There is no form of consolidation or group taxation for CIT purposes in Estonia.
Transfer pricing rules are applicable to all types of transactions between related parties. Both domestic and cross-border transactions with related parties must be conducted at arm’s length. Estonian tax legislation includes a relatively broad definition of related parties. Under the present corporate tax system, if the transactions between related parties do not follow the arm’s-length principle, then the subsequent transfer pricing adjustments are treated as hidden profit distributions subject to 20/80 monthly CIT.
As a general rule, Estonian group companies and PEs of foreign companies are obligated to prepare transfer pricing documentation to prove the arm's-length nature of the inter-company transactions with all related parties.
However, this documentation requirement does not apply to small and medium-size enterprises (SMEs) unless they have conducted transactions with entities located in low-tax territories. A company or PE is deemed to be an SME if the consolidated results of the previous financial year of an Estonian company or a PE, together with its associated enterprises or head office (i.e. at the group level), are below all of the following criteria:
- EUR 50 million annual sales.
- EUR 43 million balance sheet.
- 250 employees.
Apart from the formal transfer pricing documentation and general requirement to disclose the transactions with the related parties in the annual reports, there are no additional reporting requirements related to transfer pricing in relation to inter-company transactions.
Country-by-country (CbC) reporting
In 2017, the Estonian Parliament approved a law that introduced a CbC reporting obligation for multinational enterprises with consolidated revenue of over EUR 750 million. The first reporting period was set for 2016 with the exception that subsidiaries operating in Estonia are obligated to submit the report for 2017 for the first time in case the parent company does not comply with the reporting obligation for 2016.
Estonian tax residents who are members of large multinational groups and are not the reporting entity of the CbC report need to notify the Estonian tax authorities about the group’s reporting entity. Once the notification has been submitted, there is no need to provide the information on annual basis, unless the reporting entity changes.
The deadline for the CbC report is on the 31st of December following the reporting period at the latest.
There are no thin capitalisation rules in the Estonian tax legislation. However, with transposing ATAD into domestic legislation, certain 'exceeding borrowing costs' will become taxable at the hands of the Estonian company. Based on the draft law, exceeding borrowing costs will be taxed if they exceed set thresholds. Generally, borrowing costs are interest expenses on all types of obligations, but also other costs that accompany borrowing (e.g. guarantee and arrangement fees). In order for the tax obligation to be triggered, the following conditions will have to be met:
- It should be established whether the borrowing costs exceed the threshold of EUR 3 million. If not, then no tax obligation arises.
- If the threshold of EUR 3 million is, however, exceeded, then it should be established whether the borrowing costs are above the 30% earnings before interest, taxes, depreciation, and amortisation (EBITDA). If not, then no income tax obligation should be triggered.
- If the borrowing costs are above the 30% EBITDA, then the next step is identifying whether the company is in a profit or loss-making position, because losses can be used to reduce the taxable base.
Controlled foreign companies (CFCs)
CFC rules for companies will be introduced from 2019 onwards on the basis of ATAD.
A CFC is defined as any non-resident enterprise in which the resident company alone or together with its related parties holds more than 50% of the voting rights or capital, or is entitled to receive more than 50% of the profits. A foreign PE of an Estonian company is also considered to be a CFC.
In order for the tax obligation to be triggered, the following conditions will have to be met:
- The underlying transaction or chain of transactions generating the profit of the CFC was fictitious.
- The principal aim of the underlying transaction or chain of transactions was gaining a tax advantage.
- The CFC is effectively managed by key employees of the shareholder of the controlling company that created the opportunity to make a profit.
An exception allows the company to exclude from the scope of the provision a CFC that simultaneously meets the following two conditions:
- The accounting profit of the previous financial year did not exceed EUR 750,000.
- Other revenues of the foreign company, such as profits from subsidiaries, affiliates, and financial investments, interest income, and other financial income (i.e. non-trading income) did not exceed EUR 75,000 during the same period.