Legal Update - The Baltic States : Commercial Law

The government approved the Association Board Resolution Between the European Union and the Estonian Republic (effective 22.08.2000), by which the providing of state aid to companies in financial difficulties will be extended for another five years. European regulations generally reflect the view that state aid violates free-market conditions, endangering competition. According to the Resolution, state aid rendered by Estonia is defined as aid for the benefit of economic progress in regions with a low standard of living or a high unemployment rate. Considering that the total gross domestic product per person in Estonia is still very low compared to the European average, the term of state aid was again extended. The Resolution is being applied retroactively from 01.01.2000.

The government approved the Regulation on Taxation of Imported Chemicals (effective15.08.2000), which makes a clear distinction between chemicals imported for industry and those used for mixing fuels. The necessity for the Regulation stems from the amendments to the Fuel Excise Tax Act (effective 01.09.2000), by which the government is authorised to ensure relief from excise tax on engine fuel, engine oil, heating oil and related products

According to the current draft of the Tobacco Excise Act, the price of inexpensive cigarettes will be lowered and the price of expensive ones raised. An obligation to print the maximum retail price will be prescribed as well. The government has already started to implement these provisions by approving a resolution (effective 04.08.2000) stating that by the year 2010, the rate of the excise tax on the most popular cigarettes must be 57% of the retail price.

The Trade Union Act (effective 23.07.2000) regulates trade unions’ relations with employers, their associations and the government. The Act clarifies whom the trade union represents, defends and what kind of legal competence it possesses.

On 25.09.2000 representatives of employers, trade unions and the government failed to agree on a compromise regarding the minimum wage for 2001,due to which trade unions are planning to go on strike. The unions are demanding a minimum wage of 1600 kroons, provided that the individual income tax rate minimum is increased by 200 kroons per month. Employers, especially companies with employees belonging to the clothing and textile union, have thus far rejected the 1600-kroon minimum wage.

The Procedure for Applying for Residence and Work Permits was altered due to amendments to the Foreigners Act (both effective 01.08.2000),according to which the Citizenship and Migration Board is given jurisdiction over granting residence permits.

The Digital Signature Act will become effective 15.12.2000. However, already now the Taxation Board recognises e-bills, which help companies save millions of kroons on postage per year. The Taxation Board accepts electronic bills only when they are presented in accordance with the Accounting Act, which in essence means that when an e-bill is received, the recipient is required to print, sign and file it.

The Cabinet of Ministers adopted Regulations on the Order and Organisation of Book keeping, effective 01.10.2000. The Regulations will establish a procedure by which business transactions are to be recorded in bookkeeping registers, when making inventories, and how bookkeeping controls are to be organised. The Regulations also establish how certain documents related to bookkeeping are to be organised and set a bookkeeping cycle. On the above effective date, the Cabinet of Ministers’ Regulations no. 339 of 07.11.1995 On the Order and Organisation of Bookkeeping for Businesses are annulled.

The State Revenue Service issued regulations On the Investment of Foreign Property in Equity Capital, effective 29.07.2000. The regulations apply to investment capital brought into Latvia and establish a strict procedure to be followed for such investments, which are not subject to VAT. When bringing such investment capital into the country, documents proving that the increase in share capital has been registered with the Company Register and that the capital is in fact to be used as investment capital must be presented to customs officials.

The Saeima passed the Law on the Safety of Goods and Services, effective 19.07.2000. The law is aimed at ensuring manufacture of goods/providing of services that are safe for life, health, property and the environment. The law outlines manufacturers’ and service providers’ responsibilities, a procedure for evaluation of the safety of goods and services, as well as instructions for complying with this procedure.

In tandem with the above law, the Saeima also passed the law On Responsibility for Inferior Goods and Services, effective 19.07.2000 and 01.01.2003. The law regulates responsibility for fatality, injury or loss of or damage to property as a result of an inferior good or service. The law also establishes responsibility for compensation for any loss resulting therefrom.

The Cabinet of Ministers issued numerous regulations concerning the implementation of the Language Law, which is effective 01.09.2000: Regulations on Ensuring Translations at Events, effective 01.09.2000. The Regulations state that a Latvian translation must be made available for information disclosed at private events affecting society’s interests (e.g., health, safety, rights) and in conveying general and complete information about the event.

The State Language Centre may release the event organiser from the obligation to translate if foreign persons (physical or legal) participate in the event or if state or municipal institutions, court institutions, institutions related to the court or state or municipal companies (or companies in which the state owns a majority stake) have participated in the organising of the event.

