Last week, the daily Äripäev reported (link in Estonian) that a tax officer deemed a short sale of shares to be a repurchase (repo) transaction rather than a securities transaction and expected the investor to pay tax on the entire value of this transaction.

The key difference for the owner of securities between a repo transaction and a securities transaction is that in a repo transaction they pay interest whereas in a securities lending transaction they receive interest.

Neither the tax authority nor the Ministry of Finance could comment on this specific case, but according to the tax authority, the law does not explicitly govern all such transactions, thus the tax authority can examine each case on an individual basis.

According to the Ministry of Finance, this transaction involves securities. Examples of securities transaction are lending or borrowing of securities, repurchase or reverse repurchase transactions, buy-sell back transactions or margin lending transactions. However, according to the ministry, this is an unusual case.

Erle Kõomets, head of the tax and customs policy department of the ministry, said that the taxation has been based on a stable principle for a long time, and although the ministry is analyzing whether it would be necessary to clarify the law further, it is not reasonable to change it whimsically.

"The ambiguity comes from the fact that there are many different kinds of short-selling transactions on the market, and not all of them follow the same clear rules. Often it is difficult for the tax authorities to tell what is going on on based on limited information they have. The standard tax treatment of short selling has been stable for a long time, and this general principle will not change," Kõomets said.

Kõomets said that there will be individual cases, such as the one reported by Äripäev, but they would not necessarily call for a change in the general principles.

"As trading in overseas markets and employing foreign brokers becomes increasingly common, the probability of such occurrences may increase with time," he said.

Kõomets said that while the situation is worth analyzing, there is no rush to amend the law.

"New transactions are coming in all the time, new information is coming in all the time, and we are analyzing it from the point of view of whether there is something that our law does not cover," he said.

"We don't see the point of changing the law to cover every fine nuance," he added.

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