Estonia closed the tax chapter of the EU's acquis communitaire on June 28, and Madis Muller, economic adviser to Prime Minister Siim Kallas, said the terms were better than those for which the government had hoped.
"The most positive aspect in the negotiations was probably the achievements in the taxation of corporate income the European Union is not protesting the tax exemption of investments," Muller said. "The only substantial issue left in the chapter was the question of tax-free trade on ships, but we had already understood some time ago that Estonia didn't have any realistic perspectives in achieving the agreement."
Estonia has closed 27 of 30 chapters required to complete pre-membership negotiations with the EU. Chapters on agriculture, energy and financial and budgetary provisions have yet to be concluded.
Estonia had requested five transitional arrangements in the taxation chapter, which weren't easy to explain to the European Commission and the EU member states.
"We should, above all, be thankful to Spain, which during its presidency (of the EU) very much supported Estonia's desire to conclude agreements fast," said Muller.
Muller said he had no formal information on which member states supported Estonia's requests, but he said he believed the United Kingdom and Ireland were firmly in his nation's corner.
Estonia had requested a transitional period until 2007 for no value-added tax on electricity generated by wind and hydroelectric power.
Jaan Tepp, chairman of the board at the Estonian Wind Power Association, said he was disappointed with the decision.
"The financial aid through state support can't be as secure and long-lasting as the rules written down in the legislation," said Tepp. "We suspect that it was a political game where the government easily gave up the tax-free trade on ships and the tax-free production of wind power in order to preserve the overall tax exemption of reinvested profit."
Tepp said he suspected the European Commission, the EU's executive arm, did not strongly demand VAT on renewable energy and wanted to look through the written sessions to see how it really happened.
Estonia has three wind turbine generators on the islands of Saaremaa and Hiiumaa and plans to build up to 100 additional windmills with a total capacity of 100 megawatts, which according to Tepp is an extremely small amount and should not have bothered the European Commission.
Estonia will get a transition period until June 30, 2007, in order to retain a reduced 5 percent rate of VAT on heating sold to private residents. Previously, the government had agreed on keeping the lower VAT until 2005, but decided to prolong that in April 2002 because of the current living standards of Estonia.
The increase of VAT on heating would have hurt families with lower incomes, the government said.
Estonia will receive a long transition period until 2009 for bringing local excise duty rates on cigarettes and tobacco to the minimum EU level, which as of July 1, 2006, will be 64 euros ($63) per 1,000 cigarettes.
A high increase in the tobacco excise tax would have had a negative effect on purchasing power and would have brought along fraud and illicit trade, the government said.
"The negotiation results are quite advantageous for Estonia considering that the transition period is as long as the one for Latvia and Lithuania, whose tobacco excises are currently lower than Estonia's," Muller said.
Estonia also requested a transitional period for retaining the tax- and duty-free sales to travelers on board ships for six-and-a-half years after the date of accession to the EU, but all 15 EU members were against it. Muller said that several countries had previously made similar demands but found they did not correspondent to joint market principles.
Tax-free trade will now be permitted only on ships that are sailing to non-EU countries or passing through the Aaland Islands.
"We will have the opportunity to give the shipping sector some state support, which will ease the pressure on increasing ticket prices and in this way help keep the current flow of tourists to Estonia," said Muller.
Estonia will also have to bring taxation of dividends in line with the parent-subsidiary directive by 2009.
According to the directive, no tax can be applied to dividends paid to another member country if the parent company holds more than 25 percent ownership in the Estonian firm. In addition to the regular corporate income tax, Estonia currently taxes dividends paid to foreign parent companies with less than 25 percent holdings with an additional withholding tax, the rate of which is determined by the bilateral tax conventions.
Estonia also agreed to lower the required ownership level from which foreign investors are free from the additional tax to 20 percent from the current 25 percent by the beginning of 2004. That would mean a harmonization of tax rules for foreign and local investors, said Muller.
Latvia and Lithuania have already concluded the 10th chapter on taxation and have two open chapters ahead, one on agriculture and the other on financial and budgetary provisions. Latvia, similarly to Hungary and the Czech Republic, does not agree with the results achieved in the 30th chapter of institutions.