Infocourier

The Tallinn Circuit Court upheld the decision of the Tax and Customs Board (MTA) to retroactively enter a car sales company registered in the Czech Republic into Estonia’s value added tax register.

The dispute arose from an audit launched in 2023, during which the tax authority expanded the scope of the proceedings from examining the company’s permanent establishment to determining whether it should have registered itself as a person liable to value added tax (taxable person) in Estonia. According to the MTA’s assessment, the company’s actual economic activities took place in Estonia, even though the company was registered in the Czech Republic. According to the evidence gathered by the tax authority, the company’s active operations were carried out at the same business premises as those of an Estonian company whose employees were acting in the interests of the Czech company. Furthermore, vehicles were handed over to customers in Estonia, the customers were primarily Estonian legal entities, contracts were drawn up in Estonian and used the contact details of the company registered in Estonia, and the company also used an Estonian bank account. In the Czech Republic, the company’s activities were mainly limited to purchasing vehicles and submitting tax returns.

In the company’s view, the MTA should first have assessed whether the Czech company had a fixed establishment in Estonia, as, according to the appellant, this is a prerequisite for registration as a taxable person in Estonia. The Circuit Court did not agree with the appellant’s position.

The Circuit Court emphasised that establishing the existence of a fixed establishment is not necessarily a prerequisite for registering a person as a taxable person. The obligation to register is based, first and foremost, on taxable turnover generated in Estonia, which exceeded the threshold of 40,000 euros. At the same time, the court found that, in addition to exceeding the threshold, the evidence presented by the MTA convincingly indicated that the company also had a fixed establishment in Estonia. The Court added that the declaration obligation that has been transferred to the transaction partners under the reverse charge mechanism does not affect the company’s own obligation to register itself as a taxable person. 

It is therefore essential that foreign companies operating in Estonia assess all the circumstances relevant to their registration as a taxable person. Moreover, it is important to bear in mind that, although the purchaser may fulfil the value added tax liability on behalf of the seller under the reverse charge mechanism, the seller is not exempt from the registration obligation arising under the Estonian Value Added Tax Act. 

The Circuit Court’s decision is available HERE.

The decision of the Tallinn Circuit Court confirms that the collection of data for the purposes of assessing tax risks and the advice provided in that context do not exempt the taxpayer from the obligation to pay interest arising from the late payment of tax. In the case under review, the previous communication between the Tax and Customs Board (MTA) and a company concerned payments made to a private individual, while the subsequent assessment of tax was related to the amount of value added tax outstanding on the sale of property. 

The company had declared the sale of the property as tax-exempt turnover. During a subsequent audit, the MTA established that the transaction involved the sale of building land, which was subject to value added tax. In the company’s view, the interest claim was unfair, as the MTA had previously requested documents from the company and analysed its tax risks. The company therefore considered that the tax authority should have identified the value added tax liability relating to the disputed transaction during those proceedings. It also claimed that, prior to the transaction, the company had sought advice from the MTA by telephone regarding the value added tax treatment of the transaction.

The Circuit Court agreed with the MTA’s view that the earlier proceedings constituted advice to the taxpayer and an analysis of its tax risks, rather than a tax audit. The purpose of these proceedings was not to examine the taxation of the specific property transaction. In addition, it had not been established that the MTA had provided misleading or incorrect information in writing regarding the taxation of the transaction, whereas only misleading or incorrect information provided in writing would constitute grounds for not charging interest.

It is therefore important, when responding to enquiries from the MTA, to distinguish whether the information is being provided as part of the MTA’s audit, advisory or risk-analysis procedure. In the latter case, there is no basis for assuming that the tax authority has reviewed all tax liabilities or that no further proceedings will be initiated.

The Circuit Court’s decision is available HERE.