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Infocourier - September 2020

Infocourier - September 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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This issue of InfoCourier covers the following topics:

  • Unemployment benefits system made more flexible
  • Germany and Ireland have adopted temporary VAT rates cuts
  • Digital Nomad Visa
  • Summaries of court judgments

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

Unemployment benefits system made more flexible

Unemployment insurance benefit and unemployment allowance set to increase

On 1 August 2020, the unemployment insurance benefit for the first 100 days of unemployment increased from 50 percent to 60 percent of the former income. The rate of benefit will drop to 40 percent as from the 101st day of unemployment.
On 1 January 2021, the minimum unemployment allowance rate will be raised from the current 35 percent to 50 percent of the minimum wage of the previous year.

Temporary work
Amendments to the Labour Market Services and Benefits Act and the Unemployment Insurance Act took effect on 1 September 2020, bringing more flexibility to the unemployment benefits system and more social protection to the unemployed.
The Labour Market Services and Benefits Act now permits the people registered as unemployed to work on temporary jobs on up to 8 days a month and to receive payment for this work in the amount of up to 233.60 euros, i.e. up to 40 percent of the minimum monthly wage in Estonia. A person can do such ‘gigs’ during a maximum of 12 months per two years.
The temporary work will not count towards the unemployment insurance reference period. Any temporary job should be immediately reported to the Unemployment Insurance Fund (Töötukassa).

Eligibility to unemployment insurance benefits

Conditions for eligibility to unemployment insurance benefits were also made more flexible. If a previously unemployed person finds employment and deregisters as unemployed but becomes unemployed again after a short time, they will be entitled to the continuation of benefit, provided they have not used up their entitlement to the benefit during the previous period of unemployment and no more than 12 months has passed since taking up employment.
More information on the bill on amendments to the Labour Market Services and Benefits Act and the

Unemployment Insurance Act is available here (in Estonian).

Further information: Tax Advisor Einar Rosin erosin@kpmg.com.

Germany and Ireland have adopted temporary VAT rates cuts

Germany lowered the standard VAT rate temporarily from 19 percent to 16 percent, and the reduced VAT rate from 7 percent to 5 percent, for the period 1 July to 31 December 2020.
Ireland lowered its standard VAT rate from 23 percent to 21 percent, with effect from 1 September 2020 to 28 February 2021. The reduced VAT rate remains at 13.5 percent.

Furrther information: Tax Advisor Merike Oja moja@kpmg.com.

Digital Nomad Visa

Amendments to the Aliens Act took effect on 1 August 2020, permitting location-independent international workers to apply for a Digital Nomad Visa ("DNV" for working remotely from Estonia. Estonia is one of the first countries in the world to establish such a visa.
A digital nomad is a person who works independent of location, performing their duties remotely using telecommunications technology. Digital nomadism is a popular practice in the fields of IT, finance and marketing.
A DNV may be short-term or long-term and visa applications will be subject to general visa conditions. Visa applications were opened on 1 August 2020, and the visas are granted for up to one year. A DNV may be issued to a foreign national who is employed by, or is a partner in, a company registered outside Estonia. Freelancers may also apply.
To come to Estonia to work remotely from here, digital nomads need an invitation from a mediator who assumes responsibility for their stay. The mediator must be acknowledged as a reliable company, who is able to assess whether the applicant meets the criteria for a location-independent worker. Alternatively, the ex-ante eligibility assessment may be made by the expert commission established at the Ministry of the Interior. 
Background checks on the applicants for a DNV are performed no less rigorously than for the applicants for other visas. To prove that they have sufficient funds available whilst living in Estonia, the applicant has to provide evidence that their income meets the minimum threshold during the six months preceding the application. Currently the monthly minimum threshold is 3,504 euros.
Digital nomads are not entitled to tax exemptions, i.e. their income is taxed under standard rules.
Although the DNV has received considerable positive attention and feedback from foreign nationals, only two applications were lodged during the first week, according to media reports. Both applicants were US citizens. However, the modest number of the applications so far is likely due to the current travel restrictions. Applications for a DNV can be filed at the Estonian embassies or at an office of the Estonian Police and Border Guard Board.

