Although companies are aware that price-related agreements may not be concluded with competitors, they have often forgotten that certain types of data may not be exchanged with competitors either. Notwithstanding the fact that the parties do not consider exchanged data to be restrictive towards anyone, both parties who have exchanged information may ultimately start altering their activities relying on the exchanged information. As they could not have behaved in that way without the information, the information exchange may lead to restriction or deterioration of competition in the market for particular goods.

Communicating with competitors is not prohibited

Although at first sight one might get the impression that competitors should avoid mutual communication at all costs, this is not actually the case. When communicating with competitors, it is simply necessary to take a cautious approach as to how communication is carried out and as to what information is discussed and exchanged.

Every company may adjust its behaviour to the current or future expected behaviour of competitors. Exchange of information between competitors may lead to an increase in the efficiency of a company itself as well as of the whole market in particular goods. Sharing information may also reduce expenses of companies or hedge risks. For example, exchange of information on clients in default of payment may significantly hedge risks for both the company itself and the consumer. As a result, those consumers would benefit to whom a company can provide a service on the best conditions and at the best quality level, since the company has information on customers whose background makes them more prone to payment default.

Nevertheless, when competitors exchange information they should take into account the characteristics of a particular market in each specific case. Factors to consider include how disclosure of information aimed at the public takes place, stability and fragmentation of the market, obstacles to entry to the market, transparency, complexity of the market structure, how and what type of information in exchanged – whether individual or strategic or general market information. For example, in cases where information exchange is for the purpose of implementing a joint project which neither of the parties could independently carry out in the market due to economic and objective factors, exchange of information between competitors might be allowed under competition law if the project would result in a significant positive impact on the whole market.

Competitors should always avoid direct and indirect communication where the objective or effect might be restrictive of competition in the market, but which however would not materialise under conditions of competition, taking into account mainly the characteristics of each goods market, the price dynamics prevailing there, lifespan of contracts, as well as responses of consumers. Effects restrictive on competition (incl. division of a market in goods, increase of market power) occur mainly upon exchange of information among competitors with regard to prices or sales volume, expenses or marketing strategy.

What information to exchange?

What information may be exchanged and in what event should a company be cautious? The rule of thumb is that a company may not disclose strategic information to its competitors. Strategic information includes mainly actual prices of products/services, discounts and mark-ups, quantities sold, client lists, distribution plans, investment plans, sales of a company in respect of a specific product/service. The most critical information that competitors should not exchange among each other is mainly information related to prices and quantities. Exchange of strategic data may lead to market concentration while reducing independence of competitors’ behaviour and the desire to compete.

However, in certain events it exchange of data that might seem to be strategic information at first sight may still be allowed.

First of all, the age of data should be assessed. Although Estonian legislation and EU regulation do not directly specify how old “old“ information should be, the European Court of Justice has assumed a position that any data older than 12 months may be generally considered to be historical information. It should again be emphasised here that the specific features of each market should be taken into account, including the frequency of exchanging information; in a similar vein, the frequency of price negotiations is important. For example, if the price of a product changes every day, exchange of information less than 12 months on that market is allowed because the price change is so dynamic and, for example, a competitor relying on six-month-old information would not actually be able to change its market behaviour so as to represent a significant threat to competition in the market.

In the case of data that may seem to be strategic at first sight, their aggregation level should also be assessed in addition to their age. In particular, the more individual the character of data, the larger the risk that this is strategic information so that exchange may be prohibited. Exchange of such data where it is difficult to differentiate information concerning an individual company probably restricts competition to a smaller extent than exchange of data at the level of an individual competitor. In addition to companies, consumers also actually benefit from general information which can help them make conclusions on the situation and development trends of a specific economic sector.

In practice, aggregated data are collected by associations of companies as well as market research organisations (TNS Emor, AC Nielsen). Collecting and assembling general data in the case of associations of companies naturally requires ensuring confidentiality of the data supplied by each individual member and independence of the data collector from all association members.

In addition to general information, competitors can also share information that is genuinely public information. Genuinely public information is information that is equally accessible or in other words, obtaining it should not be more costly for competitors and consumers than for the companies exchanging the information. For example, it is understandable that in the retail trade, products of competitors have different prices. It is reasonable that in order to get to know the price of a competitor’s product, the company should go to a specific shop and look at the price there. Such an activity cannot be considered to be substituting for an action where the shop itself notifies one competitor of the prices of another competitor, because the other competitors as well as consumers have to spend significantly more time and money to obtain the same information. Thus, a shop that sends pricing information to one competitor damages free competition. The solution could lie in a shop disclosing the pricing information of competing products on its website, because then the information would be equally accessible to all competitors as well as consumers.

At the same time, it should be borne in mind that even if the data exchanged between competitors is what the parties often consider to be “in the public domain”, it is not genuinely public if the costs involved in collecting the data deter other companies and customers from accessing those data. Concerning the example in the above paragraph, the shop as well the company that received information may say that should anyone else wish to get the same information, the shop is pleased to send the information to that party as well. A question arises here as to how a competitor or consumer should know that the shop provides such information at all. For this, a competitor should carry out prior research which in turn would involve significant time and cost, which means it is probable that exchange of those data might not represent exchange of genuinely public information. An information exchange is genuinely public only if it makes the exchanged data equally accessible – mainly in terms of money and time spent on access – to all competitors and consumers.

Different methods of information exchange

Exchange of information between competitors may take place by telephone conversations, meetings or e-mails, as well as through a channel aimed at the public (e.g., a newspaper) or within an association of companies.

It might not be unusual for one competitor to ask a competitor to e-mail it a wholesale price list of products which the competitor offers to its customers. The e-mail may even be accompanied by the competitor’s pricelist to make the other competitor disclose its pricelist. A similar scenario may also take place through an intermediary, in which case the company proposes to its customer that the latter supply to it wholesale prices of competitors and quantities sold to that customer. Both events clearly involve exchange of pricing or strategic information, which is not allowed. It is advisable for the company immediately to reply to the e-mail that it does not want to receive such information in the future or transfer it, and will delete the e-mail with the information enquiry and the attached price list permanently from its mailbox. Note that, based on the current practice of the European Court of Justice,  a company that does not respond to such an e-mail or other approach by unambiguously expressing its refusal may be assumed to have accepted the information and adjusted its market behaviour accordingly.

Information may be also exchanged within an association of companies. It is understandable that when people of the same profession come together, someone might be tempted to start discussing for example pricing strategies, individual turnover in the last quarter, quantities sold or pricing trends with regard to input expenses. If any party makes a proposal within an association of companies to start discussing so-called strategic information, it is again necessary to unambiguously express refusal concerning the information exchange. In the case of an association of companies, the assumption is that every member of the association agrees to the decision or exchange of prohibited information unless the dissenting opinion has been recorded or it can be otherwise identified later.

