TALLINN - Chairman of the opposition Res Publica party Taavi Veskimagi has recommended that the rules governing the taxation of enterprises be changed and a low-rate corporate income tax introduced when a transition period for Estonia ends in 2009.
In an article published in the daily Postimees, Veskimagi said the problem arises from the EU directive under which Estonia would not be able to tax dividends if they are paid to a parent company based outside Estonia. Otherwise, the parent companies situated in Estonia would be in a position of advantage and free movement of capital would be hindered.
If this were the situation, Estonia would not be able to tax the profit distributed by a subsidiary of a foreign company to its non-Estonian parent after the transition period ends in 2009, and in effect foreign companies operating in the Baltic state would pay no income tax at all.
Under present regulations in Estonia income tax is paid only if profit is taken out of a company or a group of companies as dividend income. Re-invested profits are not taxed.
If the present system cannot be maintained, Veskimagi said the best solution would be to levy a low tax on corporate profit. If the rate was 5 percent, for instance, a 15 percent tax would have to be applied to dividends payable to individuals. The effective tax rate thus would be 20 percent, exactly as it would be if the present model were maintained.
"Simply the first 5 percent would have to be paid when the profit is formed, not when it is taken out. In the end, the change would be minimal for Estonian entrepreneurs," the former finance minister said.