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Category Archives: Tax

LEXTAL ranks high in Legal 500 EMEA

We are proud to announce that LEXTAL has been ranked by Legal 500 among other best Dispute Resolution, Tax, Commercial, Corporate, M&A and IP, IT and Telecoms teams in Estonia!

Legal 500 highlighted the following:

LEXTALs ‘efficient’ team is ‘proactive and takes the time to get to know its clients’. Ants Karu provides ‘very detailed advice tailored to each client’s individual circumstances’ and Margus Reiland ‘thinks outside the box’.

LEXTAL’s ‘fast and professional’ team is known for its experience in self-driving vehicles and cybercrime. Associate Rauno Kinkar is ‘very experienced and knowledgeable’.

The ‘diligent and responsive’ Ants Karu at LEXTAL ‘combines a good knowledge of tax and corporate law while keeping a clear focus on what is important and what is not’. Recent work highlights include advising Sevenoil and three other sellers on the sale of seven gas stations.

LEXTAL’s ‘excellent and quick team’ is experienced in both litigation and arbitration. The ‘thorough’ Olavi-Jüri Luik has ‘deep knowledge of contentious insurance contract matters’ and Urmas Ustav heads the team.

You can find further information on the Legal 500 website.

 

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Legal alert: recent amendments to Estonian corporate income tax

In the beginning of this summer the Estonian Parliament adopted several amendments to the Income Tax Act. Two amendments are particularly relevant to international groups having subsidiary in Estonia: (i) taxation of loans if they can be deemed as hidden profit distribution and (ii) reduced tax rate for regularly distributed dividends.

These amendments will come into force as of 1 January 2018. The amendments connected to taxation of hidden profit distributions shall apply to loans granted from 1 July 2017.

Hidden profit distributions by way of loans

In accordance with the new provision, Estonian companies shall pay corporate income tax on loans granted to its shareholders or other group companies if the circumstances of the transaction imply that in reality the loan is a hidden profit distribution.  The burden of proof of the ability and intent of loan repayment lies on Estonian company if the loan repayment term is longer than 48 months. The new provision does not apply to loans provided by Estonian company to its subsidiaries.

Key points to consider:

  • Up-stream loans should be granted by Estonian companies only in case these will be repaid. Avoid long repayment schedules;
  • On tax authority’s demand, Estonian company must be able to provide evidence of the ability and intent of loan repayment;
  • The burden of proof will apply on loans granted as from 1 July 2017 as well as on loans where the loan amount is increased, the repayment due date is extended or other material terms are amended as from 1 July 2017;
  • Estonian company is obliged to declare such loans in its tax return in February 2018.

Although the tax authority could impose tax in these circumstances based on general anti-avoidance rule also prior to this amendment, the new provision clearly indicates that the tax authority will start paying more attention to intra-group loans. Therefore, revising all intra-group loan agreements would be advisable.

Lower tax rate on regular dividends

Lower corporate income tax rate (14% compared to regular 20%) will be made available to Estonian companies who pay regular dividends. If the profit distributed as dividends in a calendar year is equal or less than the average of the profit distributed as dividends of the last 3 calendar years, it is subject to 14% income tax rate. Profit distribution that exceeds this amount will continue to be subject to 20% income tax rate.

Key points to consider:

  • The first year when the lower tax rate is available is 2019;
  • The lower income tax rate:
  • Applies in 2019 to one third of the profit distributed in 2018 on which the resident company has paid income tax;
  • Applies in 2020 to one third of the profit distributed in 2018 and 2019 on which the resident company has paid income tax.

