Estonian tax system is relatively simple, transparent and business-friendly. The general tax burden remains slightly below the European average. The country’s unique corporate tax system allows all undistributed corporate profits to be tax-exempt. Consequently, the majority of business income is not distributed but rather reinvested. The overall trend in public policy is from indirect to direct taxation in all aspects.
According to the Estonian corporate income tax system, effective from 1 January 2000, the moment of taxation of corporate income is postponed until the distribution of the profits. As a result, the system fosters investments and encourages companies not to “decrease” their annual profits. The system applies to Estonian resident companies and also permanent establishments of non-resident entities.
Permanent establishment in Estonia has received a broader definition as from 1 January 2011. Before that, the permanent establishment was defined as a place through which a non-resident person engages fully or partially its non-temporarily economic activities in Estonia. Now, the permanent establishment is formed as a result of geographically specified or mobile business activity in Estonia, or as a result of a business activity of a representative authorised to conclude contracts in the name of a non-resident in Estonia. Therefore, there is no need for a “place” as such, only an ongoing economic activity in Estonia is necessary.
Another significant change in the Estonian tax legislation refers to “related parties”. As of 1 January 2011, the concept has been materially expanded. Previously, persons had to be connected by an ownership to be considered as related. According to the amendment, persons are deemed to be associated if they share a common economic interest or if one person has a dominant influence over the other (subjective judgment). This in return means stricter regulations for minimising the use of transfer pricing schemes.
Furthermore, Estonian tax authorities have recently increased the number of transfer pricing audits with special attention to cross-border transactions. The new and more general definition of related parties has a direct impact on the applicability of the transfer pricing rules and transfer pricing documentation requirements. Attorneys at Law Borenius is able to assist its clients to determine whether their business structure conforms to the new regulation and identify possible transfer pricing risks.
The core of Attorneys at Law Borenius’s tax competence group is tax advisory on corporate and business restructurings and transactions. The firm has a reputable track record of acting solely as tax advisors for a transaction or a restructuring event. On the other hand, the firm’s tax competence group advises corporate clients on large scale business and M&A transaction structures as well as everyday tax matters, supporting the advisory services. Additionally, attorneys at the firm have a good understanding and practical approach to the perspectives for the interpretation of tax laws and tax risk assessment.
“A synergy of those three elements and ability to transform today’s tax disputes to a refined tax advice for the future brings added value to our clients,” concluded managing partner Marti Hääl.