E-journal: tax law (September 2015)

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This GLIKMAN ALVIN’s e-journal of tax law introduces the following and relevant thematic news:
1. Labor tax evasion by PLC. Is it clear now?
2. Bitcoin shall not be subject to VAT?

1. Labor tax evasion by PLC. IS IT CLEAR NOW?

In its latest decision  the Supreme Court agreed with the tax authority and found that the fees paid to private limited companies are remuneration. What does this decision really mean?

Labor tax evasion by PLC in narrower sense is a situation where one-man-company provides another company consultation services, for example. The tax authority has doubted the contents of such services in many cases and found that it was an employment relationship. As a result, the tax authority has fixed the recipient of service with the taxes on labor. At the same time, the tax authority has prohibited the deduction of input VAT calculated from the service fee.

What should be done in the future?

The Supreme Court agreed with the position of the tax authority and thought the reclassification of transactions was justified. It should be stressed, though, that the court provided the evaluation to a specific case and general conclusions should not be made.

Moreover, it is not news that that Estonian tax law holds the principle of being guided by the commercial substance. The principle has been provided in the law and it was implemented before it was being written in the legislation.

It should also be borne in mind that the tax authority took heart from this case and the intensity of check-ups may be expected. In the light of the afore-mentioned, the companies should have a look at their activities and risks and if necessary, consult a specialist.

Legal (non-) clarity and improving the situation

Legal non-clarity does not have an encouraging impact on the business environment, where taxation depends on the tax authority’s wish to reclassify the transactions according to its vision. Here, the cases of apartments belonging to Sylvester and Swedbank OÜ, etc. would be good examples. In all of these cases, the state has had an opportunity to implement clear rules which would be less burdening to the companies as well as to the tax authority.

It is disappointing that the state has not established clear rules so far.

It’s worth knowing that in relation to labor tax evasion by PLC in broader sense, the danger of taxation may danger these companies who own apartments, who have granted or received loans from its shareholder, who have motor vehicles, etc. Companies in danger of taxation are also those who have received management services from their parent undertaking abroad. In one case, Estonian company was freed from additional tax liability (allegedly, the service fees paid were either too big or for nothing) only because that the tax authority of the country of parent undertaking considered the service fees too low.

2.BITCOIN SHALL NOT BE SUBJECT TO VAT?

A significant position on taxation of bitcoins has arrived from the Court of Justice of the European Union. Law Office Glikman Alvin & Partnerid acts in the name of the fact that Estonia would take the same position.

The official position of Estonia  regarding the taxation of bitoins has been provided on the website of Estonian Tax and Customs Board. The turnover coming from trading with bitcoins is subject to standard 20 % rate of VAT. In other words, if one shall buy its business partner a business lunch from Sushi Cat and pay for it in bitcoins belonging to the company, the company transferring the bitcoins shall pay VAT from the bitcoins. This VAT will be then the additional VAT to the one that Sushi Cat pays for the sold lunch. In case of paying in euros, such double taxation would not occur.

Law Office Glikman Alvin & Partnerid, one of the founders of Estonian Cryptocurrency Association, founded last year, has stood by the fact that the approach to cryptocurrency would base on the legislation. In the procedure of that, the members of the association prepared a memo, where they analyzed the legal, incl. tax law, approach. A conclusion was made in the memo that bitcoin should be considered as money or other legal transferrable means of payment in the sense of VAT directive. As known, in case of payment with money (in other words – selling money) no VAT shall be paid from the money. The same conclusion should be implemented on bitcoin as well – bitcoin itself cannot be the object of VAT.

This summer a position from the Court of Justice of the European Union arrived. It is not a court decision but an opinion of the Advocate-General. Nevertheless, it is a significant document, as the later court decision will mostly overlap with the previous opinion of the Advocate-General. The Advocate-General has come to the same conclusion that was reached in the memo of the association – bitcoin, in the sense of VAT directive, is money and therefore it shall not be subject to VAT.

Despite of the opinion of the Advocate-General, Estonia has not changed its position so far. We will see what the future holds. It would be welcomed in Estonia, known as the e-state, to be progressive in the field of cryptocurrency.

 


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