Burden of proof relating to cross-border transfers and withdrawals from company bank account

The Tallinn Circuit Court recently ruled in a matter concerning a liability decision issued by the tax authority, ordering a company’s management board member to pay a tax debt incurred jointly and severally with the company.

The notice of assessment established that the company had not declared labour taxes, the ‘special cases’ income tax and non-business expenses for several months. The tax authority also found that large amounts of cash had been withdrawn from the company's bank account and that the company had made suspicious transfers to a Lithuanian company. As the company did not provide the tax authority with any explanations or documents that would have allowed it to identify the purpose of the cash withdrawals, the tax authorities concluded that the cash had been removed from the company and should be classified as a non-business expense. The tax authority claimed that the transaction with the Lithuanian company was fictitious, as there was no convincing evidence that the particular Lithuanian company provided services to the company, and the acquisition of these services had not been declared in VAT returns. In conclusion, the tax authority took the view that the sole member of the management board had deliberately breached their obligations, so that there was a direct causal link between the company's tax debt and their actions.

The Tallinn Administrative Court did not uphold the position of the tax authority and granted the appeal in so far as it concerned the transfers to the Lithuanian company, annulling the liability decision issued by the tax authority. The Tallinn Circuit Court agreed with the Tallinn Administrative Court and reasoned its ruling as follows:

  • although the member of the management board had contested the tax assessment, had submitted a large amount of new evidence in support of their claims and requested the hearing of witnesses, the tax authority did not assess the arguments and evidence submitted;
  • the liability decision does not clearly state the evidence on the basis of which the tax authority is satisfied that the company knew or ought to have known that the Lithuanian company was not, in fact, the other party to the transaction. The Court stressed that more detailed documentation of the service provision is not required by law and that the company is not obliged to produce any specific documents in addition to the basic accounting records, i.e. the purchase invoices; 
  • the fact that the services were provided to the company is not the subject of the dispute, and the names of the people who provided the services are known, but in the liability decision, the tax authority did not clarify in what form, i.e. under which companies, the persons provided the services. The tax authority did not consider it necessary to question the persons who worked for the company in order to clarify the nature of their employment, i.e. whether and with whom they had an employment contract, who paid their wages and how, etc.;
  • although the documentation proving the provision of the service was incomplete, the company's representative provided a plausible version of the transactions and explained how the invoices and the documents were to be interpreted in conjunction. The tax authority, however, did not establish a convincing overview of the non-business expenses incurred, and so the burden of proof does not shift to the member of the management board;
  • the tax authority failed to factor in the fact that as the company also had liabilities to other creditors, it may not have been under an obligation to use all its receipts to cover the tax arrears. The Court added that if the company had not unduly favoured other creditors over the tax authority, it was not deliberately avoiding paying the tax. The tax authority had not considered the payment of debt and taxes from this perspective;
  • the Court, however, agreed with the tax authority's position on the cash withdrawn from the company's bank account, as the link between the cash payments and the company’s business was not sufficiently proven. According to § 56 (2) of the Taxation Act, a company must keep records of the facts relevant for taxation purposes and it is therefore necessary to collect and retain evidence to show that a particular service, asset or obligation is relevant to its business. As the company did not have such proof, the money withdrawn from the company was subject to income tax as a non-business expense under § 51 (2) 3) of the Income Tax Act.

The report of the case is available here (in Estonian).

Tallinn Circuit Court no. 3-21-2273

Recovery by way of international administrative assistance

A company had tax arrears in Finland (alcohol excise duty) and the Finnish tax authority turned to its Estonian counterpart for international administrative assistance to recover the debt. The Estonian tax authority ordered the company to pay the foreign debt by means of orders accompanied by an instrument permitting enforcement, issued by the Finnish tax authority. The Estonian tax authority issued separate orders for the payment of the principal, the fine and the interest.

The company took the case to court, arguing that the orders did not meet the requirements of the Administrative Procedure Act and the Taxation Act as they were not legally and factually justified. The company claimed it was confused as to which claims were covered by the orders, as the Estonian tax authority issued three orders (for the principal, the interest and the fine), but the instrument that formed the basis of enforcement referred to seven different claims and lacked references to the respective tax rulings (including the relevant numbers, dates and amounts). In addition, the company argued that it had not been duly notified of the tax claims prior to the submission of the recovery request.

The Circuit Court dismissed the company's appeal and took the view that the Estonian tax authority had proceeded from the relevant legislation when providing international administrative assistance. The court also stated the following:

  • In Estonia, compulsory enforcement is executed based on a legal instrument by which the Finnish authority provides the Estonian tax authority with the information provided in the instrument permitting compulsory enforcement in Finland. A uniform legal instrument containing the required information is used in all countries. This uniform instrument is the basis for recovery and precautionary measures in Estonia and does not need to be separately recognised, supplemented or replaced by Estonia.
  • In line with the mutual trust principle, the Estonian court must rely on the information provided by the Finnish competent authority, according to which the enforcement order had been served on the company in accordance with Finnish law. The Estonian tax authority has complied with its obligation to investigate by asking the Finnish competent authority whether the enforcement instrument has been properly served on the addressee.
  • Neither the Estonian tax authority nor the Estonian court has the right to make an additional legal assessment as to whether the document has been duly served on the addressee under Finnish law.
  • To contest a uniform instrument permitting enforcement in Estonia or the validity of the notification issued by a Finnish competent authority, an appeal for must be lodged with the competent Finnish bodies. In the opinion of the Estonian court, the uniform instrument contains the necessary information for identifying the claim (the relevant period, amounts, the type and name of the claim), and the company's allegation that the instrument does not comply with the Taxation Act or the Administrative Procedure Act are thus not justified.

The report of the case is available here (in Estonian).