1. Don't throw away your tax benefit!
As of 1 January 2015, an amendment to the Estonian Income Tax Act takes effect requiring legal persons to declare all past circumstances that may affect their income tax liability in the future. The deadline set for declarations is 10 February 2015. Absolutely all entrepreneurs have circumstances that affect their income tax benefit entitlement, so for this reason it is vital not to forget the date.
Resident legal persons and non-resident legal persons having a permanent establishment in Estonia need to declare circumstances entitling them to take out invested money tax free. So, for example, capital distributions (e.g. through reduction of capital or liquidation) are tax free to the extent to which contributions to capital have been made. Until recently, capital contributions were not subject to declaration – declaration was obligatory only if a business owner wished to withdraw capital tax free. Now, however, an entrepreneur who fails to declare a contribution loses the right to take that amount into account later on for the purposes of receiving tax benefit.
To avoid loss of this right, companies need to review all past circumstances that may reduce their income tax liability and to declare these in due course. The following must be declared:
- contributions to company equity (capital contributions made by all shareholders both at the start of the business and later on, such as non-monetary and monetary contributions as well as contributions to merged/divided companies),
- income tax withheld and paid in a foreign state;
- income received from which a tax free dividend can be paid and payments made from equity,
- similar rights, which used to belong to another company, received in the course of merger, division or transformation of companies.
As of 1 January 2015, circumstances listed above that may affect tax liability must be declared on an ongoing basis in the month following the emergence of a circumstance.
For further information, please contact our Corporate and M&A or Tax Team.
2. Estonia opens its e-services to the world
From December 2014, Estonia enables non-resident foreigners to have a digital ID similar to the digital ID issued to citizens and residents. Estonian e-residency allows eligible foreigners to use the Estonian digital signature infrastructure and access some Estonian e-government and other e-services provided in Estonia from anywhere in the world. E-residency offers a convenience which Estonian entrepreneurs have already become quite used to – handling all business-related “paperwork” without leaving the office.
With an e-resident’s digital identity card (digi-ID), qualifying non-residents will be able to perform transactions with the same ease as Estonian residents. However, certain rights will still be available only to citizens and residents.
A digi-ID would allow the holder, for example, to:
- easily register a company online;
- sign corporate documents and financial statements and file them online with the Commercial Register and other Estonian authorities;
- view their tax accounts and declare taxes through the e-Tax Board;
- access all their Estonian bank accounts via a single smart card;
- use a free encrypting service for secure transfer of documents; and
- sign and conclude contracts digitally with other holders of an Estonian digi-ID.
The access to e-services that a digi-ID provides may enhance an e-resident’s direct control over their Estonian businesses, reduce the need for intermediaries and virtually eliminate the need to travel to Estonia for corporate formalities. A digi-ID may also be used in dealings with any other country where digital solutions are available.
To apply for a digi-ID, interested qualifying foreigners should visit a Police and Border Guard (PBG) office in Estonia, file an application providing biometrical data and pay the state fee. Estonian embassies and consulates will start providing the service during 2015. After receiving the application, the PBG makes the discretionary decision to approve or deny a new digi-ID within 10 working days. Once issued, the digi-ID is valid for three years.
Currently, it is unclear if public and private e-services providers will indeed offer foreign e-residents the same level of access that citizens and residents currently enjoy. Estonian e-residency does not grant foreigners legal residency or even the right to enter Estonia. The characteristics of the institution and use of the term “residency” to promote the institution could have unanticipated or unintended consequences. In particular, the use of digi-ID may affect interpretation as regards the concept of permanent establishment or determining a company’s place of effective management. Thus, management of an Estonian company from a foreign country may lead to double taxation of the company's income. The reason for this is that under international tax rules, both the country of registration and the place of effective management may be entitled to collect income tax. To avoid potential tax issues related to e-residency, we advise discussing planned activities and the corporate management model of your company with a tax specialist.
We consider that e-residency is a very interesting institution, worth exploring for foreigners who conduct or manage businesses in Estonia, or are looking to establish one.
For further information, please contact our Corporate and M&A or Tax Team.
3. Tax imposed on remuneration of foreign management and supervisory board members
Until the end of 2014, income tax was charged on remuneration payable to a non-resident member of management or supervisory board of a company only if the payment was made by a resident legal person or by a non-resident through or on account of its permanent establishment located in Estonia. However, from the beginning of 2015, remuneration of a non-resident member of a management or supervisory board paid by a foreign company for work done for the benefit of an Estonian company will be subject to taxation.
Income tax will be charged not only on monetary income, but also on non-monetary income which a non-resident receives for performing duties as a member of a governing body of a resident legal person or a non-resident permanent establishment located in Estonia.
Estonian companies that have among their board members non-resident persons receiving remuneration from a foreign company may want to review the duties and basis of remuneration of those persons in light of this legislative amendment. If, for example, a non-resident person acting as a management or supervisory board member of an Estonian company receives remuneration from a foreign group company for managing companies located in different countries, then the payer must be prepared to demonstrate to the tax administrator to what extent the activities relate to the Estonian company. Otherwise, the tax administrator may determine the tax amount on its own.
To reduce tax risks in Estonia it is advisable:
- to clearly state in the management board member agreement that the non-resident person does not receive any remuneration for acting as a board member of the Estonian company;
- to clearly state in the management board member agreement that the role of the non-resident person in relation to the day-to-day activities of the Estonian company is non-existent or minimal and keep it that way in reality;
- if a non-resident person actually engages in the activities of an Estonian company, then it is advisable to pay them separately a fixed amount for fulfilling the duties of a board member.
Tax due can be paid either by the payer of remuneration (by registering in Estonia as an employer) or by an authorised Estonian company. If the payer does not withhold income tax on the remuneration paid, then the non-resident person who received the remuneration must file an income tax return with the Estonian Tax and Customs Board by 31 March of the following year and declare the income received.