Disparities in the legislation of the Baltics

Jan 11, 2001
Kairi Kurm

TALLINN - Although the three Baltic states had very similar legislation at the
end of the Soviet period, during the first eight years of
independence legislation developed in very different directions in
each country. But in recent years a new trend has developed, which
will eventually bring the legislation of the Baltic States closer to
each other thanks to the European Union.

The harmonization should help foreign investors.

Aku Sorainen, head of the pan-Baltic Sorainen Law Offices, said that
although the Baltic States do not offer any special grants to foreign
investors besides some tax allowances in Lithuania, it is still very
attractive to invest in these countries.

"The economy of these countries is so liberal that it does not create
any obstacles to investment," said Sorainen. "The taxes are
reasonable and there aren't many bureaucratic limitations. Foreign
investors usually do not expect any special benefits, but expect to
be treated equally with local companies."

However, he said that to some extent Estonian legislation is more
favorable for local companies than it is for foreign investors.

According to the new Estonian income tax law, foreign companies have
to pay taxes in Estonia on dividends they receive from an Estonian
company. This is not the case for Estonian companies who receive
dividends from another Estonian company.

Operation in the region is easy because all three countries have
signed mutual tax conventions preventing double taxation. All three
countries have also concluded tax conventions with most Western
European countries and the United States.

He said that if the company is in the growth stage it would be
profitable to establish a subsidiary in Estonia, where profits and
re-investing are tax-exempt. Many foreign companies have shown
interest in investing the profits of their international business in
Estonia, but the income tax law is still too new and its future too
unclear for any radical decisions, said Sorainen.

The development of legislation in Latvia has also been very
promising. One of the milestones is the new commercial code, which is
entering into force soon. This development has lead some foreign and
Baltic companies to transfer the head office of their Baltic
operations from Tallinn to Riga.

Sorainen said that the Baltic States have not yet acceded to any
multilateral treaties on recognition and enforcement of court
judgments, except a trilateral one concluded between themselves and a
bilateral one with very few countries. Without these conventions
foreign judgments cannot be enforced in the Baltic States and vice
versa.

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