To exchange prohibited information, companies may also use any other public channel (media, television). For example, a company publishes a press release in a national newspaper that it will increase its wholesale/retail prices to a certain extent from a specific date. In that case, a threat exists that other competitors too will follow a similar strategy after reading the press release by publishing their press releases with regard to their pricing or future plans, which they would not have done without the initiating press release of the competitor. This in turn would lead to a situation where the participants in a market reach a common understanding, through channels aimed at the public, as to how to act in the future, even though they have not directly exchanged strategic information among each other, or agreed upon anything or signed any agreement or decision.

All these scenarios show that an exchange of information between competitors may ultimately lead to concluding a prohibited agreement, concerted practice or a decision of an association of companies where the objective is restriction or deterioration of competition, for example through determining prices or quantities. An information exchange may facilitate operation of a cartel by allowing the parties to observe who performs and who does not perform the agreed conditions. Thus, such an information exchange is a part of cartel that is subject to criminal punishment – in the worst scenario, a natural person may be subject to up to three years imprisonment.

To sum up, it should be said that competitors are allowed to communicate with each other, but each market has its own specific nature. What is allowed in one market is prohibited in another, so that an information exchange between competitors in each specific goods market should be assessed based on specific court cases and situations. Nevertheless, every company should generally see a STOP sign if the object of information exchange is  (a) information that is strategic information of a competitor (mainly prices, individual turnover, sales prices), (b) information that is less than 12 months old, (3) information that cannot be independently obtained from any other public data without spending additional time and money on this. Upon receiving such information or a request to supply such information, the rule is to reply immediately with a verifiable refusal.

Project team included partner Peeter Kutman and senior associate Ave Piik .

The acquisition of CV Online is part of the implementation of Alma Media’s strategy, according to which the company seeks growth from digital services and internationalisation. Alma Media announced on December 21, 2011 that it will purchase the company LMC s.r.o that owns the leading recruitment portals in the Czech Republic. The deal was closed on January 2, 2012.

More information:

Alma Media press relase

Every person featured in this book has been identified be researchers as being highly recommended in their particular areas of practice and we at Borenius are glad to see a number of our partners are in this list.

From Estonian office:

Sten Luiga
Marti Hääl
Margus Mugu
Priit Pahapill
Peeter Kutman

in addition to many more from Finland, Latvian and Lithuanian offices of Attorneys at Law Borenius.

Introduction

At the moment, 35% of the Estonian electricity market is open. In other words – only undertakings of consumption capacity over 2 GWh yearly are free to choose from whom they buy electricity. As of 1 January 2013 the whole Estonian electricity market will be open, so that all consumers will be free to choose their electricity provider. This means that until 2013 electricity can generally be sold only by the state monopoly Eesti Energia AS.

In 2010, 90% of electricity consumed in Estonia was produced from oil shale and 10% was produced from renewable energy sources. Compared to 2009, use of renewable energy sources in electricity production increased by 76%, reaching a total of 862 GWh. Biomass and waste were used as renewable energy sources totalling 535 GWh, while electricity produced from wind amounted to 274 GWh. Estimates are that by the end of 2011, the ratio of electricity produced from renewable energy sources will be 11.4%. [1]

The European Commission has set a target for Estonia of 25% of energy to be produced from renewable energy sources by 2020. The target has been set to enhance development of new production facilities to use renewable energy with a view to a cleaner environment. It must be noted that currently Estonia is one of the few EU Member States that actually fulfils its renewable energy targets.

Support scheme

In general the Estonian Competition Authority regulates the sale price limits of energy. However, this is only applicable to the price of energy provided by Eesti Energia AS to small consumers, e.g. households. All other electricity production undertakings are free to fix the price of electricity produced/sold by them and choose to whom they sell electricity produced at a price agreed upon by the producer and the electricity buyer.

Besides receiving the sales price of electricity, renewable electricity producers are also eligible for a support scheme under the Estonian Electricity Market Act. Support schemes were introduced to promote a cleaner environment, to reduce the amount of greenhouse gases, and to reach  European Commission goals set for Estonia by promoting companies to establish new electricity production facilities using renewable energy sources. Also, the basic idea of introducing a renewable energy support scheme in Estonia was to attract investors to establish new power plants using renewable energy sources. However, it must be borne in mind that support schemes are paid out up to 12 years as of commencement of electricity production.

The Estonian Electricity Market Act provides the basis for an electricity producer to be entitled to receive support from the grid operator for electricity supplied and sold to the grid if it is generated:

• from a renewable energy source, except for biomass,
• in an efficient co-generation regime using biomass as a source of energy,
• in an efficient co-generation regime if waste, peat, or oil-shale processing retort gas is used as a source of energy,
• in an efficient co-generation regime with a co-generation installation of electric capacity not exceeding 10 MW,
• from use of net capacity of a power plant using oil shale and which has commenced operating within the period from 1 January 2013 to 1 January 2016. [2]

The grid operator pays support to an electricity producer on the basis of an application by the producer itself and in the following sums:

• EUR 0.0537 per kWh if electricity is generated from renewable energy sources or effective co-generation using biomass,
• EUR 0.032 per kWh if electricity is generated from effective co-generation using waste, peat, oil-shale retort or capacity does not exceed 10 MW,
• EUR 0.014-0.016 per kWh from use of oil shale power plant. The price varies depending on the market price of emission reduction units.

In order to receive support, the producer must meet the following conditions:

• electricity has been generated by means of a power plant conforming to the requirements of the Estonian Electricity Market Act and the Grid Code,
• the electricity producer fulfils certain obligations stipulated by the Estonian Electricity Market Act (balance administrator, renewable energy sources or effective co-generation).

However, in recent times several issues have arisen in regard to support systems and their durability. For example, support for production of electricity from wind energy must be paid out until the total annual capacity of electricity produced from wind has reached 600 GWh. After that capacity is reached, the support sum must still be paid out in the total sum set by law, but support to be paid out to each individual producer will decrease in proportion to their production. Since, besides wind parks already in operation, several wind parks are being erected or are in the planning process, then it is only a matter of time when the capacity of 600 GWh is reached and up to which point wind energy producers are able to tolerate decreased support. Also, the majority of support paid to renewable energy producers does not go towards their profits per se but rather for repaying loans, as electricity power plants need considerable financial investment. This applies even more so in light of the fact that support is only paid out up to 12 years as of commencement of production, because in reality that is the duration of repayment of loans. Hence, there might come a point when support paid out is not enough to repay loans, thus putting at risk the future operation of the power plant and electricity  production.

