Estonia’s income inequality among worst in EU: study

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Estonia brings income tax system into line with European Union requirements

At a meeting of cabinet today the government agreed in principle to amend Estonia’s income tax law so that corporate taxation is brought into line with the European Union’s Parent and Subsidiary Directive starting from 2009. The tax system will also favour future investment in Estonia.The Ministry of Finance submitted four different systems of corporate income tax to the government for discussion. The cabinet unanimously supported the model favouring investment, which is in accordance with their coalition agreement.

The government’s decision will see Estonia no longer taxing profit at the moment of its distribution (i.e. the payment of dividends) and instead making the transition to annual taxation. Reinvested profit will remain tax-free, although income tax on distributed profit – which has been increased by the amount of non-business-related expenses and sums paid out as gifts and donations – will now have to be paid on a yearly basis. The Ministry of Finance also considers it appropriate to set an advance payment obligation if the abovementioned payments exceed a certain sum.

“Taxing of companies in Estonia has always been in line with the Parent and Subsidiary Directive in the sense of avoiding double taxation,” explained Minister of Finance Ivari Padar. “But it’s clear that our laws have to be able to be clearly understood by everyone, and that our taxation system doesn’t leave itself open to any chance of misinterpretation as being in contravention of European Union law.

“We have thoroughly analysed and discussed the issue, and reached a solution that will allow us to maintain the strong points of the system we currently have: its simplicity, transparency and uniformity, and its support for investment,” the minister continued. “At the same time, we will be amending the model to make sure that it is in full keeping with the directive.”

Upon joining the European Union, Estonia took on the obligation to bring its corporate taxation system into line with the EU’s Parent and Subsidiary Directive by 2009. The main aim of this directive is to avoid double taxation of the profits of international groups. To do this, one of the things the directive prohibits is the deduction of income tax from profit distributed to a non-resident parent company by a subsidiary.

The commission’s view, that Estonia’s corporate income tax represents a withholding tax, is based on a preliminary European Court ruling in the 2001 case of Athinaiki Zithopiia. In 2006, however, in the FII Group Litigation case, the European Court made a ruling that it only represents a withholding tax if the tax liability is created as a result of the payment of dividends and the taxable person is the recipient of the dividends.

Under the Estonian income tax system, taxation liability is not only created as a result the payment of dividends, but also as the consequence of donations, gifts, reception expenses, other non-business-related costs and fringe benefits. As such, the tax base is made up of a number of other components in addition to distributed profit. The taxable person in the Estonian model is the subsidiary, i.e. the body paying out the dividends, and not the recipient. Therefore it is not a case of withholding tax in the terms of the Parent and Subsidiary Directive. Changing to an annual system of taxation will make this fact clearer than it has been in the past.

On the basis of the decision made today by the cabinet, the Ministry of Finance will prepare a new Income Tax Act to enter force on the first of January 2009.
Source: Ministry of Finance

New law reinforces fight against money laundering

The Ministry of Finance has submitted the draft Money Laundering and Terrorist Financing Prevention Act, which will introduce two EU directives on the prevention of money laundering into Estonian law, for the first round of approval.“Adopting the draft would help us fight money laundering and the funding of terrorism more effectively,” explained Minister of Finance Ivari Padar. “Both of these are growing problems in the world at the moment and affect all of us. It’s vital too that preventing these crimes defends the trustworthiness of Estonia’s economic space as a whole.”

Should the draft enter force, the range of individuals obliged to implement the requirements of the Money Laundering and Terrorist Financing Prevention Act within their economic and professional operations will broaden.

These will be banks and all other companies providing financial services, organisers of gambling, individuals involved in the brokerage of real estate, pawnbrokers, auditors and those offering accounting services or advisory services. Also included will be merchants who receive more than 200,000 kroons (or another currency) in cash and in certain cases notaries, lawyers, bailiffs, trustees in bankruptcy and other providers of legal services.

The draft more precisely regulates the operations of these obligated individuals in identifying and running checks on the other party in a transaction or the individuals or clients involved in an official transaction than the current law.

A new requirement is that obligated individuals, barring credit institutions, must inform the money laundering data office of every transaction, whether in cash or equivalent, of 500,000 kroons or more.

A significant change established in the draft is the mandatory registration of entrepreneurs in the register of economic activities. All financial service providers who are not subject to the supervision of the Financial Inspectorate must register themselves in this way under the draft law. Those offering SMS loans are also among those who must register themselves.

The need to regulate the prevention of money laundering and the funding of terrorism with a separate act is a result of the danger represented by these crimes. Attempts to hide the origins of money obtained through crime or to finance terrorist activities could put the trustworthiness and stability of credit and financial institutions at risk, lead to wavering trust in the financial system and damage the national economy as a whole.

The new directives must be adopted by member states by 15 December 2007.

For more details see: Background to the draft Money Laundering and Terrorist Financing Prevention Act (04.07.2007)

Source: Ministry of Finance