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The Supreme Court of Estonia set a precedent that benefits companies who failed to declare contributions made to the company’s net capital timely

  • Estonia

    13-05-2020

     

    The Supreme Court of Estonia set a precedent that benefits companies who failed to declare contributions made to the company’s net capital timely

    The Supreme Court ruled that if a company has not submitted their tax returns on contributions made to the company’s net capital on due time, that will not deprive the company from using the not declared contributions for tax purposes. In the occasion that a company fails to submit the tax returns on time, the company has a higher burden of proof and the tax authority has an extended deadline for verifying the tax exemption.

    On May 12, the Supreme Court gave a ruling which will have an impact on all companies that failed to declare their contributions made to the company’s net capital on time before December 31, 2014. Contributions made to the company’s net capital (e.g. share capital, outstanding contributions, premium and reserves) allow the company to make disbursements to partners or shareholders (e.g. in case of reduction of share capital or repurchasing shares) on a company level income tax free in so far as the disimbursements do not exceed contributions made to the company’s net capital.

    The obligation for companies to declare contributions that were made before 31 December 2014 by 10 February 2015, arose from amendments to the Income Tax Act that entered into force on 1 July 2014. According to the explanatory memorandum for the amendments, companies could not use contributions not made on time for tax purposes.

    The Supreme Court disproved the explanatory memorandum with that precedent. According to § 50 section 2 of the Income Tax Act, which is the legal basis for the taxation of disimbursments made from the net capital, a company has the obligation to pay income tax on the amount of disimbursements made from the net capital, that exceeds the monetary and non-monetary contributions made to the net capital. As follows, the contributions made to the net capital are not related with the declaration of these contributions. Therefore, failure to declare the contributions does not automatically mean that the company has to pay income tax on the disimbursements.

    The precedent setting ruling of the Supreme Court was given in a cassation issued by a client of Eversheds Sutherland Estonia. The client was represented by Partner Toomas Pikamäe.

     

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