Discussions have been taking place at Estonian Government level to reduce the amounts of support for renewable energy producers as their profit margins have been too high, in the authorities’ opinion. The Estonian Competition Authority conducted a market analysis on renewable energy producers and concluded that the support system should be changed. Just recently the Estonian Minister of Economics and Communication openly stated that in the fall of this year support given to renewable energy producers will be decreased. The proposed change is that support paid to electricity producers will be fixed to the sale price of electricity sold on NordPool. This means that support to be paid out will be fixed to the electricity price received on the NordPool so that the higher the price received from the Nord Pool, the lower the support given to renewable energy producers. InEstonia, the Electricity Market Act stipulates that renewable energy support is paid by the consumer in the end, which means that a new system of support will also reduce the burden on consumers. Renewable energy producers currently operating inEstoniahave noted that in general they are not opposed to the principle of changing the support system as such because economic situations change over time. However, they argue that the change must be durable and should not hinder legal certainty – what has been promised by the Government must not at one point be taken away without objective discretion.

Although current Estonian legislation allows a favourable support system for renewable energy producers, the future of the system seems to be unclear. Importantly, the new support scheme has only been discussed at the Government level and the Minister of Economics and Communications has publicly said only that the support system will be changed. As a result, no further detailed information is available to the public as to which stage the amendments are at and what the exact changes will be. And yet, while the system and amounts of support are laid down by law, at the end support is only paid out for electricity which has been given to the grid and accepted by the grid operator.

Grid connection

As already noted, electricity produced will receive support under the Estonian Electricity Market Act if the electricity producer conforms to the technicalities set by the Grid Code. However, the grid operator itself decides whether or not the electricity producer meets the criteria set by the Grid Code. Yet if the grid operator states that the power plant does not conform to the Grid Code, then disputes may continue for some time. Of course in the end it is possible to apply to the court to decide on issues arising.

In reality, acceptance of produced electricity to the grid – that is, that the power plant is in conformity with all technical requirements – has been the biggest obstacle for renewable energy producers not receiving support set by law. Hence, in practice cases have occurred where a power plant using renewable energy sources has been operating and producing electricity but the grid operator has not accepted that the producer meets all the technical requirements of the Grid Code, so that the producer does not receive the support set by the Estonian Electricity Market Act.

In particular, grid acceptance problems have arisen with wind parks containing a certain type of wind turbine produced by a Finnish producer. These wind turbines have not been accepted by the grid operator in different wind parks because for some seconds the production capacity curve goes below the required limits. Although the technical conditions of these wind turbines have been improved several times, they still have not met the conditions set by the Grid Code. In general, the testing period of a new power plant is up to 12 months. However, if the power plant does not fulfil the conditions within the time given, the testing period must be prolonged. In reality, the wind parks mentioned have been arguing for more than two years in regard to being accepted to the grid.

In order to minimise possible risks in getting a grid connection, the Grid Code has been changed so that the electricity project of a wind park must be co-ordinated and approved by the grid operator. The grid operator must approve the electricity project within 30 calendar days as of receiving it, except in more complex cases, where the approval deadline is up to 60 calendar days. Thus, once the grid operator has accepted the electricity project of a wind park, it is more difficult for the grid operator later to argue that the wind park does not meet the criteria necessary for grid connection.

However, even if the grid operator does not accept produced electricity to the main grid, so that the renewable energy producer will not receive support under Article 59 and 59’ of the Estonian Electricity Market Act, yet nothing prevents the producer from selling the electricity produced and receiving the sale price on the open market.

Approval of Estonian Ministry of Defence

While planning construction of a power plant, an object of significant spatial impact, several approvals must be applied for by the investor. For example, approval of local inhabitants must be obtained, and as the planning area of a power plant usually covers a large area, practice has shown that obtaining approval from all local inhabitants might be cumbersome.

In regard to constructing a wind park, one of the most important approvals must be obtained from the Estonian Ministry of Defence. Currently, the Estonian Ministry of Defence has erected two air radar units in the northern part of Estonia and is planning to build two more – one on the island of Muhumaa and the other in southern Estonia. It has been proved that wind parks in the vicinity of radar disturb the working conditions of radar, namely noise and the existence of wrong targets (Doppler effect), leading to probable mistakes in detecting targets. It has also been argued that there will be an effect on the international protection of Estonian air space due to possible mistakes in forwarding information to NATO.

On that basis, establishment of wind parks needs approval from the Estonian Ministry of Defence during both the planning and the project phase. In general the Ministry of Defence approves the planning. For example, since 2007 the Ministry of Defence has approved 18 projects (10 of these with additional conditions) and did not approve 5 projects.

Thus, it is vital that an investor planning to construct a wind park in Estonia co-operates with the Estonian Ministry of Defence and that a compromise acceptable to both sides is reached by, for example, changing the position of wind turbines, the height of the turbines, or decreasing the number of turbines.

Construction of off-shore wind parks

Another issue which renewable energy investors have come across in Estonia is in regard to constructing off-shore wind parks. In order to build an off-shore wind park in a public water body, an undertaking has to apply for approval from the Estonian Government. The application must be submitted to the Ministry of Economic Affairs and Communications accompanied by a draft plan, geographical position plan with co-ordinates, approval of the main grid in regard to technical conditions for joining the main grid and, if available, an environmental impact assessment statement.

If there is more than one application in regard to encumbering a certain public water body with the right of construction of an off-shore wind park, the applications will be considered as to their conformity with Estonian social and economic development and the national strategic development plan. If none of the applications can be assessed under those considerations, they will be considered in order of the time of submission.

State approval comes into effect from the moment the order of the Government to issue state approval comes into effect and is in force for 50 years after a building permit is issued. Once state approval is issued, authorization for special use of water must be obtained and also a building permit. If the undertaking has not applied for a building permit within three years after issue of state approval, state approval becomes invalid. State approval also becomes invalid if the undertaking has not started construction of the off-shore wind park within five years from grant of building permit, or if the electricity undertaking is terminated and state approval is not given to another electricity undertaking.

Conclusion

The Estonian renewable energy market involves certain risk areas for new investors, mostly in regard to the future of the support system and acceptance to the grid. However, support system changes will most probably be revealed to the public in the fall of 2011 and as already stated above the Grid Code has been changed in recent years in order to minimise risks in regard to accepting a power plant, especially a wind park, to the grid.

Situation of other Baltic States’ renewable energy markets

-          Latvia

State aid mechanisms for renewable energy producers differ depending on the type of renewable sources used and installed electric capacity and are also regulated by considering the type of energy sources used and production technology applied, as follows:

• rights to sell electrical energy generated under mandatory procurement for the price set by law (quota and tariff system), if electrical energy is produced from hydro energy, biomass, biogas, wind energy or solar energy,
• rights to receive a guaranteed fee for electric capacity installed in a plant (if capacity exceeds 1 MW and biomass or biogas is used in electricity production),
• rights to sell electrical energy generated under mandatory procurement, if electrical energy is produced in co-generation from renewable sources (tariff system),
• rights to receive a guaranteed fee for electric capacity installed in a co-generation plant (if electric capacity is 20MW or above).