Further information: Tax Advisor Olga Lavrova olavrova@kpmg.com.

Summary of court judgments

Summary of judgment no. 3-19-649 (28 May 2020) by Tartu Circuit Court False declaration of salary payments as daily allowance

The circuit court reviewed a case where a member of the management board of a company knowingly filed incorrect data on the forms for declaring income and social tax, unemployment insurance premiums and contributions to mandatory funded pension, declaring a part of the payments made to the employees misleadingly as daily allowance for business travel.
The court found material deficiencies in the employment contracts concerned: the work was not carried out in Estonia as stated in the contracts, but the employees in fact worked abroad. The circuit court relied on the case law of the Supreme Court in its judgment and confirmed that as, in effect, no business travel took place, the payments declared as daily allowance should be treated as income from employment.
The court further analysed the decision made by the Tax and Customs Board concerning the liability of the member of the board. The liability decision was made to collect tax arrears from the Company, and it placed the responsibility for the Company’s tax violations on the sole board member. As in accordance with case-law, liability decisions are generally made in case of a failure to perform obligations provided in Section 8 (1) of the Taxation Act and in the acts concerning specific taxes, the Court found that for making the liability decision, the type of culpability and intent should be established.
The Court was of the view that the liability decision was legitimate as the payments made by the board member to employees out of the company’s bank account exceeded the amounts the employees were entitled to in accordance with the tax declaration forms. The Court established that the violation was caused intentionally as providing false information on tax forms is, by default, an intentional act.

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

Further information: Tax Advisor Einar Rosin erosin@kpmg.com.

Loan to a board member and assignment of a claim

On 28 August 2020, the Supreme Court passed a judgment on an intriguing case of a ‘triangular’ arrangement, by which a company reduced its tax liability.
The dispute arose from the loan of 600,000 euros granted by AS East-West Consulting to a member of its board. The Tax and Customs Board considered the loan to be a payment unrelated to business and claimed that the company should pay tax on the loan. Meanwhile, the board member had acquired a claim against AS East-West Consulting from a third party (OÜ Bannister), at favourable terms, and set off the loan against the claim.

The amount of the payment unrelated to business was thus reduced to take account of the claim acquired by the board member, and the amount of the company’s tax liability was to be reduced accordingly. The Tax and Customs Board, however, objected to the reduction of the company’s claim against the board member by the total amount of the claim acquired by the board member from OÜ Bannister (i.e. 89,677.21 euros), insisting that the claim may be reduced by only the amount actually paid by the board member to OÜ Bannister (i.e. 25,000 euros). The tax authority found that the transaction for assigning the claim of 89,677.21 euros between the board member and the third party was ostensible: the claim was in effect not acquired by the board member as a private individual but the company acquired a claim that had been created against the company itself. The aim of the arrangement was to reduce the liability of the board member against the company, which is under the control of the board member.
The Supreme Court reiterated its principles regarding the methods for establishing ostensibility and argued that the transaction concerned cannot be considered ostensible. The Court admitted that the terms of the transaction were clearly advantageous to the board member, and noted that the additional benefit subsequently obtained by AS East-West Consulting from the transaction between the board member and the third party does not affect the validity of the assignment of the claim.
The Supreme Court further noted that the Tax and Customs Board has not convinced the court of the existence of circumstances suggesting the intention of tax evasion. The Supreme Court reiterated its earlier position that an honest tax payer is not obliged to choose an approach detrimental to their interests: a person does not have to refrain from a legitimate transaction only because the transaction may reduce their tax liability or the tax liability of a legal entity associated with them.

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

Further information: Tax Advisor Olga Lavrova olavrova@kpmg.com.

© 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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