Amendment to the Value-Added Tax Act
The Value-Added Tax Act was amended to support the availability of quality journalism in Estonia in the ongoing information war related to the war in Ukraine.
The VAT rate on media outlets will be reduced to 5% for both printed and digital media currently taxed at the rate of 9%. The lower tax rate does not apply to publications consisting mainly of advertising material and those focused on erotic, video or music content.
The amendment will take effect on 1 August 2022.
More information on the legislative process is available here (in Estonian).
Further information: Tax Advisor Ave Rego, averego@kpmg.com
Amendment to the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act
IThe amendment temporarily reduced the excise duty to curb the price rise of diesel fuel carrying a fiscal marker (special-purpose diesel fuel) and to alleviate the impact on the agricultural sector and oil shale mines, which have seen a considerable increase in input costs due to high fuel prices.
The excise duty rate on special-purpose diesel fuel will be reduced to the minimum rate permitted in the European Union, 21 euros per 1,000 litres, from 1 June to 31 December 2022. The rate of 100 euros per 1,000 litres will be reintroduced on 1 January 2023 and the rate will increase gradually as from May 2023 until it reaches the level of 133 euros per 1,000 litres in May 2026.
The reduction is expected to reduce the sales price of diesel fuel by 9.48 cents per litre (the excise duty and the VAT), assuming that both wholesalers and retailers will lower the price by an amount equal to the cut in the excise duty.
The amendment took effect on 1 June 2022.
More information on the legislative process is available here (in Estonian).
Further information: Tax Advisor Ave Rego, averego@kpmg.com
Bill for amending the working conditions of posted workers
A bill for amending the Employees Posted to Estonia Act, the Employment Contracts Act and the Unemployment Insurance Act was proposed in April 2022 with the aim of bringing the Estonian laws into line with the Posting of Workers Directive and prohibiting discrimination of workers.
According to the bill, the worker is eligible to claim remuneration not only from the employer but also from the party who has contracted the work out to the employer and who will act as a guarantor for the employer (the general contractor). The worker may claim remuneration from the general contractor only in case the worker provides building services as a subcontractor and if a claim has been brought against the employer in court, and it has not been paid within four months from the start of the enforcement procedure. The worker may claim full remuneration from the employer but the general contractor’s liability per calendar month is limited to the minimum monthly wage established by the Government of Estonia. In case the general contractor can prove that they have exercised due diligence, they are not obliged to settle the claim.
Estonia must bring its national law into alignment with the directive during this year.
The bill is available here (in Estonian).
Further information: Tax Advisor Einar Rosin, erosin@kpmg.com
The sale of apartments built as part of property extension
The Supreme Court ruled in a matter concerning the taxation of new apartments (apartment ownerships) built in an extension to an apartment building as part of the renovation works. The tax authority found that the apartments in the extension were sold before they were first put into use, and should thus be subject to VAT.
The Supreme Court annulled the tax assessment, explaining its ruling as follows:
- if the owner of the immovable makes improvements to the entire building but sells a part of the improved building as apartment ownerships, the acquisition and improvement costs of the entire building are to be taken into account when considering the applicability of a tax exemption. The treatment for tax purposes should not depend on whether the improved building is sold as one immovable, as apartment ownerships or as legal shares in the immovable;
- in case of property extension, the sale of the new part of the building before it is first put into use may be taxed only if the existing part does not undergo any improvement as a result of the extension. This is the case mainly if regular use of the existing building continues during the extension works.
The court decided to grant the appeal and found that the tax-exempt sales of the apartments was justified.
More information on the case is available here (in Estonian).
Further information: Tax Advisor Merike Oja, moja@kpmg.com
Deduction of input VAT in case the seller has not met its tax obligation
Tallinn Circuit Court ruled over whether the buyer is entitled to deduct input VAT if the seller has not paid VAT to the state budget. The tax authority was of the view that the buyer is not entitled to deduct input VAT as parties to the transaction were managed by the same people and the buyer knew that the seller would not pay VAT to the state budget, i.e. it was a deliberate tax fraud. The Circuit Court, however, did not agree with the tax authority.
One of the companies had granted a loan to the other company, secured with a commercial pledge. The parties to the transaction were related through members of the boards and through shareholders. As the loan was not paid back in time, the pledged items (production equipment) were sold from the borrower to the lender. The equipment was paid for by offsetting against the outstanding claim. The company who had granted the loan deducted input VAT on the purchase invoice. The seller did not pay VAT on the transaction to the state budget.
In this case it was clear that a sales transaction had taken place. There was no argument between the parties over the sales price, transfer of ownership or adding VAT to the price. The court found that the aim of the sales transaction – saving the investment – was plausibly substantiated. The court explained that deduction of input VAT may be barred if there is evidence of obtaining tax advantage and performing a transaction with the aim of VAT evasion. In this case, however, the fact that the parties to the transaction were related did not carry great weight as the transaction was structured according to economic logic and such transactions are common.
In the court’s assessment, there was no evidence of tax evasion or of contradiction between the form and substance of the transaction. Thus the buyer may not be denied the right to deduct input VAT solely on the grounds that the parties to the transaction are related and the seller has not paid VAT to the state budget.
More information on the case is available here. (in Estonian).
Further information: Tax Advisor Merike Oja, moja@kpmg.com