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.
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.