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