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Principles of new corporate income tax regime to become effective on 2009 disclosed for public debate in Estonia

05.06.2006

Estonia's Ministry of Finance has disclosed a proposal to introduce an annual 10 percent tax on corporate profits starting in 2009.

Currently the income tax in Estonia is levied only on corporate income distributed to shareholders as dividends or other profit distributions, and on fringe benefits, gifts, donations, payments, and expenses not related to the business of the corporation.

However, based on the European Court of Justice judgment in the Amstel International case (Athinaiki Zithopiia AE v. Elliniko Dimosio (the Greek state)) (C-294/99), the European Commission declared Estonia's current tax regime to be contrary to article 5(1) until January 1 2009. (For the ECJ judgment, see 2001 WTD 196-17 or Doc 2001-25610.)

After analyzing six legislative options, the Ministry of Finance has proposed a new regime that would tax corporate profits on an annual basis regardless of whether any distributions are made. No further tax would be imposed on distribution of profits. This would bring Estonia's corporate income tax regime into compliance with article 5(1) of Council Directive 90/435/EEC.

The dividends paid to parent corporations would be exempted from income tax. Income tax at the rate of 10 percent would be withheld from dividends paid to natural persons and corporate shareholders with less than 10 percent 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 the dividends from tax. Fringe benefits, gifts, donations, payments, and expenses not related to business would remain taxable.

Under the proposal, a tax return would have to be filed and tax paid within six months from the end of the taxable period, and advance payments would be imposed during the taxable period.

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

Necessary regulations concerning depreciation, carrying forward expenses, and mergers and acquisitions also will be developed. Transitional provisions also would be exacted to avoid the tax exemption of profits earned but not distributed as of December 31 2008.

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