When companies look to expand into foreign markets, the Baltic States often become the first choice. Operating in neighboring countries presents numerous opportunities but also brings a variety of challenges. Although many cultural and historical similarities unite the Baltic States, legal and tax differences between Lithuania, Latvia and Estonia often become obstacles that inhibit the growth of companies. However, these challenges are not insurmountable.
In this article, I outline the key challenges businesses face when entering the Baltic markets and offer practical solutions to overcome them.
Differences in legal requirements and tax systems
Despite the cultural and economic similarity, Lithuania, Latvia and Estonia have differences in legislation and applicable tax policies. For example, in Lithuania, relatively often changed tax laws require constant updating of accounting processes. In Latvia, payroll accounting is also not simple due to the existing legal regulations and specific calculation procedures, which require more attention and accuracy. In Estonia, high requirements for digitalization can become a significant challenge for companies that have not yet arranged the IT infrastructure in accordance with the latest requirements.
These differences make it necessary to constantly follow the changes in the law and taxes of each country in order to carry out activities legally and efficiently. Without proper competencies and sufficient resources within the organization, companies have to look for competent external partners advising on accounting, tax and legal issues.
High possibility of communication challenges and misunderstandings
Different languages and, in many cases, different working methods raise additional challenges in mutual communication with outsourced partners. Language barriers and varying work methods can complicate collaboration, leading to misunderstandings, information loss, wasted time, and delays in decision-making. It is also much more difficult to prepare shared/ common corporate documents (e.g. payroll and accounting policies, employment contracts, etc.), especially when it comes to reconciling the requirements of different countries.
Smooth communication between the company and its partners ensures optimal processes, so it is more efficient to have a small and clearly defined network of partners than to look for different providers in each country.
Financial consolidation: the goal is clear, but it is not always easy to achieve it
One of the most challenging tasks for managers of multinational companies is the proper consolidation of financial data. The preparation of unified reports is complicated by the different standards and reporting formats applied in the countries. These discrepancies increase the risk of errors and hinder to accurately assess the performance of the business units. Moreover, the consolidation of financial data and reports in many cases may demand significant time and human resources.
Instead of focusing on strategic financial management, company directors and chief financial officers find themselves managing the daily tasks of accounting service partners. They must ensure compliance not only with local regulations but also with mutual agreements, such as reporting deadlines or the use of appropriate cost centres, made with partners.
These challenges are more effectively addressed by engaging financial management partners who operate seamlessly within the same markets as the company, as a result, the finance unit manager no longer has to devote time to additional coordination of work. This alignment can ensure modern, informative and effective data consolidation.
Traps – differences in payroll accounting
In all three Baltic states, the personal income tax base, the non-taxable amounts are calculated differently, and different tax rates are applied. In Latvia, the calculation of salaries is regulated by the rules requiring holidays, which coincide with weekends, are transferred to the nearest working day. As a result, more time has to be devoted to payroll administration.
Payroll accounting in Lithuania is also complex. It is aggravated by frequent changes in tax laws, so companies have to constantly monitor law changes and adapt their accounting systems accordingly.
In Estonia, where there is a significant state-driven advancements in digitalization and automation, the process of calculating wages and reporting has become notably simpler and more efficient compared to Latvia and Lithuania. Companies have the ability to automate payroll management, as well as to submit reports to state authorities more easily and quickly. With the help of modern accounting management systems, it is possible to achieve high efficiency, but the installation and maintenance of such systems requires additional investments.
Payroll processes must be handled with the utmost care and precision in order to ensure accurate data that is provided timely. In such cases, a partner working in the Baltic region can effectively optimize the payroll calculation processes, thus making it easier to reduce the administrative and time costs associated with the management of different suppliers.
A unified platform or system allows for a faster response to changes in legislation, for example, on the calculation of sickness leave payment, bonuses, business trip allowances, and provides an opportunity to maintain transparency between the employer and the employee. Finally, working with one partner helps to ensure data protection and comply with GDPR requirements, as the data is managed centrally, and not on different platforms by different providers.
If you work in several Baltic states, choose the right partners
Geographical developement/ growth is inseparable from partnerships with local regulation experts (legal, tax, financial, etc.). I will give a few basic recommendations for choosing such partners.
First, look for an equal partner. Global business service companies may not be interested in smaller projects, while local small businesses may not have sufficient resources or ensure high-quality services.
Secondly, when choosing an external provider, it is critically important to evaluate its reliability. Find out if the partner has the necessary certificates, professional insurance, experience in the markets that are relevant to you.
Thirdly, before choosing an advisory or services partner, look into the company’s clients and ask for recommendations from current or former clients.
Fourth, ask if the partner will ensure the use of unified systems and processes across all Baltic states.
The article in Lithuanian has been published on Verslo žinios portal:
https://www.vz.lt/izvalgos/2025/01/27/pleciate-versla-baltijos-salyse-kokie-issukiai-laukia-ir-kaip-juos-iveikti-562849
