December 2008

Amendment to the Value Added Tax Act

On 4 December, the third reading of the draft amendment of the Value Added Tax (VAT) Act and Income Tax Act (353 SE) took place in the Riigikogu (Estonian Parliament). The approved draft has been sent for signing to the President of Estonia.

The amendment to the VAT Act will become effective from 1 January 2009. The volume of changes is considerable. Provisions regulating such matters as the tax imposed on self-supply, determining the taxable value, the transfer of an enterprise, option-based taxation, providing warranty repair services, reversed charge, and invoice requirements have been amended. Several amendments have been made with regard to the taxation of immovables and export-import transactions. From 2009, tax policy based on market terms will be applied to transactions between related parties. Provisions that regulate taxable persons operating as a single taxable person will become effective as from 2010.

Draft amendment to the regulation based on the VAT Act

The Ministry of Finance has sent a draft amending the regulation “Medicinal Products, Contraceptive Preparations, Sanitary and Toiletry Products, Medical Equipment and Medical Devices Subject to Value Added Tax at the Rate of 5 Per Cent” for approval. The purpose of the draft is to harmonize the regulation with the amendment to the VAT Act that will enter into force in 2009. According to the above amendment, instead of the current reduced rate of 5 per cent, a new VAT rate of 9 per cent will be applied from 1 January 2009. The draft will enter into force on 1 January 2009.

Amendments to the Taxation Act

On 4 December, the Riigikogu passed the Amendment Act of the Taxation Act and Associated Acts which will enter into force on 1 January 2009.

The Act amends provisions applied to a claim for refund. In the future, the expiry date for lodging an application for fulfilment of a claim of refund is seven years as of the date of the last amendment made to the claim. A taxpayer may qualify for a rebate from the tax authorities, including a refund of a payment made prior to the due date for the payment of tax. In addition, in the future, a taxpayer who has the right to claim for a refund from the state may use the overpaid amount for settling another taxpayer’s tax liabilities.

Also, provisions regulating the payment of the tax will change. The new system of tax payment enables taxpayers to settle their tax obligations by using one single reference number. For that reason, an advance payment account is opened. Payments made to that account are regarded to have settled tax liabilities and claims if the taxpayer’s claim for refund covers the obligations incurred and the taxpayer has filed a tax return with the tax authorities by the due date for payment.

A taxpayer’s obligations are settled or set off by transfers from the advance payment account in the order the obligations arise, excluding the cases where prior to the due date of payment, the taxpayer has requested that the fulfilment of the obligations listed under 14, 15 or 16 in the list below should be excluded from the set-off. In the case of several claims with the same due date, the claims are fulfilled in the following order:

1) mandatory funded pension contribution;

2) unemployment insurance premium;

3) income tax withheld;

4) social tax;

5) personal income tax;

6) land tax;

7) customs duties;

8) gambling tax;

9) excise duties;

10) heavy vehicle tax;

11) corporate tax of a resident or non-resident legal entity’s permanent establishment;

12) value added tax;

13) local taxes;

14) interest;

15) penalty payment;

16) other obligations.

The limitation period for the calculation of interest is one year as of the date of full payment of the amount of tax or full payment or set-off of an unjustified refund to a person. A claim for interest is not submitted after expiry of the term.

New unemployment insurance premium rates from July 2009

According to regulation 160 of 27 November 2008 by the Government of the Republic, the rates of unemployment insurance premiums for employees and employers will rise from the current 0.6 per cent to 1 per cent and from 0.3 per cent to 0.5 per cent respectively. The above rates will be effective from 1 July 2009 to 31 December 2009.

Minimum social tax

In 2009, the monthly rate serving as the basis for social tax is 4,350 Estonian kroons. According to the Social Tax Act, the above rate is established by the state budget for the budgetary year.

The new Gambling Act

On 15 October 2008, a new Gambling Act was passed. The main purpose of the new Act effective from 1 January 2009 is to regulate the Estonian gambling market and to update the requirements for organising gambling games.

Amendments to the Commercial Code

On 19 November 2008, the Riigikogu passed amendments to the Commercial Code. The amendments impose more stringent requirements than currently applied to preparing the minutes of a shareholders’ meeting, the record of votes or the shareholders’ resolution that serves as the basis for electing a management board member. For example, a resolution about the election of a member of the management board of a private limited company should be signed either by a member of the management board entered in the commercial register or a shareholder of the company, and the signature should be notarised. Instead of notarial authentication, digital signature may be used to certify the record of votes. As an alternative, a member of the management board entered in the commercial register or a shareholder of a private limited company may sign a petition for entering a new member of the management board into the register.

Similar requirements will be imposed on a single shareholder’s resolution that serves as the basis for the election of a supervisory board member. According to the amendment, a single shareholder’s resolution should also be notarised or digitally signed by the shareholder.

The above amendments will enter into force on 22 December 2008.

According to the amendment to the Commercial Code adopted on 11 December 2008, prior to commencing his or her business activities, a sole proprietor has to submit a petition to be entered in the commercial register. The amendment will enter into force on 1 January 2009.

Amendments to the Holidays Act

On 9 December, the Riigikogu passed the Amendment Act of the Holidays Act. From 1 January 2009, the father will not be entitled to the paternity leave pay. The father still has the right to take a paternity leave of ten working days within two months before or after the birth of the child, although for those days he will not receive any pay. From 1 January 2009, the father will not receive compensation for the days of paternity leave irrespective of whether or not he commenced his leave in 2008.

Supreme Court decisions

Automatic extension of a management board member’s term of office

The judgement of the Civil Chamber of the Supreme Court of 11 November 2008 in the case Mägi versus OÜ NOKTETT (case 3-2-1-92-08) seeks an answer to the question whether a management board member’s term of office can be extended tacitly without a relevant resolution by the shareholders. A board member's term of office cannot be deemed extended merely because the person continues acting as a board member. As a rule, only the board member’s willingness to continue acting as a board member can be inferred from this.

However, a board member's term of office may be deemed extended if declarations and conduct of both sides can be regarded as indirect declarations of intention. In that case, in addition to the (former) board member’s conduct indicating the willingness to continue his or her activities, the shareholders resolution is necessary that explicitly approves the person's acting as a board member, i.e. extends his or her term of office retroactively. Among other criteria, such a resolution should meet the quorum requirements applicable to a resolution on the appointment of a board member as stipulated by law and the articles of association. However, the above retroactive approval may be ruled out by the articles of association.

As an exception, any other shareholders’ resolution may be regarded as a resolution extending the board’s term of office if, in effect, the position of the person as a board member is recognised by this and the resolution meets the formal requirements set for a resolution on the appointment of a board member (including the above quorum requirements).

It is essential that a person cannot substantiate being a board member after the expiry of the term of office merely by the fact that he or she continued his or her day-to-day activities as a board member. Shareholders should have a real opportunity to decide whether they wish the person to continue as a board member. One occasion for shareholders to express their decision may be the approval of the annual report prepared by the company's management board and submitted to the shareholders for approval.

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