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March 14, 2023
2023-0468

Estonian tax measures triggered after new countries including Russia are added to EU list of non-cooperative jurisdictions

  • For the first time, the European Union (EU) list of non-cooperative jurisdictions for tax purposes in combination with the Estonian Income Tax Act may have significant tax consequences for a relevant number of Estonian businesses. There are still Estonian entities that have business relationships (e.g., holdings) with Russia.
  • The Council of the EU put Russia on the updated EU list of non-cooperative jurisdictions, issued 14 February 2023 and published 21 February 2023. This automatically triggers immediate comprehensive tax-related defensive measures in Estonia as of 21 February 2023.
  • Estonian taxpayers should carefully review the impact of the new list to their business relationships with Russia and other listed countries and in addition consider potential documentation requirements and defensive measures that will apply with immediate effect. For example, purchase of transportation, telecom, accommodation, etc. services result in a withholding tax 20%.

Executive summary

On 14 February 2023, at the Economic and Financial Affairs Council, EU finance ministers approved the revised list of non-cooperative jurisdictions (EU List). Specifically, in Annex I, four jurisdictions were added (British Virgin Islands, Costa Rica, Marshall Islands, and Russia) whereas in Annex II, Barbados, Jamaica, North Macedonia, and Uruguay were removed and Albania, Aruba, and Curaçao have now been added. The list became official on 21 February 2023 upon publication in the Official Journal.

Estonia applies an immediate withholding tax of 20% on services purchased from jurisdictions on the EU List of non-cooperative jurisdictions (i.e., Annex I). Estonia also imposes corporate income tax at the rate of 25% on the acquisition of securities, holdings or a right of claim against entities located in these jurisdictions, as well as any fines, contractual penalties, compensations, loans and advance payments to such jurisdictions. All dividends redistributed in Estonia previously received from entities that are registered or resident in a jurisdiction that is included on the list are subject to taxation in Estonia.

Detailed discussion

Background on EU listing process

The EU started working on the list of non-cooperative jurisdictions for tax purposes in 2016 and published its list of non-cooperative jurisdictions for the first time on 5 December 2017, comprising two annexes. Annex I includes jurisdictions that fail to meet the EU's criteria on tax transparency, fair taxation and implementation of base erosion and profit shifting (BEPS) measures by the required deadline, and Annex II includes jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while executing their commitments. Once a jurisdiction has executed all its commitments, it is removed from Annex II.

On 14 February 2023, the EU finance ministers updated the EU List and included four new jurisdictions in Annex I.

As per the latest update, British Virgin Islands, Costa Rica, Marshal Islands, and Russia have been added, and together with American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands, and Vanuatu represent the 16 jurisdictions that are currently on the EU List. The next biannual review of the EU List is expected in October 2023.

Corporate income tax on acquisitions and payments from and to non-cooperative jurisdictions

Estonia applies an immediate withholding tax of 20% on services purchased from jurisdictions on the EU List of non-cooperative jurisdictions (Annex I). Estonia also imposes corporate income tax at the rate of 20/80 on the acquisition of securities, holdings or a right of claim against entities located in these jurisdictions. Corporate income tax is also imposed on any fines, contractual penalties, compensations, loans and advance payments to such jurisdictions. Dividends redistributed in Estonia that were received from companies who are tax resident or registered in jurisdictions included on the list are excluded from the tax exemption that only applies to non-listed jurisdictions if certain conditions regarding shareholding and taxation are met.

The redistribution of dividends received from jurisdictions on the list is subject to corporate income tax in Estonia. Transactions with related parties situated in countries on the EU list are subject to obligatory transfer pricing documentation and Mandatory Disclosure Rules (DAC6).

In addition, resident natural persons should report and pay tax on the income of a controlled legal person located in a non-cooperative jurisdiction, irrespective of whether the legal person has distributed any profits to taxpayers or not.

As the updated list of non-cooperative jurisdictions became official on 21 February 2023, the tax measures related to the above transactions were automatically introduced in Estonia.

The Estonian Tax and Customs Board has published a guide to the application of corporate income tax and withholding tax for transactions with non-cooperative jurisdictions, which can be found in the Estonian language here.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Baltic AS, Tallinn

 

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