An overview of the latest changes in legal acts

The process of setting the next year’s budget has been accompanied by a lot of tax-related discussion. When presenting the budget to the Riigikogu (the Parliament of Estonia), politicians denied any rise in taxes. However, debates are still going on within the Riigikogu covering a wide variety of issues, such as potential changes in the rates of income tax and VAT; suspension of provisions governing transition to a year-based corporate tax system and advance payments; potential changes in avoiding double taxation, etc. Drafts providing the above amendments to tax legislation have not been published yet. We hope the Government as well as the Riigikogu make their decisions soon and we can acquaint our readers with the amendments in the next issue of the InfoCourier.

Draft Amendment of Value Added Tax Act

On 19 September, the Government sent to the Parliament a draft amending the Value Added Tax Act. The draft had been prepared by the Ministry of Finance at the beginning of the year. Compared to the initial draft, several alterations have been made:

·         Although taxation principles applied to automobiles used for own purposes remain unaltered, the fringe benefit limit serving as the basis for calculating taxable amounts is planned to be doubled, i.e. 4,000 kroons per month. That decision may also affect the current maximum limit of the fringe benefit price of an employer’s automobile.

·         Amendments related to enterprises operating as a VAT group (in the current version of the Act, referred to as enterprises operating as a single taxable person) will be sustained and become effective as from 2010.

·         The definition of the term “transfer” is specified in order to determine the period when tax should be paid on transactions performed under lease contracts and on hire purchase transactions.

·         Tax exemption on goods imported within the luggage of passengers arriving in the European Union (EU) will be increased from 2,700 kroons to 4,700 kroons; for sea or air passengers, the limit will be 6,730 kroons. The amendment is planned to become effective as from 1 December 2008.

Other amendments to the Value Added Tax Act will become effective as from 1 January 2009.

Amendment Act of Commercial Code, Non-profit Associations Act and other associated acts

Amendments to the Commercial Code stipulate that on founding a company, either electronically or through a notary, the monetary contribution may be made straight to the bank account of the legal entity being founded. That technical solution will enable opening a bank account in the name of the company being founded directly via the company registration portal or a notary.

As from 2010, annual reports will be submitted electronically to the court maintaining the commercial register. Non-profit associations, who currently submit their annual reports to their regional structural unit of the Tax and Customs Board, will submit the reports to the court maintaining the commercial register as from 2010, and those reports will be made public. Sole proprietors, who are currently registered in the register of taxable persons maintained by the Tax and Customs Board, will be entered in the commercial register.

Sole proprietors whose businesses are seasonal due to the nature of their activities have the right to state to the registrar the dates on which they commence and terminate their business activities. The dates of the commencement and termination of business activities may also be stated if the business activities are of temporary nature.

The amendment abolishes the restriction based on notaries’ required citizenship. Accordingly, any citizen of a EU member country who has completed candidate service and passed the notary examination may become a notary in Estonia.

Date of entry into force: 10 July 2008. Estonian text: Äriseadustiku, mittetulundusühingute seaduse ja nendega seonduvate teiste seaduste muutmise seadus

Advertising Act

The Advertising Act provides a definition of advertising and stipulates general requirements, prohibitions and restrictions on advertising. The amendment also establishes procedures of surveillance and provisions for liability for a violation of the Act.

The Act prohibits advertising such professionals and their activities as advocates, sworn translators, notaries, bailiffs and patent agents. In addition, advertising such items as tobacco products, narcotic and psychotropic substances, weapons and ammunition, explosives and pyrotechnic products, but also advertising gambling and lotteries is prohibited. Also, cases are provided when general prohibition is not applied to the above goods and services. The Act also establishes restrictions on advertising alcohol and financial services.

For a violation of advertising requirements, a legal person is liable to a fine of up to 50,000 kroons.

Date of entry into force: 1 November 2008. Estonian text: Reklaamiseadus

Supreme Court decision

On 21 May 2008, the Administrative Law Chamber of the Supreme Court gave their judgement in the case No 3-3-1-14-08. The issue of litigation was VAT payable on plots of land which had been acquired prior to 1 May 2004. Tax authorities considered the time of acquisition not sufficiently substantiated. The object of dispute was the definition of the term “acquisition” and identifying the time of acquisition.

Since rules governing taxation of immovables changed as from 1 May 2004 when a new VAT Act entered into force, identifying the time of acquirement was of crucial importance in order to determine whether a VAT liability had arisen. In the case of a transfer of a plot acquired before 1 May 2004, no VAT liability arises; however, the sale of a plot acquired after 1 May 2004 is subject to VAT.

In that particular case, in order to acquire immovables, a company had signed a contract under the law of obligations before 1 May 2004; however, signing a real right contract was hindered by restraints arising from the Restrictions on Acquisition of Immovables Act.

The Supreme Court explained that in the Value Added Tax Act, the term “acquisition” is not used in the sense of gaining possession, but as conveying rights corresponding to a transfer. Acquisition means primarily establishing legal and actual potentiality to utilise an asset similarly to an owner of an asset.

The Supreme Court decided that when applying section 46 subsection 3 of the Value Added Tax Act, it is not important whether the intended purpose of the land had changed or whether the disputed land had been divided into smaller registered immovables or plots. Tax exemption encompasses acquisition of a portion of the acquired land as well as transferring it as a plot.

Estonian text: Link kohtulahendile