Infocourier - May 2022

In April, the Council adopted the so-called Reduced VAT Rates Directive 2022/542.

The aim of the Reduced VAT Rates Directive is to enable Member States to strengthen the resilience of their health systems; to improve their digital performance; and to contribute to a climate-neutral and green economy. In these fields, the new Directive gives Member States more leeway in determining which goods and services could be eligible for reduced VAT rates or tax exemptions.

The goods and services include, inter alia, pharmaceutical products and medical equipment; Internet access services (e.g. webcasts of programmes provided by a media service provider); and the installation of solar panels on and adjacent to private housing. The fact that Member States may apply a reduced VAT rate or exemption on these items does not mean that this will happen automatically in Estonia. Reductions and exemptions will apply only when political parties in Estonia have decided in favour of the new rules and have transposed the Reduced VAT Rates Directive into national law.

Another change, which is secondary in the context of the Reduced VAT Rates Directive but which could have significant effect on entrepreneurs, is the change to the VAT treatment of services falling under Articles 53 and 54 of the EU VAT Directive.

Article 53 covers business-to-business (‘B2B’) provision of services, and ancillary services, related to admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events, such as fairs and exhibitions. The current rules stipulate that the place where VAT ought to be charged on such admission is the place where the event takes place. Similarly, the provision of services for streaming and virtual events is taxable at the place where the event is held. The Reduced VAT Rates Directive changes the current rules for the provision of streaming and virtual events. This means that general B2B place of supply of services rules will apply, i.e. the services will be taxable at the place where the customer is established.

In addition, changes are made to Article 54 that covers business-to-customer (‘B2C’) supply of services. The place of supply of events that are streamed or made virtually available will be where the customer or client is based, whereas the current rules stipulate that these services are taxable at the place where the event is held.

Member States must transpose the Reduced VAT Rates Directive by 31 December 2024 at the latest.

The Council Directive 2022/542 is available here.

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

In its judgement published on 19 April, the Administrative Law Chamber of the Supreme Court analysed whether or not the tax authority had the right to issue a liability decision to a new board member (‘the appellant’) of a company with the purpose of collecting from the appellant the tax arrears that had been accrued before the appellant’s incorporation into the board of the company. In addition, the tax authority charged the appellant an interest on the tax arrears.

The Estonian Tax and Customs Board (ETCB) maintained that the issuance of a liability decision to a newly incorporated member of the board was justified with the fact that sums sufficient for paying off the company’s tax arrears were transferred to its bank account during the appellant’s service on its board.

Even though the courts of first and second instance had rejected the complaint by the member of the board, the Supreme Court ruled that the appeal had to be allowed and that the ETCB’s liability decision annulled in full. The Supreme Court recalled a position that had been previously repeatedly expressed – namely, that a liability decision could not be issued for tax arrears if such tax arrears had accumulated before the act the appellant was accused of or if such conduct/acts did not lead to the accumulation of tax arrears. Therefore, a company’s earlier tax arrears cannot be collected from a new member of the board. In addition, the Administrative Law Chamber annulled the interest charged, as the appellant could be held responsible only for the interest arrears that had accumulated during the time when the appellant as a member of the board violated on purpose the obligation to pay the principal.

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

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