Other amendments

In addition, there are other amendments to the Income Tax Act which will come or have entered into force:

  • As of 1 July 2017, employee share options have more beneficial rules related to full exit and employee’s disability;
  • As of 1 January 2018, there is no longer the requirement to keep a logbook when using company’s car for employee’s personal use – fringe benefit can only be declared on the basis of the kilowatts of the car. Value of the fringe benefit shall be €1,96 per kW per month or €1,47 per kW per month if the car is elder than 5 years. For example, the monthly taxes payable for 2 years old 140 kW car shall be €182;
  • As of 1 July 2017, the employer’s expenses on employee’s transportation to work with bus will not be subject to fringe benefit taxation;
  • The employer will be able to compensate employee’s transportation to work by other means of transportation than bus tax free, if the distance between the work place and employee’s place of residence is at least 50 km;
  • As of 1 July 2017, the employer will be able to compensate employee’s accommodation costs (up to €200 per month in Tallinn and Tartu and €100 elsewhere) tax free, if the distance between the work place and employee’s place of residence is at least 50 km and the employee does not own residential real estate within this vicinity;
  • As of 1 January 2018, Estonian banks are required to make quarterly advance payments of corporate income tax at 14% rate from the profits earned in previous quarter.

Should you have any questions related to above, please let partners Ants Karu (ants.karu@lextal.ee; +372 50 625 95) or Margus Reiland (margus.reiland@lextal.ee; + 372 56 905 001) know.

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Automatic exchange of financial accounts information

The Common Reporting Standard (CRS) of the Organization for Economic Co-operation and Development (OECD) on the automatic exchange of financial accounts information is intended to combat cross-border tax fraud and tax evasion.

The Common Reporting Standard was developed upon the request of G20 and approved by the OECD Council on 15 July 2014. The Common Reporting Standard provides that tax authorities all over the world will receive information from financial institutions and exchange this information on the taxpayers of the respective countries once a year automatically. Previously such information was exchanged upon request, however, from now on the information will be exchanged automatically and regularly.

In accordance with the Common Reporting Standard financial institutions undertake to conduct a due diligence procedure in order to identify the accounts of non-residents exposed to the reporting criteria and transfer this information to the local tax administration which will eventually transfer this information to the non-resident’s tax authority. Clients of the Latvian banks, Latvian tax residents, obtaining income in the territory of Latvia and possessing no foreign bank accounts, will not be affected by the exchange of information system.

As at the middle of 2016, 101 countries have undertaken to exchange information. Latvia along with 55 other countries has joined the group of early adopters; therefore, the first automatic information exchange has to be held at the end of September 2017 providing information about the year 2016. At the same time, automatic exchange will be initiated in all of the EU Member States, as well as low-tax countries such as British Virgin Islands, Cayman Islands, Isle of Man, Jersey, Guernsey etc. Russia is not among the early adopters of the Common Reporting Standard and together with other countries will start the gradual exchange of information, in compliance with country’s abilities as of 2018. As to the Belarus, it has decided not to become a member of the system and will not participate in the exchange.

The laws for the information exchange to be implemented have been developed and have come into legal effect – amendments to the Law On Taxes and Fees (chapter XII), amendments to the Credit Institutions Law and Regulations of Cabinet of Ministers of 05.01.2016. No.20 “On the Procedure how Financial Institution Performs Appropriate Verification of Accounts and Provide Information on Financial Accounts to the State Revenue Service”.

What information will have to be notified?

The Standard stipulates what information shall be notified, certain types of accounts and holders of accounts, to whom the standard will be applicable, as well as common due diligence procedures, which the financial institutions will have to comply with. Financial institutions will electronically submit the information to the State Revenue Service (SRS) until the reporting period of 31st July of the following year. Financial institutions will have to report to the SRS information on the holders of foreign legal and natural persons’ accounts (including the true beneficiaries), the balance and value of the accounts, interest and dividends from financial investments, revenue from the sale of assets, etc. In case a person is holding an account for the benefit of another person, the latter will be considered the true holder of the account and the information about this person will be notified to the respective authority.

Banks will have to notify about the accounts, owned by foreigners or passive non-financial legal entities, the beneficial owners of which are non-residents. Nevertheless, there is no notification obligation about the accounts, held by active non-financial entities, e.g., LLCs, at least half of the profit of which is generated by an active commercial practice. The SRS will ensure the further exchange of this information with other states, as well as receive the information about the Latvian natural persons’ and legal entities’ foreign bank accounts. The exchange of information may be carried out more often than once in a year.

Importantly, Latvian financial institutions have already been collecting the above mentioned information in order to exchange it in September 2017 with other parties to the system.

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