International Correspondence Lawyers & Financial Experts

Doing business in the Baltics

Date: 16-MAY-2006
Presented by: Advocate Valters Gencs, Law Firm Valters Gencs

This summary will focus on setting up a business presence in the Baltic countries – Latvia, Estonia and Lithuania. Those wishing to establish a company in one of the Baltic states must ensure that all public documents have to be ‘legalised’ (certified as authentic), ie furnished with an Apostille in accordance with the Hague Convention of 1961.

Registration of a limited liability company

The most common vehicle for commercial activity is the private limited company, the shares of which are not publicly tradable. In Latvia, these are known as Sabiedriba ar ierobežotu atbildibu (SIA), in Lithuania as Uždaroji akcine bendrove (UAB), and in Estonia as osaühing (OÜ). The founders of such a company can be legal and/or natural persons. In all states the signatures of the founders on the registration application must be approved by a notary.

Setting up the management bodies

Once they have decided to establish a company, the founders must set up management bodies. In Estonia and Latvia the compulsory administrative institution is the board, but in Lithuania it is the manager (president, director and so on). In Latvia and Lithuania members of the administrative institution can be any person regardless of his domicile. In Estonia half the board must be domiciled in Estonia, the EEA or Switzerland; if there is only one member of the board, she must be so domiciled. The founders can also appoint a council, but in neither Latvia nor Lithuania is this compulsory. In Estonia the council must be appointed only if the equity capital of the company exceeds €25,555 and if there are fewer than three members on the board. Unlike the board, there is no residency requirement for members of the council. In Estonia an auditor need only be appointed if the equity capital exceeds €25,555. In addition in Estonia an annual report of the company needs to be audited where at least two of the following three criteria are met: (a) net turnover exceeds €640,000; (b) the balance sheet total exceeds €320,000; or (c) the number of employees exceeds 10. When appointing the board, the shareholders have to decide what kind of right to representation they want to assign to it. Under Estonian law, members of the board can represent the company individually, unless the articles of association provided otherwise; the board can represent the company jointly if the articles of association do not provide representation right individually. In Lithuania the manager, as head of the administration, manages the work of the administration in compliance with bye-laws and decisions of the board, and has the power to enter into transactions on behalf of the company.

Contribution of the equity capital

Before submitting the registration documents to the registration authorities, the founders must fund the equity capital. In all three states equity capital can be contributed both in currency or in kind. However there are differences. In Latvia the minimum amount of equity capital is €2,800, in Lithuania €2,900, and in Estonia €2,600. In Estonia if the value of the property contribution exceeds €2,555 or exceeds half of the equity capital, the auditor’s approval is needed. In Lithuania, before the company is registered at least one-quarter of the equity capital must be paid in currency, and this sum cannot be less than the minimum amount of equity capital (LTL 10,000).

Stock company

The second type of capital company is the public capital company, the shares (or stock) of which may be publicly traded. In Latvia, these are known as akciju sabiedriba (AS), in Lithuania as akcine bendrove (AB), and in Estonia as aktsiaselts (AS).

Setting up the management bodies

In Latvia and Estonia the founders of the stock company must, in addition to the board, establish a council, with at least with three members on it. In Estonia, in contrast to the requirements for the members of the board, the council members do not have to be residents of Estonia, the EEA or Switzerland. In Lithuania the founders of the stock company must appoint the manager, but they can chose whether or not to establish a council and board.
The above-mentioned regulations on the representation rights of limited liability companies’ administrative institutions apply also to the representation rights of stock companies’ administrative institutions.

Contribution of the equity capital

In Latvia the minimum amount of equity capital for AS is €35,572, and the minimum equity capital must be fully paid up in currency before the registration application. Equity capital can be paid up with a property contribution only after the company has been registered and in accordance with the founding agreement. In Latvia, for particular stock companies, depending of their type of activities, there exist different requirements as to the minimum amount of equity capital that must paid up before founding: for example for stock exchange stock companies it is €142,288. In Estonia the minimum amount of equity capital for AS is €25,555, which can be contributed in both currency and property. Any property contribution must have auditor approval. In Lithuania the minimum amount of equity capital for stock companies is €43,540. At least one-quarter of the equity capital must be paid in currency before the company is registered.

Permanent establishments

Foreign merchants are able to found branches and permanent establishments in the Baltic states. In Latvia branches with rights of commercial activity and permanent establishments without rights of commercial activity are distinguished. Founders of branches and permanent establishments must submit to the registration authority documents testifying the founders’ registration in another state. It is not necessary to contribute equity capital for the founding of branches or permanent establishments. Branches and permanent establishments are not legal persons.

State fees

Certain founding expenditures must be taken into consideration by those founding companies. One of these expenditures is the state registration fee. In Latvia the state fee registration for an SIA is €105 and for a stock company it is €390. In Estonia the registration fee for a limited liability company is 0.2 per cent of the company’s equity capital – but it must be at least €255 and no more than €1,278. The registration fee for a stock company is 0.2 per cent of the company’s equity capital – but it must be at least €255 and no more than €2,555. The registration fee for a branch of a foreign company in Estonia is €255. In Lithuania the state registration fee is €35. But there is additionally a fee for the inspection of the documents by the notary of approximately €102, so the total fee is approximately €137. Registration takes 4 to 5 days in Latvia up to 2 weeks in Estonia and 3 weeks in Lithuania.

Tax reporting

In Lithuania and Latvia income tax is 15 per cent, but in Estonia corporate tax is levied only on distributions (dividends, fringe benefits, gifts, non-business expenses etc. In 2006 the tax rate is 23/77 (23 per cent on the gross amount) and it will be reduced to 22/78 (22 per cent on the gross amount) for 2007, to 21/79 (21 per cent on the gross amount) for 2008, and to 20/80 (20 per cent on the gross amount) for 2009 and later years. There is no tax on retained earnings in Estonia. So far as the taxation of dividends is concerned, Lithuania and Latvia are more attractive; but so far as the taxation of investments is concerned, Estonia is the better option.