TALLINN - Last month Finance Minister Taavi Veskimagi sent a letter to European Tax and Customs Commissioner Laszlo Kovacs proposing to amend EU regulations of taxation on parent-subsidiary companies. According to the ministry, the existing rules are a treat to Estonia's current tax code.
The Finance Ministry said that the proposed changes would allow wording in the European Court of Justice ruling on the directive to better adhere to the directive's original purpose and prevent possible contradictions with Estonia's corporate tax system.
"Our proposal to the commission is based on the logic that before changes are made in the effective tax system, we have to find out about the possibilities of retaining it," Veskimagi said.
Veskimagi's letter suggested amending the article of the directive that bans the withholding of income tax on dividends so that the article would not pertain to the income tax of a legal entity paid on the level of a subsidiary. The wording follows that of the last sentence in section 2 of the article on dividends of the tax agreements drawn up on the basis of the OECD model agreement, the ministry said.
"The original meaning of the directive, as we understand it, was to promote the free movement of capital by limiting the income tax on dividends withheld in the country of origin," the minister explained. "It was definitely not the goal of the directive to influence the legal entity's income tax payable on the level of subsidiary, which is why the interpretation given to the directive now may completely exempt the structures of certain companies in Europe from the tax and by doing so create distortions of competition on the European Union's single market."
Veskimagi cited the possibility that the interpretation of the directive may lead to a situation where income tax can be collected neither on the subsidiary nor on the parent company level.
Estonia has exempted companies' reinvested profits from paying income tax. According to some specialists, the interpretation given to the directive by the European Court of Justice would make Estonia change that system.
