CORPORATE SERVICE PROVIDERS IN BALTICS

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Latvia vs Estonia: Labour force, real estate, business language

GATE TO BALTICS is working with SME’s and we have often faced that prior to expanding in to new market, customers ask about practical perspective of business management. As professionals in the field of corporate services, we do realize that every-day business management might be different based on several different factors, including size of the company, experience in other markets, financial resources, etc. This article will focus on:

Business management for company with up to 20 employees. Useful for SME’s who are thinking about moving from their current jurisdiction or expanding in to new market within European Union.

What gives us credibility to write about such topic? Firstly, GATE TO BALTICS has offices in Riga and Tallinn and has first-hand experience in daily business management from our own perspective; one of the main areas of our expertise is corporate service provision and we have assisted in business set-up and relocation to Estonia or Latvia to 26 companies during the last 12 months. We are able to see the main issues where customers usually ask our assistance or where customers are facing trouble by doing it themselves.

1. Labour force

Current unemployment rate in Estonia is 4,4% and in Latvia 6,9%.  Average unemployment rate in EU is 6,6%. According to the latest data there are around 60 000 unemployed people in Latvia and 33 000 in Estonia. Therefore, for companies who are interested to expand their business and actively recruit employees, Latvia has almost as half as many unemployed persons who are looking for the job at the moment than Estonia. According to OECD data, level of education in both countries is high – statistically with regards to Mathematics performance, reading performance and Science performance it is above EU average with Estonia being slightly better in each of the categories. From our experience it is possible to say that most of the people participating in labour market in Estonia and Latvia are university educated and are fluent in at least 2 languages – English + their native Estonian, Latvian or Russian. If person is from Russian-speaking family, then it is almost certain that he will be fluent in at least 3 languages. Therefore, the conclusion is that employees are well educated and most certainly will be able to communicate in English.

Another important aspect for employer is labour costs. Average monthly gross salary in Estonia is EUR 1291 and EUR 1022 in Latvia. If compared to Western European countries, then the difference is significant where average monthly gross salary in Germany is EUR 3800; in UK – EUR 3000; in Denmark – EUR 5200; in France – EUR 3000; in Spain – EUR 2200; in Ireland – EUR 3200. Size of the monthly gross salary is similar to Central European countries, where it is EUR 1219 in Czech Republic; EUR 1225 in Poland; EUR 1162 in Slovakia; EUR 1000 in Romania and EUR 1116 in Hungary. If companies from Western European countries could move or expand their business to Latvia or Estonia in order to decrease employment costs, then companies from Central Europe could do that to increase competitiveness by attracting well educated employees.

Even though, average salary is important criteria to compare level of income, it is important to look at industry-specific level of income. According to data from Central Statistical bureau of Latvia, industry-specific income in Latvia:

  1. Financial and insurance activities – EUR 2020 (gross monthly);

  2. Information and communication (IT) – EUR 1549;

  3. Electricity, gas, steam and air supply– EUR 1373;

  4. Public administration and defence – EUR 1226;

  5. Mining and quarrying – EUR 1163;

  6. Professional, scientific and technical activities – EUR 1114.

According to the data from Statistics Estonia, the income in specific fields in Estonia:

  1. Information and communication (IT) – EUR 2181;

  2. Financial and insurance activities – EUR 2066;

  3. Electricity, gas, steam and air supply – EUR 1719;

  4. Mining and quarrying – EUR 1594;

  5. Public administration and defence – EUR 1579;

  6. Professional, scientific and technical activities – EUR 1554.

Just for comparison, we decided to show the average industry-specific salaries in one of Western European countries – Germany:

  1. Financial and insurance activities – EUR 6304;

  2. Consulting – EUR 6290;

  3. Information and communication (IT) – 6100;

In conclusion of the labour force review, we should mention that labour force in both countries in general is technologically advanced, speaks in several languages and are well known for hard working attitude. When it comes down to practical recruiting process, it always depends on the field where company wishes to recruit, but in general, it is easier to recruit employees in Latvia than in Estonia due to the difference in the amount of unemployed people. Salaries are higher in Estonia, but at the same time still much lower than in Western European countries. We don’t want to promote our jurisdictions as a “cheap labour” countries. However, it is quite obvious that company with 20 IT specialists in Germany would spend approximately 90 000 EUR more in labour costs compared with the same size company in Latvia and EUR 78 000 more compared with Estonia just on monthly basis. Here is necessary to mention that our calculation is based on average industry-specific salaries and therefore it could differ from situations in real life. Calculation is used to illustrate the difference in labour costs between similar companies in Germany and in Latvia and Estonia.

