More and more Finnish businesses move to Estonia

TALLINN More and more foreign companies are discovering Estonia as a good location for doing business. Especially Finland is showing a lot of interest in their Baltic neighbor. The past years, about 4.500 Finnish businesses were already established in Estonia. Even in times of financial crisis the number kept on growing. Lower tax rates, joined culture and cheap labor are responsible for this trend.

By Anneke Hermans

More and more Finnish businesses move to Estonia to reduce their costs by 48% Photo: Siska Gremmelprez & Anneke Hermans.

700 years ago, 14thcentury Fishing ships regularly went from Finland to Estonia. They made that big Baltic crossing to trade fish in exchange for typical Estonian agricultural products like beetroot and sauerkraut. This was  the first sign of cross border trade between the two countries.  Back then, such a trade mission could easily take more than one day, while modern ferries this days take no more than two and a half hours.  The fact that Estonia is so close by, made it attractive for Fins to move their businesses over there.

A survey done in 2011 by the Finnish embassy showed, that around 4.500 Finnish companies are registered in Estonia. 3.500 of them are operating actively. The list contains businesses that are for more than 10 % in the hands of Fins.

Acording to Meelis Kitsing, Director of the Economic Analyses Division of the Ministry of Economic Affairs and Communication, It is very hard to give a concrete number of Fin-owned companies.

“This is due to the fact that it is difficult to declare the exact definition of a Finish business. Do Fins have to own 3 percent, or more than the half of a company to be called Finnish?”, he says.

But why do Finnish businesses move except for the fact that Tallinn is only 80 km’s away from Helsinki? According to Valdar Liive, director from Enterprise Estonia – a company that promotes business and regional policy in Estonia – there are 4 more key reasons to explain the move: stability, simple taxes, access and low cost labor. “Although I like to see Estonia more as a cost-competitive country than a low-cost country,” Valdar Liive adds.

Stability in times of crisis

Workers at Hyrles OÜ - "In the middle of the financial crisis when people got fired, we opened our doors and started hiring." Photo: Anneke Hermans

The key factor for the stability of a country is a stable and reliable financial system. Since Estonia joined the Euro in January last year, it was easier for Finnish companies to do business in Estonia, because the currency didn’t need to be changed.  Thanks to the Euro, the country also gained more stability”, says Meelis Kitsing.

“Since Estonia joined the Euro, there is more confidence in Estonia. The Financial crisis hit Estonia hard, but we managed to come out of it pretty well. We had a GDP growth of 7.65 percent”, Meelis Kitsing says.

The Financial crisis brought some advantaged to some Finnish companies. Urmo Sisask, CEO at Hyrles – a Finnish company that produces different components of sheet metal – can confirm that.

“We started up our daughter company in Estonia the same week Lehman Brothers collapsed in the US. Due to the Financial crisis, a lot of good skilled employees were booted. So we opened our doors and started hiring people. Now Hyrles OÜ is a fast growing company that manages to double its turnovers every year.”

Re-invest for free

Another reason why Finnish companies prefer Estonia is because of the simplicity of taxes. Unlike Finnish and other European countries, Estonia doesn’t have a corporate income tax on re-invested profits. This means that the company can re-invest their profits in their business without paying money for it. The money can be invested in the company in Estonia or in Finland, if the headquarter is still there.

“Taxes only need to be paid as money is taken out of the company and used to pay out dividends. Such an income tax comes to 21 percent”, ” Valdar Liive explains.

Some people say that lower tax is the biggest reason why Finnish companies move. But according to Meelis Kitsing such statements need to be nuanced.

“It is not that the taxes in Estonia are very low. I would say that they are quite significant. If you hire people here, you also have to pay an income tax of 21 %. Besides that, you have to pay a social security tax which is 33 %. And there is an unemployment tax too. Taxes in Estonia are flat and easy to figure out, but not very low. There are places in Europe where taxes are lower, like Slovakia for example”, he says.

E – government

Another important key factor that make Finnish businesses move to Estonia is the accessibility. Ministers and other decision makers must be highly accessible and problems should be addressed directly and quickly.

Estonia is the front runner when it comes to accessibility. Therefor they created the concept of an e-government. They try to make it possible for companies to start up and maintain their business online.

“It is for example very easy to communicate with the tax department. My Finnish colleagues admire that and say that we have good tools to work with. Such an e-government helps to get rid of bureaucracy”, Urmo Sisask says.

Skilled people, less money

In 2004, 3 Step IT established their Back Office function in Estonia because of lower employment costs and availability of skilled labor. Photo: Anneke Hermans

Despite the introduction of the Euro, the wages of the Estonians stay low. According to statistics, the wage of an Estonian employee is  one third to half of the wage of a Finnish worker.

Aivar Kraus, sales Director of 3 step IT – a service company managing the acquisition, use and replacement of computer equipment  – admits that lower employment costs is one of the many reasons why his company showed interest in Estonia.

“Actually we expanded to Estonia allready in 2001 because we saw business potential there. We saw that we could sell our services to Estonian and International companies. In 2004, we established our Back Office function in Estonia because of lower employment costs and availability of skilled labor,” Aivar Kraus explains.

But according to Urmo Sisask, CEO of Hyrles OÜ, the labor costs will not always stay as low.

“The average salary is going up all the time. Maybe not in 10 years but 20 years from now, there will be no big differences anymore between salaries in Finland and Estonia. There are already certain areas in which Estonian employees get exactly the same salary as Finish employees, like the IT-sector for example. Those guys are working worldwide.  It doesn’t matter where you  are, the level of salary is exactly the same everywhere”, says Urmo Sisask.

White collar jobs & booming IT – sector

Last months, a new trend is cropping up in the Finnish – Estonian cooperation. More and more white collar jobs are moving from Finland to Estonia. Therefor it were mostly production companies who made the move oversees.

Photo: Google Maps - Anneke Hermans

Also law firm ‘Hedman Parners’ made the move from Finland to Estonia. “We moved out of business reasons, Kalle Pedak – Attorney-at-Law and partner of the law firm Hedman Partners explains.

“In the beginning of the nineties, we noticed that the Baltic and the Russian markets became very attractive to Finnish clients. When they decided to expand their businesses, we moved with them. Most of the white collar jobs move here because of tax advantages”, he says.

Also the IT-sector is booming. The Washington Post called Tallinn the Silicon valley of Estonia.

“That has mainly to do with the Start up’s. We had for example the Start Smart ! events. With this project, they want to inspire venturous and active people in becoming entrepreneurs, look beyond national borders and induce cooperation between the establishers of Estonian and Finnish start-up companies”, Valdar Liive says.

Lift out of the crisis

The main question that is often asked is if Finnish companies are pushing Estonia out of the Financial crisis. According to Meelis Kitsing, Finnish companies are indeed helping, in a direct and an indirect way.

“Businesses who are moving here create employment for Estonians. In that way, they are helping directly. But even if they bring their own employees, they are stimulating our economy in an indirect way. Those people will spend their earned money here in Estonia. So yes, I can say that they are helping us”, he says.

 

Read the testimony of two Estonians working in a Finnish company

Audio: Why do Finnish businesses move to Estonia? An interview with Urmo Sisask, CEO of Hyrles OÜ

 

 

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