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InfoCourier - May 2020

InfoCourier - May 2020

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

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Joel Zernask

Partner, Head of Tax Services

KPMG Baltics OÜ

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Summary of Supreme Court’s Judgment E-Piim vs. Tax and Customs Board:

Failure to declare capital contributions in time: impact on the tax liability upon the capital reduction payments.

Please feel free to contact KPMG’s tax advisers with any queries you may have. We hope you are enjoying reading it!

Summary of Supreme Court’s Judgment No- 3-18-989 of 12 May 2020

According to the Estonian corporate income tax system, profits are taxed only upon distribution. As profits may be distributed also through reduction of share capital, section 50 (2) of the Income Tax Act provides that companies must pay income tax on such portion of payments made from the equity which exceeds the monetary and non-monetary contributions to the equity. As from 2015, companies must declare all capital contributions in Annex 7 to tax return form TSD (Declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension). All contributions made before 1 January 2015, should have been declared in the TSD for January 2015, which was to be filed by 10 February 2015.


The recent ruling by the Supreme Court of Estonia concerns a situation where a company (AS E-Piim Tootmine) did not declare the capital contributions made before 1 January 2015 in its form TSD for January 2015 and did not correct the tax return after this failure was discovered (the term for corrections is three years ). The company declared the capital contributions made during the years 2011–2012 (over 14 million euros in total) in its TSD for January 2018 instead. The Tax and Customs Board did not consider it acceptable and removed these contributions from the tax return, arguing that the contributions were not made in January 2018. The tax decision was made in April 2018, when correcting the TSD for January 2015 was no longer possible. This gave rise to several questions, all of which boil down to the discussion, whether the failure to comply with this formal requirement rules out the right to deduct the amount of capital contributions made before 2015 from taxable capital reduction payments, as provided by section 50 (2) of the Income Tax Act. After dragging on for two years, the dispute was brought before the Supreme Court.


The Court has ruled as follows.

  • The Court agreed with the Tax and Customs Board that the company had no right to declare the contributions to equity made in 2011–2012 in the TSD for January 2018 which should have been declared in the TSD for January 2015.
  • The Court affirmed that the tax return for January 2015 could no longer be corrected as the Taxation Act provides that the term for the submission of a tax return (including a corrected one) may not be extended once it is passed.
  • The Court, however, observed that the provision of the Income Tax Act obliging companies to declare all earlier contributions to equity in the TSD for January 2015 did not give rise to a new tax liability or change an existing liability. Its sole purpose was to simplify tax-assessment procedure. This conclusion is not undermined by the fact that the explanatory memorandum to the bill introducing this provision stated that undeclared contributions cannot be later deducted from the tax liability. The Court emphasised that the taxation of capital reduction payments is based solely on section 50 (2) of the Income Tax Act. This provision does not associate the right to deduct contributions to equity from the taxable basis with the declaration of these contributions in the tax return.
  • Violating the declaration obligation nevertheless increases the burden of proof for the taxable person and extends the term for making the tax assessment for the tax authority.

In practice it means that if capital contributions have been made before 2015, but have erroneously not been declared in the TSD for January 2015, these may still be deducted from the tax liability. In this case, however, the company needs to be prepared to provide additional information and evidence to the tax authority.

The Tax and Customs Board has published its opinion on its website , maintaining that such a situation may arise only in exceptional cases. We, however, disagree with this view and encourage all companies to stand up for their rights.

More information on the judgment is available here (in Estonian).

© 2020 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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