If a power plant qualifies for several state aid mechanisms set in different Cabinet of Ministers Regulations, the producer can use only one of those rights, at its own discretion.

The quota mechanism is based upon the quota (amount) or percentage to be covered by power consumers, suppliers or producers with a share of electrical energy produced from renewable sources. According to the Latvian Electricity Market Law, a definite share of total consumption of electricity end users in Latvia is mandatorily covered by electricity produced by using renewable energy sources. This share for each type of renewable energy source is laid down in Regulations 262 (for instance, biogas power plants 7.93%, but wind power plants altogether 5.37%)

Public traders must calculate the amount of electricity subject to mandatory procurement on an annual basis according to the relevant share of total consumption of electricity end users approved by the Cabinet of Ministers. For amounts determined in line with this procedure, the Ministry will organize tenders for acquisition of rights to sell electricity generated from renewable sources (if the applicable normative enactments set such a requirement) or adopts a decision to assign the rights to sell electricity within the scope of mandatory procurement (if normative enactments do not require organizing a tender).

The tariff system as an aid mechanism is based upon the obligation of the public trader to buy electricity produced from renewable sources from producers that have obtained the rights to sell electricity under mandatory procurement for an elevated price. This obligation might be pegged to a particular amount of electricity to be bought (if the economic operator has received a definite quota) or might be set in the form of an obligation to buy the total amount of electricity not required for the power plant for self-consumption.

Each economic operator producing or intending to produce electricity from renewable sources may obtain rights to sell electricity produced in the form of electricity subject to a mandatory procurement. According to the applicable regulation, the procurement price depends on the type of renewable sources used for generation of electricity and is set for 20 years by setting a reduction rate for the second 10 years from the date of commencement of operation of the plant.

The third support mechanism for production of electricity from renewable sources directed towards investment is public support in the form of a guaranteed fee for definite installed electric capacity. In principle, this is an annual fee paid by the system operator for installed capacity.

-          Lithuania

On 24 June 2011 a new Law on Renewable Sources of Energy was adopted in Lithuania, which inter alia provided revised and detailed regulation on subsidies available to manufacturers. Since this law was enacted only recently, many legal acts implementing it are still not adopted so that many of the detailed procedures are vague. According to the new law, producers of energy from renewable sources will be subsidized by paying them the difference between a fixed tariff and the price of electricity actually sold according to prices in the energy market. Fixed tariffs will be won and incentive quotas will be distributed by auction in every region separately as designated by the Lithuanian Government. The auction is won by the manufacturer who requests the lowest fixed tariff. This regulation will not be applied to power plants with 30kW of power and less, whose energy is going to be bought by fixed tariffs set centrally by the Lithuanian National Control Commission for Prices and Energy.

Currently in Lithuania the electricity power grid operator LITGRID is unaware of the maximum potential technical limits in the power grid. Since currently manufacturers have received permits or preliminary planning terms for 1600 MW of power in the wind energy sector, LITGRID might exercise its authority to postpone connection of manufacturers to the power grid or to regulate the amount of electricity received from energy providers.

Background

Sales and rental revenue of immovables is generally tax-exempt. In certain exceptional cases, it is mandatory to add value added tax (e.g., new buildings); while in other cases VAT may be added voluntarily if the tax authority has prior notification.

However, no format requirements or other terms have been established for this notification. Generally, too, once notification is made, the tax authority provides no feedback as to its understandability, sufficiency or even proof of receipt – but simply acknowledges the information. Of course, all this applies only if notification has actually reached the tax authority and has not gone missing in the hands of the postal service provider or inside the tax organization. Notification and failure to notify are accompanied by legal consequences which may eventually prove fairly expensive to the tax payer and the other party to the transaction.

Essence of the problem

Case law at the level of the Supreme Court has established that revenue from immovables is presumed to be tax-free and if a decision to charge value added tax is not notified, then no other reasons can later justify adding VAT. Moreover, the buyer and tenant are not allowed to deduct VAT added without legal basis.

In most cases buyers and tenants do not question the legality of adding VAT, in particular when it is appropriate for the buyer. For instance, developers of commercial property have nothing against VAT being added to the price when buying an immovable and often do not pay attention to the need to notify the tax authority as a pre-requisite for fulfilling the requirement to input VAT deduction. Therefore, the first essential problem is that often nobody checks whether the other party to the transaction is entitled to add value added tax.

Another important problem is that in reality carrying out checks and related risk management is impossible. In particular, the tax authority regards information – as to whether VAT has been added and whether it has been notified – as a tax secret and does not issue information even if the person requesting the information has a justified interest. For instance, imagine you are a tenant and in the course of an audit you have to check whether it is legally justified to reclaim input value added tax from rent invoices. However, in principle there is no way to establish whether the lessor had the right to add VAT or whether the tax authority was properly notified about VAT being added.

Alternatively, if you are not a VAT payer and you have no right to deduct input value added tax, you are clearly not interested in having VAT added to rent invoices. There are not many ways to assess the legality of the activities of the lessor since the tax authority considers the information a tax secret and does not disclose it.

Possible solutions

The tax regime applied towards immovables – whether it is tax-free or taxable revenue and whether or not the tax payer has notified the authorities about having added the tax– should not be a tax secret and probably is not a tax secret. Hopefully, the tax authority will reach this conclusion before some company is prohibited from deducting input value added tax because it has not been sufficiently diligent in determining whether the other party had the right to add VAT. Such a tax dispute can be hard to imagine if at the same time the tax audit documents include requests by the tax payer to the tax authority that have essentially been unanswered or are hidden behind the alleged need to protect a tax secret.

No universal or generally applicable recommendation is currently available for solving these problems. Rather, it is necessary to assess the possibilities to obtain the necessary evidence in every single case.

However, one should definitely be aware of these potential problems in upcoming transactions. In purchase transactions, the buyer can require from the seller proof of notification that it has decided to voluntarily add VAT and can ask the seller to obtain confirmation from the tax authority that they have indeed received notification. Before entering into a rental contract, the lessee should ask the lessor for proof and, if possible, documentation, about the right to add VAT on a voluntary basis. Although, under the law currently in force in the case of the sale of immovables, reverse taxation is typically applied, it does not solve the problem, but can actually add to the confusion.

In first order, since suretyship and guarantee have different legal implications, it is necessary to decide which one to use. In the case of suretyship, one should consider foremost that the agreement must limit the maximum liability of the person giving the suretyship. If no limitation is provided, the surety is considered void. For this reason, one must keep in mind that the commonly used wording of a suretyship agreement “provides a surety for (or secures) all obligations” is void in the case of natural persons. Since this principle has recently been introduced to the law, it is important to check that new requirements are applied when existing agreements are being extended or are being used as an example.

