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InfoCourier - October 2019

InfoCourier - October 2019

InfoCourier provides a monthly overview of the latest changes in legislation.

Joel Zernask

Partner, Head of Tax Services

KPMG Baltics OÜ


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InfoCourier - October 2019

Court favours narrow interpretation of tax exemption on gains from sale of property used for residence

This spring, Tallinn Circuit Court reached a ruling in two matters concerning the interpretation of § 15(5)1) of the Income Tax Act. In accordance with the said provision, gains from transfer of immovable property are exempt from income tax if an essential part of the immovable is a dwelling which was used by the taxpayer as his or her place of residence until transfer. In both cases the court adopted a narrow interpretation of the tax exemption in question.

In case 3-18-1861/16, the claimant who had sold an apartment and then a garage unit, located on separate immovables, maintained that the gains from both sales should be exempt from income tax. The claimant argued that they have not been treated on equal terms with those owners of dwellings whose dwelling and garage are located on one and the same immovable property. The court did not agree with the claimant’s view, arguing that the claimant did not sell the apartment and the garage unit in a single transaction but in separate transactions with different parties at different times. For this reason, there were no grounds for treating the disposal of the apartment and the garage as a single sale. The fact that the claimant owned the garage unit only because it was located near the claimant’s residence is not sufficient for the provisions of § 15(5)1) of the Income Tax Act to apply.

In case 3-17-1884/25, the claimant had bought several adjacent immovable properties, and the claimant’s dwelling house (residence) was located on one of the properties. One of the properties was later divided into four properties. The claimant then sold all the properties at the same time but did not declare any gains on the sale. The claimant argued that the object of the sale was the dwelling house located on a single plot of land. Both the tax authority and the court concluded that the exemption is applicable only to the immovable where the owner’s dwelling house was located. As the other immovables were entered in the land register as independent units, the gains from the sale of these immovables are subject to income tax.

The reports of the cases are available here and here (in estonian).

Additional information: Tax Advisor Einar Rosin,

Fictitious employment relationship

In case 3-18-1876, Tallinn Circuit Court investigated a purported employment relationship. The Tax and Customs Board held that a company had reported an employee for tax purposes who had not actually worked for the company, and issued a notice of assessment for reducing the company’s payroll taxes. The company had filed income and social tax forms but had not paid the due taxes to the state. Besides, the person receiving the payments from the company was not registered in the employment register.

The court found that the employment contract between the company and the employee lacked detail: it did not include a sufficient description of the duties of the employee and there was no indication of the amount of remuneration. The court also took note of the fact that the person in question had no qualifications or experience in the relevant line of work.

The court further found that the remuneration paid was disproportionately large considering the duties mentioned in the employment contract and the payments had been made out of sums paid to the company on the same day and in approximately the same amounts by another company whose board member was known to the recipient of the payments. After tax proceedings, the tax authority concluded that the person receiving the payments was reported as an employee in order to increase their maternity and parental benefit and apparently also to help them qualify for a larger mortgage. There were several parties involved in the scheme.

Both the administrative and the circuit court ruled that the employment relationship was fictitious as the tax forms were filed late and all at once, payroll taxes were not paid and the person in question was not registered in the employment register.

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

Additional information: Tax Advisor Einar Rosin,

© 2021 KPMG Baltics OÜ, an Estonian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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