Tax catch: is it service or employment?

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Priit Raudsepp, the attorney-at-law of Law Office GLIKMAN ALVIN introduces in legal blog of thematic web of Äripäev, the newest decision of Supreme Court en banc, which is pioneering in several ways. Namely, the Supreme Court treated thoroughly the approach to tax claim in bankruptcy proceeding, as well as tax thematic of labor tax evasion by PLC.

This court decision was long awaited for its tax law approach by the companies, taxation officials and tax consultants. There was hope that it would solve the permissibility or non-permissibility of Labor tax evasion by PLC.

Labor tax evasion by PLC in narrower sense is a situation where one-man-company provides another company consultation services, for example. Tax Board has seen an employment in this situation and demands taxes on labor from the receiver of the service.
Similarly to previous requalification cases, the Supreme Court took the position that in case of labor tax evasion by PLC, granting the other qualification is basically possible. Thereat, the en banc blamed the tax authority and courts for poor treatment of the legal grounds of requalification and its reasoning.
The tax authority relied in its allegations, amongst other, on the fact that the General Part of the Civil Code Act does not allow to transfer the competence of the directing body. The en banc did not agree with that position. The respective rule regulates the internal relationships of legal person and it is not treatable as prohibitory rule of tax law.
Specific directions for requalification were not provided by the Supreme Court unfortunately. The Supreme Court did explain that even if the contracts need to be requalified, it does not mean automatically that the paid fees shall be requalified as income from employment. In this case the tax claim must be left unrecognized, at least partially.
Double taxation and limitation period
The Supreme Court once again stressed the obligation of tax authority to avoid double taxation from occurring. When before the court has explained the opportunities of avoiding double taxation regarding VAT then now the court provided specific directions for income tax. The court explained that if it was an employment, the “service fee” that accrued on the company’s bank account can be taken from the account tax-free by the shareholder. The tax obligation already made by the company, from which the company has paid the remuneration or dividend taxes, can be fixed post factum. In the respective part, the court agreed with the appellant in cassation and it is a significant, innovative position. The tax authority has so far denied such opportunity of fixing.
For tax payer, the en banc’s position pursuant to which the non-elimination of double taxation by the tax authority does not automatically bring along the cancellation of tax claim, is negative.
On the evaluation of the writer, the opposite position shall be taken where double taxation cannot be eliminated any more due to limitation period. In this case, the limitation period was one of the arguments of the tax payer, but the court had not treated this so far. In making the final conclusion, it is important whether and when the company providing the service has paid the received fees forward (e.g., remuneration/ dividend payments).
In the proceeding of the Supreme Court, there are two similar cases at the moment. One could hope that the court shall provide additional and more specific directions on the basis of which the permissible services of tax law can be limited from the non-permissible ones. 
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