Estonia: 2011 brings several changes for tax payers

The tax year 2011 brings several changes for Estonian tax payers. Firstly, the Euro was adopted as official currency. Secondly, new rules for employee stock options have been introduced. Thirdly, the definition of related persons has been expanded. Fourthly, the investment account concept has been introduced for individuals. Finally, changes to the VAT act were made.

Introduction of the Euro.
Estonia has adopted the Euro as its official currency on 1 January 2011. The official exchange rate is: EUR 1 = EEK 15.6466. All tax declarations and reports (eg annual report) drawn up for periods ending on 31 December 2010 or earlier must be in EEK (Estonian Kroon), even if the report/declaration is actually submitted to the authorities in 2011 or thereafter. Tax payments made or tax refunds issued in 2011 will be in EUR with the amount calculated according to the official exchange rate. Beginning in 2011, all amounts must be declared in EUR cents (no rounding).

Taxation of employee stock option plans.
As from 1 January 2011, new rules for employee stock options have been introduced. Options will not be taxable as fringe benefits if the period from grant to exercise is at least three years. The employee will have to pay a 21% income tax on capital gains derived from the sale of shares received.

Definition of related persons.
The definition of related persons has been expanded to include persons having a joint economic interest or dominating one another, and individuals that are partners (ie cohabitants), even in the absence of marriage. Previously, legal persons had to be connected by an ownership percentage or the Management Boards of the entities would have been  identical to be deemed to be related. The broader definition will have a direct impact on the applicability of the transfer pricing rules and transfer pricing documentation requirements (ie more transactions will require documentation).

Investment accounts for individuals.
A unique feature of the Estonian corporate tax regime is that there is no annual taxation of earned profits; only the distributed part of profits is taxable. Beginning in 2011, this principle was expanded to include certain investment income of individuals. A resident individual may open a separate bank account (investment account) with a credit institution situated in an EU/EEA member state or an OECD country, make investments in certain tradable securities and transfer any income from the investments to the investment account. Only the excess amount (the part of capital gain) taken out from the investment account (if not invested into qualifying securities) compared to prior contributions will be subject to a 21% personal income tax. Taking back the amount of initial investment is tax free.

VAT reverse charge mechanism.
The reverse charge mechanism applies for the supply of metal waste and real estate transactions if the Estonian Tax and Customs Board is informed before execution of the transaction (if the taxpayer has the option to apply VAT on the transaction). It is not available for sales of residential property (eg apartments and dwellings) and for real estate transactions that are automatically subject to VAT.

Cash-based VAT calculation available to small companies.
As from 1 January 2011, the availability of the cash-based VAT calculation is expanded to companies with an annual turnover not exceeding EUR 200,000. Under a cash-based VAT calculation, input VAT is deductible at the time an invoice for goods or services has been paid and output VAT is declared at the time payment for goods or services is received.

Mait Riikjarv


Barbara Krüglstein

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