may 2010

Draft amendment to the Value Added Tax Act 

The Ministry of Finance has prepared a draft amending the Value Added Tax (VAT) Act and sent it for coordination between the ministries. The amendment act is expected to enter into force in January 2011.

Amendments to the VAT Act involve the following:

• The Act will be supplemented by special arrangements for imposing VAT on immovables and metal waste. According to the special arrangements, VAT on domestic supply of immovables and metal waste will be charged to a recipient (through reverse charge). The special arrangements will be applied only to transactions with immovables which are subject to option-based taxation and metal waste specified in the list of waste established by the Minister of the Environment regulation No. 17 of 15 April 2004 which is prepared on the basis of the Waste Act.

• Special arrangements for cash-based VAT accounting will be stipulated. The special arrangements will apply to all VAT payers whose annual supply does not exceed 3,000,000 kroons. Although cash-based VAT accounting will be applied on a voluntary basis, the tax authorities will have to be notified thereof. The special arrangements will not apply to cross-border transactions or transactions with the settlement term of more than three months.

•  The list of persons who have to register as a taxable person will be supplemented. The obligation to register will apply to persons who provide B2B services through a seat or permanent establishment located in Estonia.

• Foreign persons’ VAT liabilities in Estonia in cases where their business in Estonia is not performed through permanent business establishment here will be specified.

• Tax exemption on providing services which are related to the use of sports facilities or sports equipment will also be applied to foundations.

•  Application of zero rate VAT to services which are related to aircrafts is specified, i.e. the application of the above rate is determined by an air carrier operating mostly on international routes, not by an aircraft or its route.

• The period in which a VAT liability arises on transportation of a new means of transport to Estonia will be specified. A VAT liability arises within ten calendar days from transportation to Estonia regardless whether or not the means of transport is subject to registration in Estonia.

• The concept of excise goods within the meaning of the VAT Act will be specified. Provisions regulating the taxation of excise goods will also apply to solid fuels.

•  Provisions related to the taxation of natural gas and electricity will also apply to heating and cooling energy transmitted via network.

For further information, please contact: Merike Oja moja@kpmg.com

Court judgements

Tallinn Court of Appeal’s judgment on withholding income tax on dividends  

Under the judgment of the Tallinn Court of Appeal at the end of 2009 (case 3-06-398), foreign Undertakings for Collective Investment in Transferable Securities (UCITS) may apply to the Tax and Customs Board for a refund of income tax withheld on dividends which have been received by those investment funds from Estonian companies.

The above case involved the Fidelity Funds, a UCITS fund registered as a legal entity in Luxembourg which received dividends from Estonian companies AS Hansapank and Merko Ehitus in May 2004 and 2005. Since the Fidelity Funds’ shareholding in the above companies was less than 20%, income tax was withheld on dividends in Estonia. However, at that time withholding tax (WHT) was applied only to dividend payments made to non-resident legal entities; income tax was not withheld on dividends paid to resident legal entities or UCITS funds established in Estonia. The Fidelity Funds filed an appeal stating that such discrimination is incompatible with the Treaty of Establishing the European Community as it restricts free movement of capital. The Fidelity Funds explained that in Estonia UCITSs can only be established as pools of assets and not as legal entities; therefore, for taxation purposes, the Fidelity Funds has to be compared to Estonian UCITSs which are not legal entities. The Fidelity Funds cannot be compared to a resident legal entity because due to objective circumstances, they are not in a comparable position. The Tallinn Court of Appeal came to the same conclusion stating that comparing investment funds which perform similar economic functions, irrespective of their legal status, shows whether or not free movement of capital has been restricted. Since income tax is not charged on dividends received by UCITSs established in Estonia, in this particular case the non-resident fund did not receive equal treatment with Estonian UCITSs.

As the Court agreed to compare the Fidelity Funds to UCITs established in Estonia which are not legal entities, unequal treatment of resident and non-resident funds and consequently, infringement of the Treaty of Establishing the European Community was proved. The Court held that the provision of the Income Tax Act stipulating the obligation of WHT does not have to be applied to income tax which was withheld on dividends distributed before 31 December 2006. A tax refund may be applied for with respect to the income tax withheld as from the day of Estonia’s accession to the European Union (1 May 2004). An application for a refund has to be filed with the tax authorities within three years as from the date the court judgment enters into force, i.e. within three years from 20 April 2010.

For further information, please contact: Liina Mauring lmauring@kpmg.com
 

InfoCourier does not cover all amendments to Estonian legislation. 

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