Rules against tax avoidance

Firstly, there is a General Anti-Avoidance Rule (GAAR) applicable to both individuals and companies. According to this rule, no account shall be taken of a transaction or chain of transactions the principal purpose or one of the principal purposes of which is to obtain a tax advantage which is contrary to the content or purpose of the applicable tax law or international agreement and which is not genuine having regard to all the relevant circumstances. A chain of transactions may consist of more than one intermediate stage or part. A transaction or chain of transactions shall not be considered genuine unless it is made for real vital or commercial reasons, which reflect the actual economic substance of the transaction.

In case of companies, income tax is charged on the amount that a resident company would have received as income, or on the amount that a resident company would not have incurred as a cost if transaction or chain of transactions corresponding to the above-mentioned features had been absent.

Secondly, as of January 1, 2019 corporate income tax is levied on the exceeding borrowing costs which exceed:

• EUR 3 000 000;
• 30% of the taxpayer’s EBITDA and
• the losses of the taxpayer.

There is no CIT liability on exceeding borrowing costs in case of

• a standalone entity;

• financial undertakings;

• loans used to fund a long-term public infrastructure project where the project operator, borrowing costs, assets and income are all in the European Union.

f a company is a member of a consolidated group for financial accounting purposes, it can choose between two exceptions applicable to consolidated groups.

In case of exceeding borrowing costs the taxable period is a financial year. The tax return has to be submitted and the income tax paid by the 10th day of the ninth calendar month of the next financial year at the latest.

As of January 1, 2019 corporate income tax is also levied on the non-distributed income of a controlled foreign company (CFC) arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. This rule is not applicable in case the CFC’s accounting profits do not exceed EUR 750 000, and non-trading income does not exceed EUR 75 000.

The taxpayer is required to declare CFC’s profits subject to tax in Estonia and to pay tax on CFC’s profits no later than by the 10th calendar month of the next financial year of the foreign controlled company.

As of January 1, 2019 a non-resident who has a permanent establishment in Estonia is required to declare the assets brought to Estonia for the permanent establishment.