On 28 December 2018, Estonia published the Income Tax Amendment Act in the Official Gazette, apply from 1 January 2019. The key measures of the Act provide the implementation of the EU Anti-Tax Avoidance Directive (ATAD) as urged by the European Commission. The measures are summarized below:
Restriction on interest deduction
A new limitation on interest is bring in providing for the taxation of excess borrowing expenses that exceed a 30% of earnings before interest, tax, depreciation and amortization (EBITDA) limit, with a EUR 3 million safe harbor and an exemption for:
- Enterprises that are not part of a business group and has no related parties or permanent establishments (PE);
- Financial undertakings;
- Loans utilized to finance public infrastructure projects in the EU; and
- Members of a consolidated group where its equity to total assets ratio is equal to or greater than that of the group, except financial corporations belonging to the group;
Where the excess borrowing costs of a taxpayer do not exceed the limits for a tax period, a tax credit may be claimed for the tax paid on excess borrowing costs in the preceding periods up to the limit provided, with the overpaid tax refunded.
CFC Rules (CFC)
New controlled foreign company (CFC) rules are introduced given that the profits of a CFC will be attributed to a resident controlling company and taxed as profits if resulting from the use of assets and the assumption of risks associated with key employees of the controlling company and attributable to non-genuine transactions, the main purpose of which was to obtain a tax advantage;
CFC rules contains foreign PE and foreign companies where an Estonian resident company itself or together with affiliated companies holds a direct or indirect participation of more than 50% in the voting rights, capital, or rights to profit of the foreign company.
An exemption from the CFC rules applies where the CFC profits for the preceding financial year do not exceed EUR 750,000 and other operating income, profits from affiliates, associates, financial investments, interest income and other financial income do not exceed EUR 75,000 in the same period.
General Anti Avoidance Rule (GAAR)
A new general anti-avoidance rule (GAAR) based on EU Anti-Tax Avoidance Directive (ATAD) is introduced, which includes, non-genuine arrangements or series of arrangements thereof that are put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable law should be ignored for the purposes of determining the corporate tax liability.
