Date of publication: 22 December 2017
Vitali Galitskihh, Head of Tallinn Office
Estonia is called an ‘administrative offshore’, since 99% of all public services may be obtained online.
Ukrainians rank third by the number of e-resident cards received in Estonia. At the moment the Police and Border Guard Department of this country has received over 1600 applications filed by our fellow citizens for e-residence. At the same time, Ukrainians occupy the first place by number of legal entities registered in Estonia: already 314 Ukrainian companies have changed their registration for Estonian with the help of an e-resident card.
The e-resident card provides them with full access to all electronic public services in Estonia; the majority of those who receive an e-resident card are not representatives of the oligarchy or big business, most of them are small and medium-sized businesses, in particular, the very same startups so selflessly supported by the Ukrainian government. Unfortunately, meanwhile the entrepreneurs choose the advantages and liberal approach of the Estonian legislation to the development and support of the entrepreneurial environment in the state.
The outflow of capital and labor force is a litmus test demonstrating the actual state of the economy and helping to make predictions for the future. The increase in capital outflow or its reduction is a direct proof of the crisis recovery or, to the contrary, its aggravation. Before determining what does the Ukrainian business look for and find in Estonia, it is necessary to identify the main reasons for the capital outflow from Ukraine. We will single out only some of them that, in our opinion, are playing the most significant role in the companies’ decision to change their residency.
Political instability. Like everything in this world, business – and not only Ukrainian – strives for stability, both economic and political. One thing is for certain: a large number of ongoing reforms, constant changes in legislation and changes in the leadership of the state apparatus negatively affect the desire of entrepreneurs to do business in Ukraine. The entrepreneurs can adapt to any system, any situation and even to any tax rates, all they need is time. However, the constant changes and lack of stability make it more difficult for businesses to adapt, and the jurisdictions giving them such a coveted stability become more attractive. Ukraine cannot yet compete with jurisdictions where the entrepreneurs can easily make a forecast for both tomorrow and the next year.
Ease of doing business. The political and economic stability of the state directly affects the ease of doing business. Although the concept of ease of doing business index is based on ten indicators that do not take into account inflation or infrastructure, the index itself is an important indicator for demonstrating a favourable business environment, as it includes an assessment of the simplicity and speed of business registration, tax declaration, loan receiving and guarantees for obligations under the agreements. In 2017, in the ease of doing business ranking compiled by the World Bank, Estonia climbed the 12th line, while Ukraine got its 76th place.
Tax policy. An inefficient and complex tax system is certainly not the most important factor contributing to the capital outflow, but remains on the list of significant ones. Using the example of Scandinavian countries we can conclude that business can flourish even at high tax rates if it has an understanding of the taxation system and sees the result on which the state spends the received taxes. Unfortunately, in Ukraine, having a fairly high tax burden, the efficiency of the state machinery distributing these taxes is extremely low, and business understands this like nobody else.
Devaluation and inflation. The risk of monetary depreciation forces the entrepreneurs to keep money in a different currency and, as we can see, in another country. By using the European banking system, they are largely overcautious of direct losses, since the inflation rate in Ukraine this year has reached over 11% and the devaluation risks are increasing, while the inflation rate in the Eurozone is around 1%, and there are no such risks. This is especially important for international companies, which are attracted not only by stability, but also the simplicity of payments for goods and services.
The reasons for capital outflow from Ukraine are very different, but when answering the question, why Estonia, Ukrainian business mentioned the stability in the state as a main reason. A quiet country in northern Europe with a common history having no turmoil and revolutions but having a very pragmatic approach to entrepreneurship. Over the years of independence Estonia has managed to increase its attractiveness for investments, achieve low inflation rate, develop a transparent and understandable tax system, create a credible banking system, and develop legislation capable of protecting the counterparties’ rights in discharging their obligations.
Estonia is not a tax haven and does not compete with offshores. The business, coming to Estonia from Ukraine, is not seeking to optimize taxes, but to work and develop in conditions of stability and support from the state. Estonia is called an ‘administrative offshore’, since 99% of all public services in the country may be obtained online. Every Estonian has an ID card that is used for remote identification and as an electronic digital signature. At the moment, the use of electronic public services has resulted in the disappearance of queues in institutions and all processes are carried out automatically. In particular, the company is registered online, the payment of bills, payments for services and transactions – through online banking, any contract may be concluded without leaving home by using an electronic digital signature, and the online filing of the tax return takes no more than ten minutes. The automation of processes has lead to minimal bureaucracy and lack of corruption.
It is also necessary to understand that Estonia offers its e-residence and services with no restrictions for citizens of all countries but, at the same time, does not guarantee the success of doing business. For example, other Estonian companies and banks are alert to doing business with companies whose beneficiaries are residents of Ukraine. That is, the assertion that our entrepreneurs are warmly welcomed is a falsehood. But those who are willing and ready to work may do this with no hassle.
In fact, Ukraine is actively adopting the Estonian experience, for example, plans to introduce a tax on the offshore capital. The experience is unprecedented — in 2000 Estonia abolished the profit tax and introduced a tax on distributed profits, under which the profits used for business development are not taxed and only profits distributed as dividends are subject to taxation. Thus, the taxation of the offshore capital stimulates the reinvestment of enterprises in Estonia. However, for the second year in a row the Ukrainian Government only declares its readiness to repeat the Estonian experience, and part of the Ukrainian business chose not to wait, but live according to Estonian laws right now. The outcome of this reform in Ukraine, like many others, is difficult to forecast.
The instability in the state at all levels directly affects the capital outflow. The less predictable are the decisions of the authorities, the higher is the entrepreneurs’ desire to protect their business in other jurisdictions. People and businesses are striving for simplicity. In the age of globalization the states’ borders are blurred and the Internet opens unlimited opportunities for doing business and, thus, those countries that count on that attract the capital from other countries. Unfortunately, only the state apparatus is able to implement measures necessary to improve the economic state of the country and to significantly reduce the amount of the offshore capital.