Estonia Implements EU Anti-Tax Avoidance Directive Measures

; posted on
January 3rd, 2019

Estonia published the Income Tax Amendment Act in the Official Gazette. The main measures of the Act provide the implementation of the EU Anti-Tax Avoidance Directive (ATAD) as urged by the European Commission.

General Anti Avoidance Rule (GAAR)

Under the GAAR laid out in the Act, non-genuine arrangements or series thereof that are put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable law should be ignored for the purposes of determining the corporate tax liability.

Interest Limitation

A new limitation on interest is introduced providing for the taxation of excess borrowing costs (net interest expense) that exceed a 30% of EBITDA limit, with a EUR 3 million safe harbor and an exemption for:

  • Financial undertakings;
  • Companies that are not part of a group and have no related companies or permanent establishments;
  • Loans used to finance public infrastructure projects in the EU; and
  • Members of a consolidated group where the equity to total assets ratio is equal to or greater than that of the group, except financial corporations belonging to the group;

Where the excess borrowing costs of a taxpayer do not exceed the limits for a tax period, a tax credit may be claimed for the tax paid on excess borrowing costs in the preceding periods up to the limit provided, with the overpaid tax refunded.

CFC Rule

For the purpose of the rules, CFCs include foreign permanent establishments and foreign companies where an Estonian resident company itself or together with affiliated companies holds/owns direct or indirect participation of more than 50% in the voting rights, capital, or rights to profit of the foreign company.

The profits of a CFC will be attributed to a resident controlling company and taxed as profits if resulting from the use of assets and the assumption of risks associated with key employees of the controlling company related to the non-genuine transactions.

Exit Tax Rules

Income tax will be levied on an amount equal to the difference between the market value of an asset and its book value when transferred out of Estonia by a resident company to another establishment in another EU Member State or a third country.

An exemption from taxation applies in respect of asset transfers related to the financing of securities, assets given as collateral, or where assets are transferred to fulfill prudential capital requirements or to manage liquidity, provided that the assets are returned to Estonia within 12 months.

Complying with EU commission’s deadline, the measures (other than exit tax rules) will apply from 1 January 2019.

Source:  Estonian Government

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