• Measures taken by the Estonian Tax and Customs Board in connection with an emergency situation
• An employment subsidy programme offered by the Estonian Unemployment Insurance Fund
• State compensation for days on sick leave
• Amendments to the Sport Act
• Overview of court decisions

In order to alleviate a temporary liquidity crisis, the Estonian Tax and Customs Board suspended the calculation of interests on tax arrears of companies for the duration of the emergency situation. The suspension is applicable for two months from March 1 to May 1. We would like to draw your attention to the fact that as opposed to the tax arrears generated during the period, in this case the suspension means that interests will not be calculated for the two months.

As decided by the government, the Estonian Unemployment Insurance Fund (EUIF) will pay a subsidy for two months in a three-month period (from March to May) to every employer who fulfils at least two of the following three criteria:

1. The employer must have suffered at least a 30% decline in turnover or (in the absence of turnover) revenues for the month it wishes to be subsidized for, as compared to the same month last year;

2. The employer is not able to provide at least 30% of its employees with work in the extent agreed upon and it applies § 35 or § 37 of the Employment Contracts Act;

3. Based on § 37 of the Employment Contracts Act, the employer has cut the wages of at least 30% of employees by at least 30% or down to the minimum wage established by the government.

The amount of the subsidy will be up to 70% of an employee’s average monthly wage for the last 12 months, but it will not exceed 1,000 euros for a month. In order to get the subsidy, the employer must also pay a wage of at least 150 euros (gross) to the employee.
As for low-paid workers, the EUIF will make sure that together with the sum paid by their employer and in accordance with the working time defined in their employment contracts they will receive at least the minimum wage.

The EUIF and employers will pay all payroll taxes on wages and subsidies.
Detailed instructions on how to apply for the subsidy will be published by the EUIF on its webpage. Applications can only be filed by employers and will not yet be accepted in March.
More information is available here. 

For the period of March to May, the state will compensate for the first three days of sick leave for all incapacity leave applications. The Patient Portal digilugu.ee has an added functionality that allows employees who are sick or need to be on care leave to file online for a sick leave note.

The state made advance payments of social tax for sole proprietors for the first quarter of 2020 to help them cope with economic difficulties caused by the crisis.

• The Ministry of Finance is planning to lower the interest rate calculated on tax arrears to 0.03% per day and to grant tax authorities the right to further decrease the interest rate to zero, if necessary.
• The suspension of mandatory funded pension payments by the state is under discussion.

Amendments to the Sport Act and other associated acts entered into force on March 1st. The aim of the amendments was to regulate the previous scholarship payment system based on which tax exempt scholarships were awarded to athletes who were, in fact, in an employment relationship. This meant that state taxes were not paid and athletes were without any social guarantees.

A special scheme for athlete scholarships and athlete grants was implemented to prevent any disputes and to avoid the misuse of scholarships. A limit was imposed for sports-related scholarships – they may not exceed 12 times the minimum monthly wage per calendar year. The threshold limit produces the requirement that employment contracts or some other form of contracts under the Law of Obligations Act must be concluded with athletes. Fixed-term (five-year) employment contracts with an extension option may be concluded with athletes.
Athletes who have a contract with a sports organisation or sports school can now be paid tax exempt athlete grants (a new type of grant) every month in the extent of two minimum monthly wages. In this case it is not allowed to award scholarships to them. If a scholarship has been paid to an athlete and a contract is then concluded with him/her in the same calendar year, the total annual amount of scholarships and grants may not exceed 24 times the minimum monthly wage.

The amended Sport Act is available here.

Additional information: Tax Advisor Einar Rosin, erosin@kpmg.com.

The agreement between the Republic of Estonia and Guernsey for the elimination of double taxation with respect to taxes on income and the prevention of tax invasion and avoidance has been proclaimed and published in the State Gazette. The agreement is based, broadly, on the OECD model tax convention.

The agreement will enter into force on the date of the later notification provided by the parties on the completion of procedures required by their laws to bring the agreement into force. The provisions of the agreement will have effect in respect of taxes chargeable for any taxable period beginning on or after the first day of January following the year in which the agreement enters into force.

Additional information: Tax Advisor Mikk Tereping, mtereping@kpmg.com.