Disclosing Information, effective 01.09.2000. The Regulations list situations in which it is permitted when informing the public to use a foreign language along with Latvian.

Regulations on the Naming of Places, Institutions, Social Organisations, Businesses and Events and the Use of such Names, effective 01.09.2000. These Regulations state that social-organisation, private-organisation and busi-ness names must be written using only letters of the Latvian or Latin alphabets, though this particular restriction is only effective on businesses beginning 01.01.2001.

The Cabinet of Ministers passed Regulations on Certification for Providing Freight Forwarding Services, effective 01.10.2000. The Regulations set out a new order for granting and issuing certificates for engaging in this activity. According to the Regulations, the certificates will be issued by a committee to be formed by the Ministry of Communications. If a company is granted this certificate before the effective date stated above, then such certificate is valid until its expiration date. Subsequent certificates, however, must be granted in accordance with the requirements of the new Regulations.

The Cabinet of Ministers’ Regulations on the Procedure for Issuing Licenses for International Road Transport of Cargo no. 320 are effective 23.09.2000. The Regulations establish a procedure by which the Ministry of Transportation issues international cargo transport licenses and licenses approved by the Conference of European Transportation Ministers. The licenses list the countries in which such transport is permitted and set quotas. The Regulations also indicate what information must be provided in the license.

Regulations on the Circulation of Tobacco Products are effective 02.09.2000 and will replace the Cabinet of Ministers’ 07.10.1997 Regulations on the Circulation of Tobacco and Tobacco Products. The Regulations include a ban on the sale of cigarettes with a nicotine level exceeding 1,2 milligrams (ban effective only 01.01.2003) and extend the terms of and simplify licenses relating to the circulation of tobacco and tobacco products.

The Cabinet of Ministers’ Regulations on Distribution of Petrol Products no. 311 are effective 16.09.2000, 01.12.2000 and 01.01.2001.The Regulations provide a procedure for submitting reports to the State Revenue Service and regulate production, transport, wholesale and retail sale of petrol. The Regulations also list the conditions for receiving a license for engaging in business activity involving petrol.

The Cabinet of Ministers’ Vaccination Regulations no. 330 mandate vaccination for members of certain professions. The Regulations also regulate vaccination procedures, denote persons permitted to administer vaccines and list contagious diseases against which vaccination is mandatory. The Regulations are effective 30.09.2000, with certain provisions having later effective dates.

The Parliament adopted a new version of the Civil Code, effective 01.07.2001, with some exceptions, which shall replace the existing Civil Code and the Code on Family and Matrimony. The new version consists of six books: general provisions, persons, family law, material law, inheritance law and obligations law. Sorainen Law Office is currently drafting an overview of the most significant aspects of this Code for distribution to clients.

By adopting the Law on Digital Signatures, effective 26.07.2000, the Parliament has taken the first steps in the creation of a legal basis for electronic commerce. The law regulates the creation, checking and validity of the digital signature, rights and responsibility of users of digital signatures, certification services and requirements to the providers of such services, as well as rights and functions of the supervisory institution on digital signatures. A safe digital signature now has the same legal effect as a signature in written documents and must be considered as evidence in court proceedings.

The new version of the Company Law, effective 01.01.2001, establishes a new order for the establishment, reorganisation, liquidation, management and activities of public and private companies, as well as the rights and obligations of shareholders. Sorainen Law Office is currently preparing to distribute an overview of the most significant aspects of this law and how it will affect the activities of companies in Lithuania. The Government adopted Resolution No. 827, effective 20.07.2000, which implements provisions of the Law on Enterprises regarding the right of foreign enterprises to establish and register a branch and a representative office in Lithuania. This Resolution provides a list of documents needed for the registration of representative offices and branches of foreign enterprises in Lithuania.

Order No. 68 adopted by the General Director of the Department of Statistics facilitates the procedure of registration with the Registry of Enterprises of newly established companies with foreign investment capital. This Order abolishes the requirements to submit documents on the financial standing of foreign investors and the articles of association of foreign investors to the institution responsible for registration of companies with the Registry of Enterprises.

Amendments to the Law on Patents, effective 05.07.2000, modify the rights of patent owners, use of inventions requiring permission of the Lithuanian government, and abolish compulsory licensing.

The Law on the Settlement of Employment Disputes, effective 13.07.2000, establishes mandatory conditions and a procedure for investigation of individual disputes between an employee and an employer deriving from employment relations, as well as the competence of the bodies assigned with investigation of such disputes.

