labor costs
  • strong export propensity of the Estonian economy by virtue of its geographical position which makes the country an ideal “springboard” to penetrate the markets of northern Europe
  • low taxation
  • streamlining of the bureaucratic apparatus
  • reliable system of legal protection for foreign investments