How to avoid deletion from the VAT register?

On 7 May 2015, the Estonian Supreme Court delivered judgment in case No. 3-3-1-17-15, the significance of which lies in laying down preventive guidelines to avoid deletion from the VAT register.

In this particular case, the Estonian Tax and Customs Board (ETCB) wanted to delete a company from the VAT register because it suspected that the company was not engaging in real business. The ETCB instructed the company to produce documents proving its engagement in business activity; otherwise, the company would be deleted from the register. The ETCB gave the company several opportunities to comply, but the company failed to do so.

The Supreme Court found that failure to submit information required by a tax authority is not sufficient to justify deletion from the VAT register. At the same time, the company’s inaction considerably complicated the tax authority’s task of ascertaining whether the company was really engaged in business. Moreover, the fact whether a real business existed was not sufficiently substantiated for the purposes of extending the registration.

It follows from the judgment that it is unwise to ignore the tax authority’s requirements and a company facing the risk of deletion from the VAT register should cooperate with the tax authority, eg by producing documents on request and providing explanations proving engagement in real business activity when asked. Companies that fail to do so may face a serious risk of being deleted from the register even if no actual grounds for deletion exist.

Supreme Court judgment on taxation of operation of private limited companies

On 12 May 2015, the Estonian Supreme Court delivered judgment in case No. 3-2-1-82-14, where the main focus of discussion was on the permissibility of providing services through so-called one-man firms (private limited companies) and taxation of services provided by these firms. The tax authorities tend to impose payroll taxes on payment for these services, treating the payment as wages of the person providing services on behalf of the company. However, entrepreneurs object to this interpretation.

In this case, the Supreme Court explained the situation to some extent – in principle the court found that the tax authority can requalify payment for services as wages. However, that depends on certain circumstances, which must be sufficient to prove that the person providing services under the name of a private limited company was informally employed by the company paying the service fee. According to the Supreme Court, the mere fact that a legal person provides management or consultancy services cannot be seen as a basis for imposing an additional tax obligation. Moreover, the fact that a service contract is ostensible does not necessarily mean that the whole payment made for the service can be requalified as wages.

To our knowledge, the Supreme Court is processing two more cases which will hopefully help to further clarify provision of services by one-man firms.

Don’t throw away your tax benefit!

On 1 January 2015, an amendment to the Estonian Income Tax Act took effect requiring resident legal persons and non-resident legal persons having a permanent establishment in Estonia to declare all past circumstances that affect their future income tax liability. The deadline set for declarations was 10 February 2015.

However, companies that failed to declare these circumstances (especially contributions to company equity and dividends received from foreign countries) by 10 February this year have not lost the opportunity to apply for tax exemption. Entrepreneurs have three years to amend their tax returns prepared for January 2015, setting out the circumstances giving entitlement to tax exemption.

We advise companies who did not file their tax returns in due time to seize the opportunity because after the expiry of three years their tax returns can no longer be changed and so they may lose their entitlement to tax benefit.

Innovative tax solutions earn “Baltic Tax Firm of the Year” award for the fifth time

On 21 May 2015, SORAINEN was named the “Baltic States Tax Firm of the Year” at the prestigious International Tax Review European Tax Awards in London. This is the fifth time that SORAINEN with its regional Tax & Customs Team has been honoured with this international commendation.

SORAINEN and other shortlisted finalists were independently evaluated by International Tax Review editorial staff, consulting practitioners and tax executives from companies around Europe. The award was judged according to size (which indicates what a tax team is capable of taking on), innovation (which proves that the firm addresses tax issues that cannot be fixed with straightforward solutions) and complexity (which highlights the firm’s ability to address tax issues that are out of the ordinary).

More information about the award is available here.

SORAINEN launches CIS/Russian Desk as new service to support clients in cross-border matters in the region

SORAINEN launched a CIS/Russian Desk consisting of a specialist team of lawyers focused on complex legal support in cross-border matters, including projects originated from the CIS region, and assisting clients to enter CIS markets. The main purpose of the new service is to handle CIS-related projects to meet clients’ expectations, develop our network of cooperation partners and strengthen cross-border capacities. More information about SORAINEN CIS/Russian Desk is available here.

Information about measures to combat VAT evasion in Member States

On 11-12 May 2015, SORAINEN tax specialist Tanel Molok participated in a meeting in Budapest of the VAT Europe Group, uniting VAT experts from EU Member States. The main purpose of the meeting was to share practice between Member States in combating VAT evasion.

The meeting resulted in a summary table of requirements applicable to taxpayers in Member States and rules for substantiating transactions. The table is a handy tool for addressing VAT issues while operating in another Member State. For more information about the summary table, please contact Tanel Molok.