Tax developments in Estonia 2011

On January 1, 2011 Estonia adopted euro as currency instead of kroon, but it did not bring any significant changes on tax field as most of the numerical indicators were converted to euros with slight approximation in favor of taxpayer.

However several changes in tax law field that were not related to changeover of currency came into effection at the beginning of the year 2011. Amendment of Estonian Icome Tax Act detailed the definition of permanent establishment and included under the definition also non-fixed places of business (for example a mobile office). Also it was clarified that income earned through a permanent establishment is taxed at the moment when it is transferred out of the permanent establishment in Estonia. Amendments of Income Tax Act involved also fringe benefits and so the definition was broadened to include also benefits provided to employees by any company belonging to the same group with the employer. Definition of affiliated person was also changed and corresponding exclusive list was replaced by a non-inclusive list. Also it was clarified that persons are affiliated if they have common economic interests or dominating influence over one another. Important amendment is also that share options to employees are to be taxed on realization not on issue. Share options are not taxable if the period between issue and sale is at least three years.

On January 1, 2011 amendments in Estonian Value Added Tax Act came into effection.  Special arrangements for imposing reverse charge on internal supply of taxable immovables and metal waste was applied. Also it is clarified a place of supply of natural gas and energy and from this moment the place of supply is considered as location of the consumer (recipient of the goods/services). Additionally, the taxable value of imported goods that have initially been subject to a customs procedure other than importation may under certain conditions be lower than their value at the moment of arriving in the customs territory.

There is also an important amendment in Value Added Tax Act for small businesses in Estonia according to which businesses with annual supply of less than 200 million EUR are eligible for cash based VAT accounting (special arrangements of VAT accounting) on internal supply. This is a great advantage and improves the economic situation of small size businesses as the obligation to account for VAT arises when payment for the supply is actually received.  Normally VAT is accounted for on the invoice basis.

In addition to amendments that came effective on January 2011, Estonian Parliament made several remarkable decisions in June 2011 regarding legal acts in Estonian taxation field. Estonian Parliament decided to lower the income tax to 20 % starting from the year 2015 (legal persons 20/80). Also it was decided to allow to withhold woodland maintenance expenses from the taxable income of timber and forest sales during the next 3 taxation periods starting from the year 2012. Positive decision for employers was to exclude work related development trainings from the taxable fringe benefits. The compensation of costs for the formal education acquired by the employee within the adult education system will not be treated as fringe benefits in Estonia. Currently, these expenses are subject to fringe benefit taxation. Negative influence for taxpayers brings a decision according to which the amount of untaxed expenses like housing loan interests, training expenses and contributions is decreased from 3196 EUR to 1917 EUR starting from the year 2012.

There was also a remarkable amendment regarding taxation of accommodation costs in Estonia made by Estonian Government on October 2011. Estonian Government accepted amendments in Estonian Taxation Act and in Estonian Income Tax Act according to which in future accommodation expenses in Estonia will be exempted from tax. Effective acts exempt accommodation costs from tax only if costs are until 77 EUR in case of domestic business travels and until 128 EUR in case of business travels abroad. Amendments are planned to enforce from January 1, 2012

In addition to previous there were developments also in the field of international tax treaties in Estonia. The treaties with Albania, South Korea and Serbia are effective as of 1 January 2011  bringing the total count of effective Estonian tax treaties to 47. Also on March 11, 2011 the new protocol to the tax treaty with Georgia has entered into force. Protocol will become effective on 1 January 2012. On April 20, 2011, Estonia and United Arab Emirates and on September 19, 2011 Estonia and India concluded a treaties for the avoidance of double taxation with respect to taxes on income.

Previous shows that this year developments in Estonian taxation field are remarkable. As taxation field develops very fast and needs amendments on legal basis also, it is foreseen that next year will be as progressive as this one. European Comission has made a proposal to Estonia to create a common system of corporative income tax and Estonian Government already discusses this proposal.

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

T: +371 67 24 00 90

Email: valters.gencs@gencs.eu