The deepening integration of Latvia and Estonia in business

Next year marks two decades of working in the Baltics without customs borders. I stood at the Estonian-Latvian border in 2004 when the borders between 10 new European countries were dismantled and the first 20 vehicles pass through without customs checks. That night we celebrated joining to the EU and this started our real integration. 

Regional integration and cooperation play pivotal roles in driving economic growth and stability. A prime example of such cooperation is the partnership between Latvia and Estonia, that have made significant progress in aligning their business environments. While they have not yet achieved a fully unified market, these two countries have taken substantial steps toward integrating their goods, services, labour, and financial sectors, which has strengthened their economic partnership. 

The Path to Integration:

Latvia and Estonia, neighbouring countries with similar history but distinct approaches to promoting economic growth, had different development strategies. With a population of over 3.2 million inhabitants, these nations have successfully created a common market. Third neighbouring state - Lithuania, lags in practical integration of Baltic compared to Latvia and Estonia. Nevertheless, Lithuania has managed to attract numerous entrepreneurs from Latvia and Estonia, who have opened accounts in its initially fintech companies, such as PAYSERA and REVOLUT*, that are successfully transferring into the banking business.

Tax Systems: Business-Friendly and Identical:

One of the standout features of the Baltic countries is their business-friendly tax systems. Latvia and Estonia are lauded for their progressive and business-friendly tax approaches, especially for new ventures. Their tax frameworks allow businesses to pay taxes only when they decide to distribute or withdraw profits. Both countries maintain an identical Corporate Income Tax rate of 20%, which does not need to be paid immediately. This offers businesses flexibility in managing their finances, providing a significant advantage, especially during the early stages of development.

E-Signatures: Seamlessly Bridging Borders:

Estonia and Latvia have also excelled in the extensive use of e-signatures, a critical component of modern business operations. Both countries allow the use of e-signatures across borders, and their electronic document systems are interoperable. This means that documents signed with Estonian e-signatures are recognized and accepted in Latvia, and vice versa. For example, with the Latvian ID card, one can electronically access the Estonian Tax Administration portal, submit documents, and receive them. Similarly, an Estonian e-signature provides access and passwords to the Latvian Tax Administration system (after receiving the electronically signed application), making cross-border business transactions more efficient. This means that entrepreneurs can, for example, conclude contracts with entrepreneurs from a neighbouring country without leaving home, but the concluded contract with an electronic signature will have the same force as if it had been signed at a notary public. Latvia is even a little more open than Estonia in this regard, but development continues every day.

Integration Challenges and Prospects:

Despite remarkable progress in business integration, some challenges persist. In Latvia State Notary is responsible for Company registration, but in Estonia it is a Tartu court, however, in 3-5 days you will get your company registered! Differences between Estonia and Latvia are minor, such as the very precise number of board members in Latvian statutes. Estonia's flexible approach allows companies to appoint board members, but changing a company's address often requires a change also of statutes. These minor differences characterize the level of integration or even excellence in integration.

The Role of E-Residency:

Estonia has pioneered the concept of e-residency, offering to establish a digital presence in the country, facilitating access to various services and enabling remote e-signatures. This approach has opened opportunities for cross-border business operations, particularly for third-country citizens. Latvia has similar practices, but not marketed it. Foreign company from the third country can access services in Latvia by using the Estonian e-ID. 

Looking Forward:

The Baltic market is an EU market and is interesting even for countries like the UK and the USA. While the Baltic market has not yet achieved full unity, the progress made in aligning tax and financial systems, e-signatures, and cooperative environment is remarkable. And two countries together with Lithuania is 6 million market speaking English in the business. You can rely confidently on your English in the region, but over time, of course, it is essential to know the most important words in the local language.

* Foreign company has license to operate in Lithuania as a bank