Interest, Tax Too High, Estonian Business Says

TALLINN, Estonia -- Estonia, developing a free-market economy after decades of Soviet Communist rule, is strangling entrepreneurs with heavy taxes and credit restrictions, business representatives say. Many small- and medium-sized companies in the Baltic state are struggling to cope with high bank interest rates and tough loan conditions, including a 150 percent collateral guarantee for high-risk projects and new ventures. "The lack of access to capital remains a major problem for businesses just starting out," said Marina Kaas, director of the Estonian Small Business Association, or EVEA. "The banks insist on a good business track record, turnover, which a new company does not have," she said. "Even regular annual interest rates of 30 percent are still too high for smaller companies to pay."Under the present tax system, corporations pay a 26-percent profit tax, the same rate as individual income tax. That compares to a profit tax in Russia that can run as high as 43 percent.The government reduced the rate from 35 percent on Jan. 1, but the benefit was offset by the simultaneous scrapping of a 25-percent tax deduction on reinvested profits. "This country cannot afford to continue this outrageous political trick," Kaas said. "The current system is not oriented towards stimulating individuals and companies to invest their earnings or profits."One company, Reeda, Kardinad & Disain, has carved itself a niche in the market for curtains and interior furnishings. But company director Reet Reinok says taxes make life tough. "The government should do more to help businesses starting out," she said. The business association EVEA has lobbied the government for tax incentives, including relief for reinvested profits and private equity investments. The government should also provide interest-free loans for companies to help them get established or offer a three-year tax holiday, it says. The government argues that the Estonian business community is relatively well-off compared with other sectors. Ivar Hoerd, deputy head of the finance ministry's tax department, acknowledged that some small firms were struggling but said taxation was not the only solution. "It could equally well be solved through the budget, banking or government policy," he said, poiting to a recent law providing government guarantees, subsidies and loans for small businesses. But EVEA's Kaas said the government was not doing enough. "As long as the entrepreneurial culture is not valued in this country, we cannot speak about a full transition to a market economy," she said. "At the moment money is flowing into offshore accounts and people make arrangements to avoid paying the full rate of tax," she added. Small businesses are not the only ones with a tax headache in Estonia. Foreign companies registering in the country had their tax holidays abolished this year, which some say could affect foreign investment levels. Foreign businesses investing $51,000 or more had been entitled to a two-year tax break followed by another two years with a 50 percent deduction. Minimum foreign-company investments of $1 million also had a two-year tax holiday, then three to five years at 50 percent depending on the size of the investment.