In the case of a guarantee, the most important aspect is to establish whether the person in question had an economic interest in issuing the guarantee. If there is no economic interest, the person is considered to be a consumer and the guarantee becomes void. Determining whether there is an economic interest is often a complex task. According to a guideline of the Estonian Supreme Court, an economic interest can be assumed if the collateral is issued by a person who is also a member of the company’s management board and its only or main shareholder. Naturally, this assumption can also be disproved. One way is to show that the guarantee would also have been issued if the person had not been a member of the company’s management board and a shareholder. However, lack of economic interest may in this case be considered an exception, since a board member who is also a shareholder generally issues a security mainly due to his or her involvement in the company.

Although in certain cases failure to obey the law may result in invalidity of collateral, the court may find that some other similar agreement exists between the parties. In the case of suretyship, such an agreement may be joining in the obligation and in the case of a guarantee, it may be suretyship. Naturally, in this case one has to take into account that the obligation is secured in a way that differs from the initial agreement between the parties. For this reason, one should, from the start, choose suitable collateral or draft an agreement considering all possible risks.

The main objectives of the amendments are:

• To ensure equal opportunities for market participants.
• To increase market transparency for market participants and competent authorities.
•  To increase the powers of competent authorities for inspecting transparency-related areas and to harmonize the powers of supervisory institutions on the European level.
• To strengthen protection of investors.
• To deal with organizational shortcomings and limit excessive risks.

The central objective of the proposal is to ensure that all trading is carried out in regulated trading locations, i.e. on regulated markets, in multilateral trading systems and organized trading systems. The motivation for the amendments was that there is no harmonized regulation for alternative markets where small and medium-sized enterprises (SMEs) are active. This means a significant difference in transparency requirements for market participants.

Moreover, alternative markets do not have sufficient liquidity. This explains why SMEs are unable to raise substantial capital from the market and market entry is too expensive. The aim is to create a regulation that would apply to alternative markets, ease market entry and simplify raising capital. A main objective is to limit the cost of market entry and specify the documents to be submitted by market participants (e.g., documents concerning the history of the company), with the objective of increasing confidence in alternative markets and their participants.

In connection with the notable increase in the derivatives market, inspection and supervision of exposure has become problematic. The objective of the regulation is to make markets in derivative instruments more transparent for competent authorities (e.g. supervisory institutions), while reducing the operating risk of participants in the derivatives market. Supervisory institutions will be entitled to intervene in all phases of validity of a derivative contract and to take measures for reducing exposure.

Another objective is to establish a new framework for trading practices. The changes mainly concern investment-related advice, the notification obligation and portfolio management. Among other things, lawmakers have considered it necessary to specify and emphasise the need to assess the suitability of the investment product for every customer. The overall principle of the new framework is to provide additional protection.

The proposal includes specification of company management-related regulations (in particular, investment firms). The financial crisis has highlighted shortcomings in connection with risk assessment and its management by management bodies and internal control of the company. The proposal aims to ensure that competent persons in companies operating in the financial instruments market have sufficient knowhow and skills so that they understand the risks related to company operations and are able to hedge them. According to the explanatory memorandum to the draft regulation, the objective is to ensure that companies are managed smartly and reliably in the interest of investors and market integrity.

Amendment proposals also include additional requirements for trading locations, establishing a harmonized regulation for business companies within and outside the European Union for entering the financial instruments markets and general modernization of the market structures framework.

Amendment proposals have been forwarded to the European Parliament and the European Council for discussion and adoption in the hope that theDirective amendments will be in force during the next few years.

First of all, the dominant aspect of the court case in question is that the person subject to proceedings carried out market transactions between himself and a company over which he had full control. By law, a transaction in which a person who benefits from a financial instrument stays the same (i.e., the buyer and seller are essentially the same person) can be regarded as possible market manipulation. However, the law acknowledges that not all such transactions can be automatically regarded as market manipulation (Subsection 188¹⁵ (1²) and Clause 3) of the same of the Securities Market Act). If the person is able to reasonably justify the pattern of activity resembling market manipulation and its compliance with market practice, certain transactions that have the pattern of activity of market manipulation are not automatically punishable as market manipulation.

In greatly amplified and perhaps overemotional comments, claims have been made that in light of the Supreme Court decision one should avoid or even stop performing transactions on the Tallinn Stock Exchange because of its low liquidity and small trading activity as every single transaction affects the price of the security and can be regarded as market manipulation. In our opinion, this approach is misleading.

Firstly, in our opinion, the main message of the Supreme Court decision is as follows:

(i) a market participant must be ready to justify every transaction where the person benefiting from the financial instruments does not change and (ii) in particular, that person must be able to justify the economic meaning of a transaction whose pattern of activity resembles market manipulation and its compliance with accepted market practice.

Secondly, since the price of a security is formed on the basis of the ratio between supply and demand, all transactions or transaction orders that deviate from the market price affect price development, regardless of whether the market has low liquidity or small trading activity.

We also believe that in the future, transactions on the Tallinn Stock Exchange will not automatically bring about an accusation of market manipulation. Note, though, that where transactions deviate from normal practice the market participant must be ready to justify the transaction. One such circumstance that needs justification is, for instance, sale of a large shareholding through the stock exchange as it is not a regular practice of the Tallinn Stock Exchange – a large offer means that the share price is expected to fall, as a result of which such holdings are generally sold through a broker who settles the transaction with a seller in one or several blocks. In terms of justification, it is important to keep in mind that this is a category open to judicial assessment to be analysed separately in each specific market manipulation case. As to justification, the Supreme Court has said that one of its significant criteria is vital credibility.

According to the Central Bank of Estonia, the Financial Supervision Authority (FSA) and the Banking Association, in October 2011 the total asset value of all Estonian banks stood at approximately €19 billion.(1) In Estonia, seven banks have been established as locally registered credit institutions, 11 banks act as branches of a foreign credit institution and approximately 250 foreign banks are licensed to offer banking services as cross-border service providers. The two leading banks in the Estonian market are Swedbank and SEB, followed by Danske Bank (acting through a branch) (formerly Sampo Bank) and Nordea Bank (acting through a branch).(2) The Estonian banking market is controlled by these major Scandinavian banks, which together hold a total market share of approximately 95%.

As Estonia is a member of the European Union, Estonian banking law and its respective regulations are generally in line with EU directives and regulations. In order to create competitive financial and banking markets, Estonia has adopted and implemented most of the required EU banking and finance law regulations, including:

• the Capital Requirements Directives (Basel II) (2006/48/EC and 2006/49/EC);
• the Markets in Financial Instruments Directive (2004/39/EC) (MiFID);
• the Reorganization and Winding-Up of Credit Institutions Directive (2001/24/EC);
• the Deposit Guarantee Schemes Directive (1994/19/EC) (DGSD);
• the Money Laundering Directives (2005/60/EC and 2006/70/EC);
• the Financial Collateral Directive (2002/47/EC); and
• the E-money Directive (2000/46/EC).

