Tax authority’s new weapons

Aripaev writes that the amendments regarding taxation of dividends that are entering into force in November are giving the tax authority new weapons to fight tax dodgers.

The tax authority has already initiated several proceedings that could amount to tens of millions of euros in unpaid tax.

Starting from November 1, business undertakings that receive a dividend from their non-resident subsidiary must be ready to explain to the tax authority why they have a foreign subsidiary in the first place.

According to the amendment in the taxation of dividends act, business undertakings must prove that they have not set up a subsidiary abroad to gain a tax exemption in Estonia.

This means that companies must first prove to the tax authority that their subsidiaries abroad have sufficient business and were not set up for tax optimisation purposes.

Kaido Lemedik, deputy head of the tax authority’s audit department, warned that Maksuamet is closely communicating with tax authorities of foreign countries, and in case of suspisions, is asking information from authorities abroad.

The amendment concerns all business undertakings who own at least 10 percent of a subsidiary abroad that grants them an exemption  from paying 20% income tax when the dividend is paid to the parent company.

Last year, 435 busienss undertakings received a dividend from a foreign subsidiary.

One red flag for the tax authority is when an Estonian company buys a business undertaking abroad, takes out the profit in the form of dividends and sells the company, because this means that transaction was made only for tax exemption pruposes.

Unlike in most other countries, Estonian resident business undertakings pay income tax on profit only ince it is paid out in dividends at a rate of 20%.

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