Russia was added to the list of non-cooperating countries in the field of taxation

Countries that have not started a constructive dialogue with the EU on tax administration or that have not fulfilled their obligations in implementing the necessary reforms are included in the list of non-cooperating countries for tax purposes. 

Russia has been added to the list since 21 February, after the EU Council working group updating the list reviewed new legislation adopted by Russia in 2022 and found that Russia had failed to meet its obligations to address harmful aspects of the special regime for international holding companies. To boot, dialogue with Russia on taxation matters has stalled due to Russia's aggression against Ukraine.Adding Russia to the list of non-cooperative countries for tax purposes means that: 

– Income tax must be withheld from the payment made to the Russian undertaking for the provision of services. Income tax does not have to be withheld if the undertaking has a permanent place of business in Estonia;
– Dividends received from a Russian company cannot be forwarded without paying taxes;
– if securities issued by a Russian undertaking are acquired; if a share in the undertaking there is acquired; if late payment or liquidated damages are paid, damage is compensated out of court or arbitration, a loan is granted or an advance payment is made to a Russian undertaking, it is considered an expense not related to business;
– The income of a legal person located in Russia, but under the control of Estonian residents, is subject to income tax at the level in the role of a natural person, in defiance of whether the Russian undertaking has distributed the profit to the taxpayer or not.

Amendments in the taxation of income received in a pension investment account

On 1 January 2023, amendments in the Income Tax Act concerning the taxation of income received in a pension investment account came into force. The purpose of the amendments is to align income taxation with investment account regulation and reduce the risk of double taxation. 

The most important amendments that took effect concern the fact that the following are not subject to income tax:
– interest received by means of a financial asset acquired with money in a pension investment account or the income of which is based on an investment fund that is taxed or exempt from income tax;
– dividends received from foreign undertakings, received from financial assets acquired by means of money in the pension investment account;
– insurance benefits received in the pension investment account.

What is more, income received in a pension investment account is not considered as income upon the calculation of the minimum personal income tax allowance.
All of these amendments will be applied on a retroactive basis as of 1 January 2022.

Sale of surplus electricity becomes tax-free

On 15 February 2023, the Parliament (Riigikogu) approved amendments to the Electricity Market Act, based on which small producers no longer have to pay income tax on the sale of surplus electricity. This amendment is applied on a retroactive basis as of the beginning of 2022. This means that all small green power plants that produce more energy than they are able to consume, and therefore sell the surplus on to the electricity market, will be returned the income tax paid on the income earned this year and in the following years.

Such a decision was made to encourage more people to invest in environmentally friendly energy sources. The former taxation regime did not favor investing in renewable energy, as the construction of the respective system requires a large financial investment, and private persons were unable subsequently deduct such amount from their income. Furthermore, the sale of the remaining green energy was subject to income tax.

As of 1 January 2022, income from the sale of electricity is not subject to income tax if the electricity is produced by using renewable energy sources (solar panels, electric wind turbines, etc.). Any surplus income tax will be refunded after the income tax return is approved.

The activities of debt factoring and debt collection service providers will be subject to supervision

Estonia must adopt the EU directive 2021/2167 (the so-called regulation of debt collection) by 29 December of this year at the latest. It establishes a common framework and requirements for credit servicers and credit purchasers, including the obligation of authorisation of credit servicers. 

Who needs to be authorised?
As the draft is currently being prepared in Estonia and there is no published version yet, the article points out the mandatory part, i.e. the minimum requirements, for adoption. The directive regulates the requirements applicable to credit servicers (in Estonia, debt collection service providers) and credit purchasers and stipulates some consumer protection measures (e.g. credit institutions must take restructuring measures before initiating enforcement proceedings). In line with the directive, the authorisation obligation must be applied at least to such credit servicers that purchase non-performing credit contracts from credit institutions or banks. If Estonia adopts only the minimum requirements set out in the directive, it means that a debt collection service provider's authorisation will not be required from those debt collectors that only purchase non-performing credit contracts issued by a financial institution authorised by the Estonian Financial Intelligence Unit (e.g  business loans) or a credit provider authorised by the Estonian Financial Supervision Authority.

Which credit products are covered?
The directive does not only concern consumer credits, but also business loan agreements. As already mentioned, the directive applies as a minimum requirement to the resale of such loans, including business loans, which have been issued by credit institutions, i.e. banks, and which are non-performing. The directive does not have an impact on such non-performing credit agreements that are not past due, are less than 90 days past due or that have not been terminated agreement pursuant to the national civil law of a Member State. If Estonia decides to expand the scope of application of the directive, then the obligation of authorisation may also concern those creditors that, in addition to the management and purchase of non-performing loans issued by credit institutions, also (or only) resell and manage the following loans:  

– non-performing loans issued by other creditors who are considered as creditors within the meaning of the Creditors and Credit Intermediaries Act
– business loans (financial institutions authorised by Estonian Financial Intelligence Unit, which are not currently covered by Creditors and Credit Intermediaries Act) 
– loans issued by credit institutions and other creditors that are performing. 

The issue of whether credit servicers and credit purchasers should be added to the list of obligated parties in the meaning of the Money Laundering and Terrorist Financing Prevention Act also needs to be discussed in Estonia, also it is necessary to discuss the exact list of requirements applicable to the authorisation, but it is clear from the minimum requirements set forth in the directive that these requirements will be similar to those that already are applicable to other financial market participants (good business reputation of the management board, requirements regarding the internal control system and internal procedures, etc.).

Changes to business law

On 1 February 2023, amendments to the Commercial Code entered into force and the Commercial Register Act became valid. It is a new and separate law, which will enter into force in four stages: in addition to the general initiation of validity on 1 February, the changes will take effect on 1 August and 1 September of this year and 1 March of the following year.

The most significant amendment to the Commercial Code is the fact that the second sentence of Section 136 was declared invalid. Therefore, there is no longer a minimum capital requirement for the establishment of a private limited company in the Commercial Code. From now on, the smallest nominal value of a share will be 1 cent, and this is also the new minimum capital requirement of a private limited company. Therefore, after 1 February 2023, it is no longer possible to establish a private limited company without paying a contribution, but a contribution of at least one cent must be made. The purpose of the amendment is to incentivate the founders of the company to concentrate more on how much capital is actually necessary to initiate business activity. Also, the abolition of the minimum capital requirement is related to the fact that one net asset requirement was waived, i.e. the net assets of a private limited company no longer have to correspond to at least half of the minimum share capital established by law (1,250 euros). The same net asset requirement was omitted for joint-stock companies, but it should be borne in mind that the minimum capital requirement (25,000 euros) is maintained for joint-stock companies.

In addition, the Commercial Code provides new rules for commercial groups. In other words, the Commercial Code now gives the parent company the opportunity to instruct a member of the subsidiary's management body if the subsidiary acts against the interests of the group as a whole.

The regulation that concerns contact persons has also been updated. As of now, contact persons must be set if the legal entity is established in a foreign country, and it is no longer neede, if the company's board is located in a foreign country. The Commercial Register Act also establishes the term for being a contact person. If there is no mandatory contact person in the register, the registrar can delete the legal entity from the register in a simplified manner. In addition, under certain conditions, it is possible to delete from the register those legal persons that have not submitted their annual report by the due date.

Several amendments set forth by the Commercial Register Act will come into effect in stages. For example, as of September 2023, the list of shareholders will be kept by the Business Register, which will also allow the acquisition in bona fede of shares in the future. In March 2024, amendments regarding making entries in the Business Register and reserving a business name will enter into force on a specific date