An analysis has been completed in the Ministry of Finance on the possible versions of the income taxation of commercial organisations since 2009, as the transition period for bringing into conformity the income tax law with the directives of parent undertakings and subsidiary undertakings, provided for Estonia, is ending.”We assessed six income tax models and their possible positive and negative effects on the Estonian business environment, taking as the basis the international practice and the latest developments in the field of corporate income tax,” told Minister of Finance Aivar Sõerd when introducing the analysis.
“When analysing the models we paid special attention to their functioning in the context of European Union directives and international tax agreements.”
“From the different models we consider most appropriate the one with which the profit is taxed with a low tax rate, irrespective of whether it has been distributed or not,” the Ministry of Finance explained. “According to this model, the profit of a commercial organization shall be taxed after the end of the financial year. The taxing of the expenses not related to enterprise, specific benefits and gifts and donations is continued. In the case of the parent undertaking with at least 10 percent sharing the income tax is not deducted on dividends at the distribution of profit.” The tax rate of commercial organisations would be 10% and when paying dividends to natural persons, an additional 10% income tax would be deducted in order to guarantee people the equal taxation of wages and of the income on investments (i.e. 20% rate).
The basis for calculating the tax rate is the principle that the corporate tax burden would not increase when compared to today.
Minister of Finance has sent the analysis to the interest groups for getting their opinion, and he is planning to meet with them in order to discuss the models.
All others can express their opinion on given material and make additional proposals to the Ministry of Finance on the address Suur-Ameerika 1, 15006 Tallinn or by e-mail: firstname.lastname@example.org .
Estonia needs to change its income tax system as the transition period for bringing into conformity the income tax law with the EU directives of parent undertakings and subsidiary undertakings, provided for Estonia by the EU accession agreement, is ending on 31 December 2008. According to the directive, the profit that is distributed to the parent undertaking needs to be exempted from the deducted income tax in case of at least 10 percent sharing as of 1 January 2009.
According to the decision C-294/99 (Athinaïki Zythopoiia AE) of the European Court of Justice from 4 October 2001, any liability to taxation that has emerged from the distribution of profits of a company, can be regarded as a deducted tax, irrespective of whether legally the tax payer is a profit-distributing subsidiary undertaking or the income tax is deducted from the parent undertaking that receives the dividends. Since in Estonia also the company profit is taxed at the moment of paying the dividends, the European Commission has stated that income tax of legal persons paid in Estonia at the time of distribution of profits is not in compliance with the directive.
The analysis can be read in detail on the Ministry of Finance home page
http://www.fin.ee/index.php?id=281 , subdivision Tulumaks 2009.
Source: Ministry of Finance