Tax changes in Estonia 2012 and 2013
Estonian Parliament made several remarkable decisions in June 2011 regarding legal acts in Estonian taxation field that came into force with the amendments of Income Tax Act on January 1, 2012. Specifically, Estonian Parliament decided to lower the income tax to 20 % starting from the year 2015 (legal persons 20/80). Positive decision for employers was to exclude work related development trainings from the taxable fringe benefits. The compensation of costs for the formal education acquired by the employee within the adult education system will not be treated as fringe benefits in Estonia. Currently, these expenses are subject to fringe benefit taxation. Negative influence for taxpayers brings a decision according to which the amount of untaxed expenses like housing loan interests, training expenses and contributions is decreased from 3196 EUR to 1920 EUR starting from the year 2012.
Starting from 2012 the employers are able to make contributions to the employees III pension pillar without having to pay income tax, provided that the contributions do not exceed 15% of the payments made to the employee in a calendar year or 6000 EUR. It is important to note that the tax exemption only applies to income tax, and payments are still taxed with social tax, the unemployment tax and when needed with the mandatory funded pension contribution.
The amendments to the Income Tax Act in Estonia abolished the tax exempt threshold on accommodation expenses. Previously, any accommodation expenses incurred on business trips were tax exempt provided they did not exceed EUR 77 per day on domestic trips and EUR 128 per day in case of foreign trips - the excess part was taxable as fringe benefit. According to the amendments the referred thresholds are abolished and any business trip related accommodation expenses are tax exempt without any limitations.
On April 1, 2012 various amendments in VAT Act entered into force. At the request of the tax authorities, the reverse charge mechanism was extended to the supply of gold. Under reverse charge mechanism the customer, instead of supplier, is liable to remit VAT on a transaction to the tax authorities. The purpose of the amendment was to limit tax fraud. As a consequence of anti-avoidance rules introduced to the Liquid Fuel Act, the respective amendments were also introduced to the VAT Act. Under the amendments, only the fuel, which is placed under excise suspension arrangement may benefit from the zero rate of VAT. Previously, any supplies in excise warehouses were subject to zero VAT rate, which often gave rise to abuse. The lessor’s rights to deduct input VAT on the maintenance cost of leased assets were restricted. Input VAT on such cost can only be deducted under certain specific conditions. Simplified procedure for VAT exemption on import of goods is applied on the conditions where the import is followed by the immediate delivery of the goods to another Member State. To be entitled for the exemption, the foreign importer may use the assistance of customs agents instead of registering himself in Estonia as a VAT liable person. Customs agent will declare the intracommunity supply which follows the import on behalf of the importer on its own VAT return. The application of the reduced VAT rate of 9% was specified. In respect of periodical publications (newspapers, journals), the reduced 9% VAT rate can only be applied if the publication is printed on the paper, but not in case the publication is issued electronically.
On June 14, 2012, the Estonian Parliament adopted the Act amending the Social Tax Act that entered into force on August 1, 2012. There are various cases where family members assist each other without being in a formal working or contractual relationship and having no entitlement for social benefits as a result of such unpaid work. The amendments in the Social Tax Act make it possible for self-employed persons to pay social tax on behalf of their spouses, providing the latter with an entitlement to the same social benefits as the self-employed person has him or herself.
At the end of the year 2011, the Parliament of Estonia decided to abolish the boat tax and sales tax in Tallinn beginning from January 1, 2012. Although sales tax was abolished, the advertising tax rate in Tallinn was raised by 25%.
Council of Tallinn adopted a regulation that exempts landowners in Tallinn from land tax up to 1500 m2 that took effect on January 1, 2012. Simultaneously, the land tax rate for the rest of the land in Tallinn was increased from 1.5% to 2.5%.
In addition to previous, there were developments also in the field of international tax treaties in Estonia. The treaty with Jersey and the new protocol to the tax treaty with Georgia became effective on 1 January 2012. The new protocol to the tax treaty with Singapore took effect on March 30, 2012. The double taxation treaty with United Arab Emirates entered into force on March 29, 2012 and it will be applied retroactively from January 1, 2011 making the total count of effective Estonian tax treaties to 49. The double taxation treaty with India entered into force of June 20, 2012. The provisions of the treaty will generally apply from January 1, 2013, in Estonia and from April 1, 2013, in India. Estonia has also signed double taxation treaties with Cyprus, Thailand, Uzbekistan and Mexico that will need to go through the internal proceedings in both parties to come into force.
Previous shows that this year developments in Estonian taxation field are remarkable. Estonia has also been very active in signing double taxation avoidance treaties with many countries that will strengthen the business connections, facilitate economic relations, predispose investments, assure the equal treatment of people and eliminate double taxation that might arise as the concurrence of the legislation of both parties. As taxation field develops very fast and needs amendments on legal basis also, it is foreseen that next year will be as progressive as this one.