The most important legal act for the establishment and regulation of credit institutions and their activities in Estonia is the Credit Institutions Act, which came into force in July 1999. Since 1999, due to the continuing development of EU banking law, the Credit Institutions Act has been amended approximately 50 times.

The following laws and regulations also apply to banking activities in Estonia:

• the Commercial Code;
• the Money Laundering and Terrorism Financing Prevention Act;
• the International Sanctions Act;
• the Securities Market Act;
• the Financial Supervision Authority Act;
• the Deposit Guarantee Act;
• the Bank of Estonia Act;
• the Law of Obligations Act;
• the Paying Agency and E-money Act;
• Personal Data Protection Act;
• Private International Law Act;
• the specific regulations of the Ministry of Finance and the Bank of Estonia (the Central Bank); and
• the FSA official guidelines.

Legal Form and Licensing

When wishing to offer banking services in Estonia, a market participant can choose to establish itself as:

• a locally established credit institution;
• a branch of a foreign credit institution; or
• a cross-border banking services provider.

Estonian law also permits the establishment of a representative office of a foreign bank, a savings and loan association or an association bank. However, due to legal restrictions and an underdeveloped regulatory framework in that area, and taking into consideration the current market situation, such forms of activity are not widely used in Estonia. Estonia has only a few representative offices, approximately 15 savings and loan associations and no association banks.

Credit institution
The most restrictive regulations apply to the activities of locally established credit institutions. Such credit institutions can be founded only in the form of a public limited company (‘aktsiaselts’) and with a minimum paid-in share capital of €5 million. The credit institution’s share capital must be paid-in in cash only and it cannot be established through a public share issue. According to the Commercial Code, a public limited company’s shares and shareholders’ register must be maintained by the public Central Register of Securities and it is the obligation of the management board to ensure the timely submission of correct shareholder information to this register. The share register may be examined in accordance with the provisions of the Central Register of Securities Act by:

• shareholders;
• members of the management or supervisory board;
• competent state institutions; and
• any other person with a justified interest.

According to the Credit Institutions Act, only a licensed credit institution (i.e., holding an activity licence from the FSA) may collect deposits and receive other repayable funds from the public. In order to obtain an activity licence, the credit institution must, alongside its application, present the FSA with the following information and documentation:

• its articles of association;
• its foundation resolution or decision if the legal entity is being established;
• its business plan;
• evidence of its paid-in share capital;
• a balance sheet and profit-loss statement;
• information about the bank’s IT support/software data, security and other control systems;
• a description of internal procedures and bank manuals;
• information about the managers, supervisory board members, head of the internal audit unit and head of the control committee;
• information concerning the bank’s independent auditor;
• information about the shareholders and more specific information about those shareholders who are natural persons that own more than 2% of the total share capital or shareholders who are legal persons that own more than 5% of the total share capital;
• detailed information about shareholders with a qualified shareholding (more than 10%);
• documents substantiating the company’s net amount of own funds accompanied with the report of a sworn audit, if the applicant is an operating company;
• specific data concerning companies where the applicants shareholding exceeds 20%; and
• document under which the applicant undertakes to pay necessary deposits in case the applicant shall provide investment services in accordance with the Securities Market Act.

All information and supplementary documents must be presented to the FSA in Estonian or with an Estonian translation.

The FSA must decide within six months of receiving all the required documents and information whether it will grant the activity licence. This must be no later than 12 months after the credit institution delivered its first application to the FSA.

In addition to establishment costs, the credit institution must pay expenses of €1,500 for the FSA’s management of the licensing procedure.

According to the Credit Institutions Act, every credit institution which is established as a public limited liability company must include the Estonian word for ‘bank’ (‘pank’) in its official business name. Companies that do not hold a banking activity licence are not permitted to use this word in their official name.

In case a credit institution also offers investment services, it needs to keep in mind that from 1 of January 2013 the audit of the credit institution needs to be in accordance with the conditions specified in the Auditors Activities Act. Hence, more rigorous requirements shall be implemented for the auditors compared to the current requisites.

Furthermore, in the recent years Basel Committee of Banking Supervisors have developed a thorough document – Basel III – regarding the liquidity and capital adequacy requirements of the international banking sector, inter alia implementing new minimum capital requirements and enforcing new rules for leveraging. This will bring along extensive renewals in the international (including Estonia) banking regulations. The members of the Basel Committee have promised to implement the renowned regulations on 1 January of 2013. The progress of implementing Basel III (also the new regulations being implemented) can be followed at Basel Committee’s homepage.

Additionally, Directive on Deposit Guarantee Scheme concerning regulations on bank deposits and guarantees regarding how deposits are protected is being pushed through European Parliament and the Council. The aim is to implement a stricter regulations for the banking sector regarding the protection of deposits held by the banks in case depositors wish to withdraw their deposits.

Given the cost of the financial instability for the real economy, European institutions are discussing whether to impose additional taxes on the financial sector. The aforementioned taxation plan aims to guarantee more stable economy and prevent any further financial crisis in the future.

Branch of foreign credit institution
If a foreign credit institution plans to offer banking services in Estonia on a permanent basis, it can establish a branch. Under the Commercial Code, a branch is not a separate legal entity and the foreign credit institution is still liable with all its assets for obligations arising from the branch’s activities. On registration of the branch, the credit institution must include the Estonian word for ‘branch’ (‘Eesti filiaal’) in its official business name.

Before a branch of a credit institution can be registered in the Commercial Register, the bank must apply for an activity licence from the FSA in accordance with the regulations established in the Credit Institutions Act. For this purpose the Credit Institutions Act provides two different licencing procedures, depending on the applicant credit institution’s country of origin.

Any credit institution registered in one of the contracting states of the European Economic Area (EEA) has the right to apply for an activity licence under the European passport regulation by informing the FSA of its intention to register a branch in Estonia through the financial supervision authority of its home country. In addition to the application, the credit institution must present the FSA with:

• a business plan or activity programme (including information about its planned services and a description of its organizational structure);
• its branch address; and
• information about its branch directors.

According to this authorization procedure, the credit institution can register its branch and begin offering banking services provided that: (i) it has received approval from the FSA through the financial supervision authority of its country of origin; or (ii) at least two months have passed since it presented its documents to the FSA and the FSA has not replied or informed it of any additional requirements.