1.1. Labour taxes

Last, but not least, it is important to present tax system with regards to employee remuneration. Detailed tax rates and reviews about each tax system you can find on our website here: EstoniaLatvia. We will use example with calculation where we will take gross monthly salary in the amount of EUR 2000 to illustrate how much it will cost to employer and how much will employee receive after all taxes are paid:

Estonia:

Total cost for employer: EUR 2676
Social Tax: 660
Unemployment insurance (employer): 16
Funded pension (II pillar): 40
Unemployment insurance (employee): 32
Income Tax: 374,49
Gross Salary: 2000
Net salary: 1553,51

Latvia:

Total cost for employer: EUR 2482
Social Tax (employer contribution): 481,80
Business risk fee: 0,36
Social Tax (Employee): 220,00
Personal income tax: 365,99
Gross salary: 2000
Net Salary: 1414,01

Germany (Tax class I, Berlin):
Total cost for employer: EUR 2396,50
Social Tax (employer): 396,50
Social Tax (employee): 401,50
Income tax: 190,33
Gross salary: 2000
Net salary: 1408,17

Compared with Latvia, in Estonia it is more expensive for employer to pay to employee and if gross monthly salary would be EUR 2000, then in Estonia total costs for employer would be EUR 2676 and in Latvia – EUR 2482. It is also more expensive than in Germany – see the numbers above.

2. Real Estate market in Estonia and Latvia

When expanding in to new territory, it is important to be aware of the real estate market. It wouldn’t be smart to incorporate a company, recruit employees and realize that real estate prices are too high or there are no appropriate objects on the market. We will briefly illustrate the real estate market situation in Latvia and Estonia and show the most important differences between these two jurisdictions.

Since most of our customers are interested in Riga and Tallinn (capitals) we will analyse real estate situation in these cities. If someone is interested to receive information about real estate market outside the capitals, contact us and we will help you. According to information obtained from Land Registries of Latvia and Estonia, price of properties is higher in Tallinn (Estonia) with 1700 EUR/M2 while it was 1390 EUR/M2 in Riga. However, this is the average price and by doing manual “quick search” on the most popular real estate portals in Latvia and Estonia we will provide data which could be more useful.

100 M2 renovated office premises in Tallinn:  EUR 120 000 – EUR 350 000.

100 M2 renovated office premises in Riga: EUR 70 000 – EUR 680 000.

The price range is so large due to the different locations and condition of the property. Amount of properties in the market according to criteria of size is very similar between Riga and Tallinn. The largest difference is that in Riga are more luxurious properties in locations like old town or with the view to the sea, which explains the price of the most expensive office which costs EUR 680 000.

Rental prices for 100 M2 renovated office in Tallinn are: EUR 400 – EUR 2500; in Riga: EUR 300 – EUR 1700.

In conclusion, it is possible to see that prices of real estate are slightly higher in Estonia, however, company with up to 20 employees could find office premises in both capitals for similar price.

3. Working language

Even if the company will hire local employees, it is useful to know if the management board will be able to communicate with business partners, customers and local authorities in language they understand. In both countries – Latvia and Estonia – additionally to their native Estonian and Latvian mostly everyone speaks English and / or Russian. Unless company intends to work in a very specific industry far away from the capitals, it should be able to communicate with their business partners in English. It is common practice in both countries to conclude bilingual contracts – usually in native language and in English.

Communication with authorities is one important field where both countries differ. For example, in institutions which are closely related to dealing with international companies, in Estonia is possible to submit documents in English and even communicate in English with helpdesks. In Estonia it is possible to submit incorporation documents to Company Registration portal in English, which has proven to be extremely useful (and cheaper) to international companies wishing to create subsidiary in Estonia. Managers of international companies are able to write in English to Business Registration portal in situations if something is unclear.The same applies for making changes in the company – for example – the change of company’s address, increase of share capital, change of beneficial owners – all these things can be done in English within Company Registration Portal.

Situation in Latvia is more complicated. Even though mostly all websites of authorities are in English, they serve purely informative goal. For example, Latvia has developed brand new and fancy looking website for The Enterprise Register which is available in Latvian and English and even has a chatbot, who unfortunately speaks Latvian only (at least at the moment). However, The Enterprise Register does not accept documents in any other language than Latvian, which might not be a problem for company who has local employees, but still it is not so comfortable like it is in Estonia. Also, the brand-new website is purely for information purposes – you can’t register the company or make amendments to existing company through it, like it is with Company Registration Portal in Estonia. State Revenue Service of Latvia lately has done a great job in renewing Electronic Declaration System, but unfortunately, it accepts documents only in Latvian. The same applies for communication with customers in all state instances. No doubt, that there are smart employees who are capable of communication in English, however, in most cases it is not required from them.

In terms of communication in foreign language with state authorities, Estonia definitely is ahead of Latvia.

CONCLUSION


With more unemployed people and slightly lower costs for employer with regards to remuneration, Latvia seems like a better place where to move or establish a company and recruit employees. There is this minus with regards to communication in English with state authorities. However, if company employs local professionals, the “language problem” can be lifted as well.

In general, when compared with other EU Member States, Estonia and Latvia have created business-friendly environments which are open to foreign companies. Strong points which support this are: educated labour force; low real estate prices; multi-lingual business language; significantly lower employee remuneration compared with Western European countries.



Reinis SietinsComment