Compliance of a legal form of a transaction with its actual economic substance

Recently the Supreme Court considered once again the issue of whether service agreements can be classified as ostensible transactions.
A company had concluded service agreements with firms connected with its board members as well as an authorisation agreement and a contract for services with two firms for the provision of services. The Estonian Tax and Customs Board (ETCB) issued a notice of assessment that treated payments under these agreements as wages and required the company to pay payroll taxes on them. More specifically, the ETCB claimed that five agreements concluded with subcontractors were ostensible transactions that were used to gain a tax advantage and to avoid the payment of payroll taxes, i.e. a legal form was used that was not in compliance with the substance of the transactions.
The court disagreed with the claim of the tax authorities that the transactions had been ostensible. The court affirmed that in the framework of freedom to conduct business, it was permissible to take tax considerations into account in economic activities, and that did not mean that transactions based on tax considerations were by default ostensible. At the same time, the court declared that it was not permissible to attribute to a transaction a distortive economic substance that did not comply with its actual substance.
The court held that on the basis of the facts it was possible to conclude that the transactions were conducted in order to avoid taxes, that the tax advantage gained manifested itself in savings on payroll taxes, and that it was in the economic interests of the natural persons who had provided the services to amass financial assets to their companies. As a result, the court found that in their economic substance the payments constituted employment income that was to be treated as expenses for the company, i.e. the payer, and that payroll taxes were to be paid on the payments.
The decision is available here (in Estonian).

Additional information: Tax Advisor Ave Rego, averego@kpmg.com.

Fictitious employment relationship

The Supreme Court analysed the existence of a purported employment relationship, the calculation, declaration and payment of payroll taxes, and the accuracy of data in the employment register. The Estonian Tax and Customs Board (ETCB) claimed that a company had knowingly filed false data on income and social tax forms, while actual payments had not been made to the respective employee, and the payroll taxes calculated and retained were not paid to the state budget.
In addition, there was no proof that any work had actually been done, and the entry in the employment register conflicted with the date of the conclusion of the employment contract. As no wages had in fact been paid to the employee, the company did not have the right to declare payroll taxes. Furthermore, the entry concerning the employment relationship had not been filed correctly in the employment register. The ETCB issued a notice of assessment for reducing the company’s payroll taxes declared on tax forms and had the entry in the employment register deleted.
The Administrative Law Chamber of the Supreme Court declared that the parties had concluded an ostensible contract and that the employee had not done the work agreed upon and was not paid for it, which is why the declaration of payroll taxes on tax forms was unjustified. In addition, the court affirmed that the ETCB had the right to delete the entry in the employment register as there had not been an actual employment relationship.

The decision is available here (in Estonian).

Additional information: Tax Advisor Einar Rosin, erosin@kpmg.com.

Covert transfer of business

In a court case no. 3-18-2139/31, the Tallinn Circuit Court upheld the appeal to annul a notice of assessment issued by the Estonian Tax and Customs Board (ETCB).
The court found that the legal and factual basis of the ETCB’s notice was not sufficiently clear. According to the material factors to substantiate the notice, the sale of beer brewing equipment by a company connected with the appellant; hereafter ‘Õlletehas’, was an ostensible transaction to conceal the transfer of Õlletehas to the appellant.
The court decided that in the notice of assessment, the tax authorities had not clearly defined the composition of assets that constituted the company as such. The court affirmed that the beer brewing equipment acquired by the appellant was of key importance in the continuation of the economic activities of Õlletehas – indeed, it was impossible to continue beer production without the equipment. Still, there were no grounds to conclude that the equipment was the only or the main component of Õlletehas’s identity. The court dismissed the tax authorities’ assertion that the transfer of the equipment constituted adequate grounds for claiming that the whole business (or part of it) had been transferred to the appellant.
The court declared that contrary to the notice of assessment, Article 83(4) of the Taxation Act could not be used as a legal basis for the assessment of the relationship between the parties. The article only covers ostensible – and therefore void – transactions. A transaction is ostensible if the parties do not in fact want the agreed-upon outcomes of the transaction, i.e. they have covertly agreed not to be bound by the rights and responsibilities detailed in the transaction. So, the application of the article would have presumed a reassessment of the transactions between the parties, which had not been done in the notice. The tax authorities had explicitly reassessed only the sales transaction between Õlletehas and the appellant.

The decision is available here (in Estonian).

Additional information: Tax Advisor Merike Oja, moja@kpmg.com.