Amendments to the Law on Employment Contracts, effective 26.07.2000, establish the requirements for an employer to issue to the employee the employment certificate. In accordance with the amendments, the employer must present to the employee a document identifying the employee (an employment certificate) before the employee begins working. The employment certificate must contain the following data: photo, name, surname and personal code of the employee. The employee must retain the employment certificate or keep it in a place provided by the employer or a person authorised by the employer. Employment certificates must have been issued to employees within two months of the Amendments’ effective date.

The Parliament has passed Amendments to the Law on Taxation of Income of Natural Persons. The Amendments establish the procedure for recognition of debts not repaid as deductible expenditures for enterprises without the status of a legal person, which decreases the taxable profit of such enterprise (effective 31 July 2000).

Amendments to the Corporate Income Tax Law, effective 31.07.2000, provide for the same regulations as the Amendments to the Law on Taxation of Income of Natural Persons concerning the addition of debts not repaid to the list of deductible expenditures; extend the list of taxable-at-source services rendered by the foreign enterprises; and diminish the tax rate from income received by foreign persons from a 24% to a 15% tax rate. Also, under the Amendments, the acquisition of computer software shall be considered as an investment and will not be taxed.

What follows is a general overview of taxation of dividends paid by an Estonian company to a Finnish company or a natural person. Reference is made to the new Estonian Income Tax Act ("Act"), effective 01.01.2000, and the Convention Between the Government of the Republic of Finland and the Government of the Republic of Estonia for the Avoidance and Prevention of Evasion with Respect to Taxes on Income and Capital Gains ("Tax Convention").

According To The Act According to the Act, an Estonian company distributing dividends to shareholders will pay income tax on 26/74 of the amount distributed as dividends if the recipient is a resident of a foreign country, regardless of whether the recipient is a legal or natural person.

If the recipient is a resident of a foreign country, the dividend payment will be subject to an additional 26% withholding tax. If the recipient is a non-resident foreign company with more than 25% of the shares or votes in the distributing company at the time when the decision to distribute dividends was made or when dividends were paid, the above-mentioned withholding tax would not be applicable and no withholding would be made.

In a situation where there is a difference in the stipulations of the Income Tax Act and the Tax Convention concerning the taxation of a non-resident legal person or a natural person, the Tax Convention prevails.

Finland may, according to the Tax Convention, impose taxes on both legal and natural persons residing in Finland and receiving dividends from an Estonian company. However, the Tax Convention gives also Estonia, i.e. the distributing company’s country of residence the right to levy taxes. The Tax Convention regulates maximum tax amounts that can be levied on Finnish companies or natural persons.

Estonia may impose a tax amounting up to as much as 15% of the total amount of dividends if the recipient is a legal or natural person residing in Finland. Legal persons must then control less than 25% of the shares of the company distributing dividends.

Finland is obliged under the Tax Convention to deduct the tax withheld in Estonia from the tax to be paid by legal or natural persons in Finland. Thus, the tax paid on dividends in Finland is the Finnish income tax from which the amount of withholding tax paid in Estonia is deducted. This does not apply to the income tax of 26/74 paid by the Estonian company, which is not deductible in Finland.

In Estonia dividends are not subject to social taxes. However, social tax will be levied on salaries paid to the members of company management, regardless of whether the recipient of the salary is an Estonian resident and regardless of whether there is a tax convention between Estonia and the country where the recipient resides.

If the recipient of the dividends is a Finnish company, the distributing Estonian company is required to present declaration TM1 to the Estonian tax authorities by February 1 of the year following the distribution. The declaration must contain the amount paid as dividends and the amount of tax withheld.

The distributing Estonian company also presents declaration FT2, which indicates the amount of tax withheld by the tenth day of the month following the distribution.

In addition to declaration FT2, certificate TM2 concerning the residence of the recipient must be presented, though this certificate may be substituted by a different document verifying residency. The obligation to present a certificate of residency applies both to legal and natural persons. The local tax authorities of the recipient verify the certificate, which is valid for 12 months from the date of issue.

If a non-resident, in this case Finnish, company controls more than 25% of the shares or votes of an Estonian company at the time distribution of dividends was decided upon or at the time dividends are distributed, no tax is withheld in Estonia. However, the Estonian company must pay income tax 26/74. In other cases the Estonian distributing company must withhold tax not exceeding 15% of the amount paid as dividends, as well as pay 26/74 of income tax.