E-Journal: tax law (December 2014)

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This GLIKMAN ALVIN’s e-journal of tax law introduces the following and relevant thematic news:

1. Significant change in Income Tax and Social Securities Return (ITSST)
2. The Estonian tax change did not get the approval from Europe
3. The taxation of electronic services shall change as of 2015
4. Tax obligation of members of management bodies expands
5. 1000 euros and a car. Changes in Value Added Tax Return (VATR)

1. EXEMPTION AND SIGNIFICANT CHANGES IN SUBMITTING ITTSST-S

In certain cases the owner can withdraw money from the company without tax obligations. Regarding exemption, it is important to declare the respective data in ITTSST submitted on 10.02.2015.

The ground principle of income tax system of Estonian companies is the postponing of tax obligation until the distribution of profit. At the same time, the payment of dividends does not automatically mean tax payment. For example, the tax obligation shall not arise when the company pays dividends on the account of dividends received from the subsidiary. The exemption applies in case the holding in subsidiary is at least 10%. So far, the implementation of such exemption took place upon informing the tax board on the tax return which was submitted after the payment was conducted. As of 2015, the grounds of such exemption must be informed about to tax board at the time the respective right has arisen. So for the described dividends, the tax authority must be informed at the moment of receiving the dividends and the fact when the received dividends will be payd forward tax free, is of no importance.

The tax obligation of a company is influenced in addition to dividends received from the subsidiary, the contributions made by shareholders’ equity and paid and withheld income tax in a foreign country. The tax obligation may be influenced by the received or paid liquidation, payments made in relation to reduction of capital and repurchase of one’s shares.

Taking into account that a principle change of informing the tax board shall take place at the beginning of 2015, as of 10.02.2015, the tax authority must be informed on the  submitted ITTSST of all described circumstances taken place so far. Establishment of all described circumstances influencing the tax obligation may be time-consuming and we suggest to start collecting the respective data as soon as possible. A significant complexity is related to establishing the necessary details in case the company has repeatedly merged or divided. We are gladly ready to assist in establishing these circumstances. 

2. The ESTONIAN TAX CHANGE DID NOT GET THE APPROVAL FROM EUROPE

Several tax changes talked about widely have made many Estonians more aware – for many tax changes, the approval of Europe is needed. For example, the approval of the Council of Europe was necessary for the change of taxation of cars and reverse charge of precious stones. The application of Estonia regarding the cars was approved by the European Commission and the Council of Europe granted the consent for establishing an exception. Regarding the reverse charge of precious stones, the topic that was covered by us in the e-journal of September, things went differently. European Commission was against establishing an exception.

Thereat, the proceeding of the application is interesting. For example, an unusual confidence was expressed regarding the approval during the proceeding of the draft legislation, “[…] that Ministry of Finance has been able to reason the necessity of reverse charge of precious stones fully and properly and getting the approval would not be a problem.” At the same time, it can be seen from the Communication of the European Commission that there was no reason to be confident. The European Commission reproached Estonia of presenting deficient information and the fact that the approval for exception cannot come only on the basis of doubt of possible frauds. The position can be seen from the Communication of the European Commission that before establishing exceptions, it is necessary to use regular measures, such as fiscal controls.


 

3. THE TAXATION OF ELECTRONIC SERVICES SHALL CHANGE AS OF 2015

As of 01.01.2015, the determination of the place where electronic communication services and electronically supplied services (e-service) are provided shall change. As a result of which the usage price of Skype amongst other, shall increase.
The changes are significant in providing the named services cross-border. The change is related to VAT package passed in 2008, which changed completely the rules of supply of services. If earlier, the place of supply was the country where the service provider was located, then as of 2010, two main rules became effective: (i) if the service is provided from company to company (B2B), the place of supply is the country where the service receiver is located; (ii) if the service is provided from company to consumer (B2C), the earlier principle remained valid – the place of supply is the country where the service provider is located.

