Recently Ministry of Finance disclosed the proposal to introduce the taxation of accumulated profits of the corporations on an annual basis at the rate of 10% from the beginning of 2009.

Currently the income tax in Estonia is levied only on the income of corporations distributed to its shareholders as dividends or other profit distributions, as well as on fringe benefits, gifts and donations and payments and expenses not related to the business of the corporation. However, in reliance to the decision of the European Court in case Amstel International, the European Commission declared current tax regime to be contrary to Article 5 (1) of the Council Directive 90/435/EEC and granted the transitional period for implementation of Article 5 (1) until 1 January 2009. 

After analyzing six different options the Ministry of Finance has proposed the new regime where the profits of the corporations would become taxable on an annual basis regardless of whether any distributions are made. No further tax would be imposed at the moment of distribution of profits. This will bring Estonian corporate income tax regime incompliance with Article 5 (1) of the Council Directive 90/435/EEC. To retain the attractive investment environment from the one side and ensure the receipt of tax equivalent to today’s figures on the other side, the proposal foresees the taxation of corporate profits at the rate of 10%.

The dividends paid to parent corporations would be exempted from income tax. Income tax at the rate of 10% will be withhold from dividends paid to natural persons and corporate shareholders whose shareholding represents less than 10% of the shares, votes or rights to profit in the distributing corporation. Double taxation of dividends received from other corporations should be avoided by exempting such dividends from tax.

Fringe benefits, gifts and donations and payments and expenses not related to business would remain taxable.

It is proposed that the tax return shall be filed and tax paid within six months from the end of taxable period and advance payments will be imposed during the taxable period.

Special rules shall govern the taxation of non-profit organizations, foundations and insurance companies.

Necessary regulations concerning depreciation, carrying forward expenses and mergers and acquisitions will be also developed. Transitional provision will be also enacted to avoid the exemption of profit earned but not distributed as of 31 December 2008 from tax.

At this point of time no further specifics of the proposed tax regime are disclosed and only public debate has been initiated.

For further information please contact:

Piret Jesse

attorney at law

Law Office Tark & Co

Roosikrantsi 2, 10119 Tallinn

Estonia

tel.:  +372 611 0900

fax:  +372 611 0911

e-mail: piret.jesse@tarkco.ee