A bank registered in a non-EEA country must apply directly to the FSA for an activity licence. In addition to the aforementioned information and documents, the bank must present information about its qualified shareholders and other branch establishment documents and information required by the Commercial Code, including:

• an official certificate (e.g., an extract from the Company Register of its country of origin) concerning its existence in its home country;
• a document certifying the authority of its branch director(s) or a copy of a resolution appointing the director(s);
• a copy of its articles of association;
• information on the branch’s planned principal activities; and
• the branch’s contact details.

In addition to the above, in order to establish an Estonian branch of a bank registered in a non-EEA country, the bank must present:

• respective consent from its state of origin’s financial supervision authority;
• confirmation that it holds a valid activity licence;
• data relating to its net assets amount and its capital adequacy; and
• data relating to its state of origin’s deposit guarantee system.

Contrary to the European passport system and subject to other provisions of the Credit Institutions Act, the FSA may refuse to grant authorization if:

• in the FSA’s opinion, the financial situation of the foreign credit institution is not sufficiently sound;
• the corporate structure of the branch of the foreign credit institution in Estonia is not suitable for the intended activities;
• the legislation of the credit institution’s state of origin does not require it or the financial supervision authority of the home state does not exercise sufficient supervision, including supervision on a consolidated basis;
• the managers or directors of the established or operating applicant are not in accordance with requirements provided by the law; or
• the financial supervision authority of the foreign state has no legal basis or possibilities for cooperation with the FSA.

In such cases the FSA must issue a reasoned decision for its refusal to grant authorization within two months of receiving the application and the specified data and documents.

The branch licensing procedure requires no additional processing fee to be paid to the FSA and the establishment costs and expenses are generally lower than those of a credit institution.

Cross-border banking services
According to the Credit Institutions Act, cross-border banking services in Estonia can be offered only by credit institutions registered in an EEA contracting state. [1] If a credit institution plans to provide cross-border services in Estonia, it must inform the FSA through the financial supervision authority of the contracting state and indicate which transactions and acts it intends to conclude and perform in Estonia. The credit institution may commence the provision of cross-border services once notice has been forwarded to the FSA. However, the FSA may also formulate a decision in which it determines conditions for the credit institution’s provision of services in Estonia or refuses to issue the license, in which case the FSA needs to inform the credit institution and the FSA of the respective EEA contracting country of the decision.

Representative office
Pursuant to the Credit Institutions Act, a foreign credit institution may open a representative office in Estonia. A representative office can be established for representative purposes and for the protection of a credit institution’s interests in Estonian territory. It is not considered to be a legal entity and cannot offer any banking services or conduct any other business activity in Estonia.

In order to open a representative office, a foreign credit institution must submit the following data and documents to the FSA:

• confirmation from the financial supervision authority of its country of origin that the credit institution holds valid authorization;
• the representative office’s activities programme;
• a document certifying authorization of the representative;
• a document concerning the registration of the credit institution in its country of origin (e.g., an extract from the Commercial Register or a transcript of the registration certificate);
• the credit institution’s articles of association; and
• the seat, address and contact details of the representative office.

These documents must be submitted to the FSA together with a notarized translation into Estonian.

Association bank and savings and loan association
Under the Credit Institutions Act and the Savings and Loan Association Act, it is possible to establish association banks or savings and loan associations. No association banks are currently operating in Estonia and only 20 savings and loan associations have been established, which have only a regional and limited impact on the Estonian financial market.[2] The Credit Institutions Act sets out a minimum capital requirement of €5 million for association banks. Savings and loan associations are not licensed or supervised by the FSA.

According to the Savings and Loan Association Act, savings and loan association is a financial institution which primary and permanent activity consists of the following transactions between its members:

• deposit transactions to involve savings and other repayable funds;
• loan transactions, including consumer credit, mortgage loans and factoring;
• lease transactions;
• involvement of securities, guarantees, benefits and earmarked repayable funds offered by foundations, structural funds or payment agencies established by the European Commission or EEA contracting states or other similar persons and intermediation thereof;
• involvement of securities, guarantees or other repayable funds offered by financial institutions or insurers and intermediation thereof;
• advising on issues regarding economic activities; and
• other similar transactions which by its nature are similar to the transactions hereinabove.

A savings and loan association can be established based on the common territory (e.g., local government), on the principle of employment, service or profession (e.g., medical staff, fishermen, miners, etc). The association has to have at least 25 members and the minimum monthly payment for each member is 30 euros. The minimum capital requirement is 31 950 euros.

Every loan given by the savings and loan association has to be in accordance with the terms and conditions provided by the Savings and Loan Association Act. Furthermore, the law provides extensive terms for risk management for these associations.

Association banks are exempted from the obligatory requirement to be established, operate and be targeted at limited groups of people on a regional level.

Financial Supervision

State financial supervision in Estonia is conducted by the FSA, acting under the Financial Supervision Authority Act and operating through the Bank of Estonia. The FSA carries out financial supervision on behalf of the state, but in its actions it is independent of the Bank of Estonia and the government and has its own standalone budget and supervisory and management board. The FSA was established and began its activities as a unified financial supervision authority on January 1 of 2002 when three autonomous supervision authorities were merged into one supervision entity.

According to the Financial Supervision Authority Act, the main functions and rights of the FSA are to:

• analyze and monitor constantly the compliance of subjects of financial supervision with the requirements for financial soundness and own funds;
• guide and direct subjects of financial supervision in order to ensure sound and prudent management;
• apply measures prescribed by legislation to protect the interests of clients and investors;
• apply administrative coercion on the basis of, to the extent of and pursuant to the procedure prescribed by the Financial Supervision Authority Act;
• make proposals for the establishment and amendment of legal acts and other legislation concerning the financial sector and related supervision, and participate in the drafting of such laws and legislation;
• cooperate with international financial supervision organizations, foreign financial supervision authorities and institutions, committees and other authorities of the European Union and other competent foreign authorities and persons;
• participate with the other EU member states in requesting for permission or in other procedures provided by the Financial Supervision Authority Act;
• perform functions arising from the Guarantee Fund Act, the Money Laundering and Terrorist Financing Prevention Act, the International Sanctions Act and legislation issued on the basis thereof; and
• perform other functions arising from law which are necessary to fulfil the objectives of financial supervision.

In addition to market participants acting under the Credit Institutions Act, the FSA supervises:

• insurance companies;
• insurance brokers;
• investment service providers and other financial market participants;
• investment management companies;
• investment funds;
• pension funds;
• e-money institutions; and
• any other subjects or activities regulated by the applicable financial market laws.

Locally established credit institutions are directly supervised by the FSA. Although the FSA’s direct supervisory rights and powers are related to banking activities in Estonia in the form of branch or cross-border services, supervision in these cases is mainly conducted by the financial supervision authority of the respective credit institution’s country of origin. According to the Financial Supervision Authority Act, the Credit Institutions Act and concluded bilateral cooperation agreements, the FSA is obliged to:

• support such foreign country supervision;
• provide information; and
• assist foreign financial supervision through local inspections or other supervisory activities.