The above means that in applying the B2B rule, the service provider put 0% VAT on the invoice and the receiver of the service subject to taxation the service in its country by reversed charge. In providing the service to a consumer of another member state (B2C), the service provider added VAT to the invoice which was valid in the country of the service provider. That is why the VAT rate of the country of the service provider has been implemented on B2C service. This is one of the reasons why many providers of e-services have been located in Luxemburg. Namely, the standard VAT rate in Luxemburg (15%) is the lowest in the European Union.

As of 2015, the place of supply of e-services in case of B2C transactions shall change. This means that the place of supply shall be the location of the receiver of the service or consumer from thereon. (i) This brings along to the providers of e-services additional documentation obligation, as it is necessary to establish the location of the receiver of the service. (ii) At the same time, it also brings along to the provider of service additional administrative burden related to declaring the turnover. (iii) For the consumer, it likely means the increase of prices of e-services. Skype has already informed that shall increase its prices due to increased VAT obligation.

Estonian company who provides cross-border e-services, has two options as of next year: (i) implement the special arrangements arising from § 43 of Value-Added Tax Act and declare and pay all VAT to Estonian Tax board; or (ii) register the company as person liable to value added tax in any country where the users of its e-service are, and declare and pay the VAT in all these countries. 


 

4. TAX OBLIGATION OF MEMBERS OF MANAGEMENT BODIES EXPANDS

In the beginning of the new year, the tax obligation of non-residents who are members of the management bodies of Estonian subsidiaries of foreign companies or permanent places of business, shall expand. So far, the income tax had to be paid from the fee of the non-resident member of the management body only in case the payer of the fee is Estonian subsidiary or permanent place of business in Estonia. As of next year, the arising of Estonian tax obligation depends on what the payment is made for and who made the payment is of no importance.

For example, it is usual that the employee of a foreign parent undertaking is a member of the management body of Estonian subsidiary. The assignment of the employee is, amongst other, to run the Estonian subsidiary. The employee receives remuneration from the foreign parent company only and a separate remuneration for the tasks of the member of the management board of Estonian subsidiary is not prescribed. This is the situation most influenced by the change. The implementation of the change can become quite complicated. First of all, it may be difficult to establish how large is the part of remuneration for running the Estonian subsidiary or permanent place of business. Secondly, the foreign parent company has the obligation to register itself as non-resident employer in Estonia. At the same time, the parent company gets the obligation of withdrawing and paying of taxes in Estonia and also the obligation of submitting tax returns. What can save from the registration of the foreign parent company in Estonia and the obligations related to it, is when Estonian subsidiary or permanent place of business pays the fee of the management body itself. In addition, the obligation of social tax may arise in Estonia, but generally it is excluded by a respective European regulation.

5. 1000 EUROS AND A CAR. CHANGES IN VALUE ADDED TAX RETURN (VATR)

We have written before about the 1000 euro draft and tax changes related to cars. The changes connected to the first influence the submitting of November VATR-s on 22.12.2015 and the second change must be considered when submitting the December VATR on 20.01.2015.

As the changes are quite significant and finding the appropriate declaration forms and their explanations might be difficult, we shall hereby introduce them separately. A. in submitting 

the November return, the new VATR and its INF forms, on which the explanations can be found at the end of the referred forms, established by the regulation, shall be guided by;
B. in submitting the December return, the complemented KMD established by the regulation shall be guided by, INF form shall remain the same.

In relation to VATR INF it is worth knowing that the return submitted up to December 2015, the invoices may be reflected summarized by transaction partners. At the same time, it is worth knowing that INF must not reflect absolutely all invoices. The Estonian Bar Association has advised the law offices to add the following explanation to the invoices issued:
“Pursuant to the provisions of § 27 (14) of Value-Added Tax Act, the receiver of this invoice is not obliged to reflect it in the annex of a value added tax return (VATR INF). The unilateral declaration of the invoice may cause inconsistency in the data base Tax and Customs Board, which in turn may cause the conduction of additional inquires and check-ups by tax authority.”

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