Amendments in taxation of non-residents in Estonia

  • 2006-06-14
  • by Konstantin Kotivnenko
On May 31 the Parliament of Estonia adopted amendments to several legal acts, including the Estonian Income Tax Act. The adopted law provides three different dates of entry into force of the amendments. One part of the amendments will enter into force on July 1, 2006, but these amendments do not substantially affect the regulation of taxation of non-residents in Estonia.

Retroactive changes from Jan. 1, 2006. Pursuant to the changes, the implemented provisions of the EU Royalties and Interest Directive will be expanded to Switzerland. Under the next version of the law, royalties and interest paid to a Swiss shareholder who owns at least 25 percent of the shares of the Estonian distributing entity will not be subject to withholding tax in Estonia.
Amendments to enter into force on Jan. 1, 2007. One of the most important changes in Estonia is clarification of the tax status of SE (Societas Europaea) and SCE (European Cooperative Society). From Jan. 1, 2007 SE and SCE will be considered tax residents of Estonia if they have registered offices in Estonia. Likewise, dividends paid to a 20 percent shareholder in an Estonian company are not subject to withholding tax, unless a beneficiary is located in the low tax territory. From Jan. 1, 2007 the threshold for exemption from withholding tax is reduced to 15 percent.

A major change is also related to exiting from a real estate investment. Presently, a nonresident's gain is taxed upon transfer of at least 10 percent shareholding in a company, 75 percent of whose assets comprise immovables located in Estonia.
The present law enables tax-avoidance by nonresidents investing in real estate through a local investment fund or a chain of local companies. The amendment is intended to tax gains received by nonresidents from transfer of a shareholding in a company, contractual investment fund or another pool of assets. Both in case of assets of a company or a fund, if immovables located in Estonia make at least 50 percent of assets, it will trigger income tax.

Additionally, the easily avoidable condition whereby a shareholding of at least 10 percent had to be transferred for tax liability to arise will be eliminated. In the future, the condition of taxation will be that a nonresident's shareholding in a company or a fund must be at least 10 percent as of the moment of transfer, and the amount of the shareholding being transferred is irrelevant.
Overall, the adopted amendments indicate further harmonization of the Estonian tax legislation to comply with requirements set forth in the European Union legislation and clarify the existing provisions of the Estonian Income Tax Act.

Konstantin Kotivnenko is an attorney-at-law at Sorainen Law Offices in Tallinn