The FSA is directly funded by market participants, which means that credit institutions and their branches incur additional costs.

In general, the supervision fee consists of two parts. The first part is the capital share, which for a locally established credit institution is an annual amount equal to 1% of the required minimum amount of net own funds (currently €5 million). The second part is the share calculated on the basis of assets. In the case of a credit institution or branch of a foreign credit institution, this is an annual share of the supervision fee, which is calculated on the basis of assets and equals an amount between 0.005% and 0.05% of the assets of the credit institution or the corresponding Estonian branch. Depending on the FSA’s estimated costs and financial budget, the exact rate will be approved by the FSA supervisory board on an annual basis. For 2011 the rate was fixed at 0.01% of the credit institution’s or branch’s assets.

The supervisory fee payable by branches of foreign credit institutions is calculated on the basis of the branch’s assets.

A new regulation regarding the communication between European financial supervision authorities is being pushed through the Council of the EU. The main goal is to improve communication, cooperation, coordination, consistency and trust amongst the supervisory authorities in Europe.(12)

Other Requirements

When founding a bank in the form of a credit institution, a branch or an entity offering cross-border services, it is important to clarify whether applicable requirements set by other Estonian laws or regulations apply to the bank’s activities and business. Institutions embarking on offering banking services in Estonia should consider the following issues:

• Credit institutions and branches are obliged to open a current account with the Bank of Estonia and conclude agreements for becoming a member of the Estonian settlement system.
• Credit institutions and branches must fulfil reporting requirements to the Bank of Estonia, the FSA and the Department of Statistics.
• Credit institutions, branches and cross-border service providers must ensure that their banking activities comply with laws and regulations regarding money laundering and terrorism financing prevention. These issues are mainly regulated by the Money Laundering and Terrorism Financing Prevention Act.
• Credit institutions and branches must ensure that their activities are in accordance with the Deposit Guarantee Act and, if required, must become a full member of the Deposit Guarantee Fund.
• If a credit institution, branch or cross-border service provider offers investment services in addition to its banking services, it must ensure that these services are provided in accordance with the Securities Market Act and any legislation established on the basis thereof.
• If concluding customer service agreements or other business agreements, the bank must ensure that these agreements are in accordance with the provisions of Estonian contract law (the Law of Obligations Act) and other applicable laws.
• Credit institutions and branches must comply with Estonian taxation laws and regulations. Most banking services, except for leasing and factoring, are free from value added tax in Estonia. Depending on the capacity of the leasing or factoring activity, it may be recommended to establish a separate legal entity or at least analyze the taxation issues more specifically if such services are to be provided by the credit institution or branch directly.
• After establishing its activities and depending on the services provided, a bank might consider becoming a member or partner of the Estonian Banking Association, the Credit and Export Guarantee Fund or the Rural Development Foundation.

For further information on this topic please contact Priit Pahapill at Attorneys at law Borenius by telephone (+372 665 1888) or by fax (+372 665 1899) or by email (priit.pahapill@borenius.ee)

Endnotes

[1] The freedom to offer cross-border banking services in EEA countries is regulated by Article 28 of the EU Capital Requirements Directive (2006/48/EU)

[2] According to the Union of Estonian Savings and Loan Associations, approximately 15 savings and loan associations are registered in Estonia. For more information see www.hoiu-laenu.ee/index.php?lang=eng

As we know, one of the key principles of intellectual property is the specific term of protection. Under the current Copyright Act, the rights of performers and phonogram producers are protected for 50 years.

With regard to performers, the term is calculated from the date of the performance or where the recording of the performance is lawfully published or communicated to the public, within 50 years from the date of the performance. Depending on whichever date is the earliest, the term is calculated either from the date of first publication or the date of first communication to the public.

With regard to phonogram producers, the term begins either as of the date of recording of a phonogram or if the phonogram is not published, then as of the date of communicating the phonogram to the public.

Extension of the term

Recently, the media dealt with adoption of European Parliament and Council Directive 2011/77/EL and its extension of the term of protection of the rights of performers and phonogram producers to 70 years.

We should clarify here that the Directive is not directly applicable and that European Union Member States are required to enforce the legislative provisions necessary for compliance with the Directive not later than 1 November 2012. Thus, as long as the regulation laid down in the Copyright Act is not amended, the fifty-year term continues to remain in force in Estonia for protection of both performers and phonogram producers.

The need to extend the term of protection is justified by the fact that performers normally launch their careers at an early age and the current term of protection of recordings does not protect their performances during their entire lifetime. As a consequence, the income of performers falls towards the end of their lifetime. It is also claimed that the 50-year term of protection precludes the opportunity for a performer to prevent or restrict a possible improper use of their performances. The extension of the term of rights protection allows for the objective that the exclusive right granted to performers for reproduction of performances and making them available to the public, the right to receive fair remuneration for reproduction intended for private use and the exclusive right of distribution and rental, should provide for income at least until the end of a performer’s lifetime.

Transition methods

In addition to the term of protection, Member States should also consider several conditions dealing with transition methods, the performer’s options to terminate agreements with phonogram producers under certain circumstances, the performer’s right to require supplementary annual remuneration, and so on.

For example, if a performer has concluded an agreement for transfer and assignment of rights with a phonogram producer and they have agreed on non-recurring remuneration, upon extension of the term the performer is entitled to receive annual supplementary remuneration from the phonogram producer for each full year immediately following the 50^th year after the phonogram was lawfully published or made available to the public. At the same time, the performer cannot waive the right to receive annual remuneration. This also means that where such an agreement was concluded or is planned to be concluded, it will be regarded as irrelevant.

As to payment of this remuneration, theDirective requires the phonogram producer to allocate 20% of the revenue which the phonogram producer receives during the year preceding the year for which the remuneration is paid, from the reproduction, distribution and making available of the phonogram in question following the 50th year after it was lawfully published or made available to the public.

This change in the law will undoubtedly lead to an additional monetary burden for phonogram producers for another 20 years. The right to receive supplementary remuneration foreseen for performers will be managed by collecting societies, i.e. in Estonia, presumably the Estonian Performers Association.

Unless the agreement between the performer and the phonogram producer states otherwise, a contract concluded in respect of transfer or assignment before 1 November 2013 will also remain in force after the rights of the performer are no longer protected under legislation in force on 30 October 2011.

Impact scope

The amendments dealt with above, to be introduced into to the Act as well as those left out of the framework of this article, not only concern performers and phonogram producers but anyone whose economic activities are either directly or indirectly related to use of performances or phonograms as well as those who can be considered users of performances or phonograms on other grounds and under other circumstances.