TALLINN - The recent decision by the Finnish Tax Board to make Helsinki Consulting
Group pay taxes on undistributed income of its Estonian subsidiary has
caused a row between the two countries' business circles and even led one
Estonian MP to invite Finnish businesses to take up residence in Estonia
should their country become "too socialist."
Esko Koolitus ja Konsultat-sioonid (Esko Schooling and Consulting), the
subsidiary of the Helsinki Consulting Group, posted earnings of 2.1 million
kroons (134,000 euros) in 2001, out of which 500,000 kroons were paid in
dividends that were later taxed by Estonian tax authorities.
Finnish tax authorities believe that all retained income or 1.6 million
kroons is taxable.
"There is a situation in Estonia at present where the profit of a company is
not taxed, and the money remains at the company's disposal forever," said
Jouni Weckstrom, inspector at Finland's Helsinki and Uusimaa Tax Board,
describing the situation as "offshore."
Helsinki Consulting Group CEO Pentti Yletyinen, said he was surprised by
"We have operated in Estonia for more than 10 years, and our subsidiary
there is a fully independent company," he said.
"Such an interpretation [by Finnish tax officials] means that subsidiaries
of Finnish firms can no longer compete on an equal footing in Estonia," he
said. "Does this mean that the tax board is attempting to obstruct Finnish
firms from transferring to Estonia?"
Finland and Estonia have signed an agreement on nondouble taxation, under
which corporate income is taxed only in the country where it was earned.
Estonian Economic Affairs Minister Meelis Atonen also found the decision
perplexing. "It certainly isn't correct," he said. "Perhaps [Weckstrom] has
become too active and is giving vent to his complexes.
"Estonia is certainly not a tax haven," stressed Atonen.
Both the Organization for Economic Cooperation and Development and the
European Commission have found that on the basis of international criteria
Estonia is neither a tax haven nor an offshore zone.
By all means Estonia has the best tax environment in Europe," said Finance
Minister Tonis Palts, who promised to take up the matter with his Finnish
colleague on Sept. 5.
"Finnish businessmen have invested so much in Estonia that we are very much
interested in reaching a result to satisfy both parties," said Palts.
In the minister's opinion, the incident demonstrates that Estonia has a
better business environment than Finland.
"We are being seen as a competitor," he said.
On hearing about the tax official's decision, one local politician went so
far as to invite Finnish business to set up shop across the Gulf of Finland
should the Finnish government continue its socialist ways.
"Those businessmen who do not want to move into offshore zones would
certainly be prepared to consider moving across the gulf," said Taavi
Veskimagi, chairman of the ruling Res Publica party faction in Parliament.
He said Finland's desire to squeeze money out of companies that had moved to
Estonia was understandable, but at the same time it would be more expedient
for those shaping Finnish tax policy to act in the name of the businessmen
having no reason to leave the country.
Tero Honkavaara, head of the Finnish Industry and Employers' Federation,
believes the tax official's decision was rather an incompetent solo effort
and did not mark a change of policy, despite the increasing trend of Finnish
companies opting for Estonian addresses.
"The tax official seems to have made a solo effort in an issue that clearly
is not in his competence," said Honkavaara, adding that there was a clear
tax board instruction for such cases and attempts to apply stipulations for
the taxation of an Estonian subsidiary were destined to fail.
In 2000 Estonia introduced a zero-tax on corporate income, according to
which only dividends and fringe benefits could be taxed. This resulted in a
conflict with Latvia, which feared that foreign companies would reregister
in Estonia. Eventually the two countries signed an agreement on non-double
taxation that took effect on Jan. 1, 2002, and that gave them more leeway as
to the taxation of the other country's subsidiaries located on home
Latvia plans to lower its corporate income tax from the current 19 percent
to 15 percent in 2004, although the current budget situation has prompted
some officials to call for a gradual introduction of this new rate.
Lithuania's corporate income tax is currently 15 percent.