Ministry opposes abolishing retained profits corporate tax zero rate

Evelyn Liivamägi.
Evelyn Liivamägi. Source: ERR/ Kadri Põlendik

Both the Ministry and Finance and the main business lobby group in Estonia are of a mind that even if it were to bring in additional revenues to the state, abolishing the current corporate tax exemption for retained company earnings would do more harm than good to the economy, and consequently the state budget.

Evelyn Liivamägi (pictured), deputy undersecretary for financial and tax policy of the Ministry of Finance, said that abolishing the income tax exemption on reinvested profits may well bring additional income to the state, but in this case the government would then also have to revise downwards its own expectations regarding economic growth.

Liivamägi said: "Estonia has emerged from crises, such as the coronavirus crisis, much faster than forecast precisely due to the fact that the undistributed profits of companies have not been taxed; companies have been able to use these to make the necessary expenses and investments needed to stay afloat."

"When we wait for the economy to recover and start to grow, withdrawing money from companies will certainly not contribute to that. In this sense, the position of the Ministry of Finance is that if we want economic growth, we must leave the money not taken out of companies, for them to grow and invest," she went on.

In any case, the additional taxation of corporate profits does not automatically mean that more tax money will go into state coffers, Liivamägi went on.

"If you take into consideration the years 1999 and 2000, when the present-day income tax system was introduced, starting in the 2000s profits increased enormously, simply because there was no longer any reason to conceal anything. Before that, the regular tax system was based on accruals, so the goal of every entrepreneur was to display these profits to be as low as possible, in order to pay less tax. It was simply a case of tax frauds and schemes moving from one place to another," the official went on.

Mait Palts, Director of the Estonian Chamber of Commerce and Industry (Eesti Kaubandus-Tööstuskoda) said that the notion that Estonian entrepreneurs pay less income tax compared with business-people in other countries is wrong.

Mait Palts. Source: ERR

Palts said: "If we look at the income tax paid by Estonian companies, whether it is from special benefits or dividends, then in fact our income tax burden is completely comparable to the Nordic countries and the rest of Europe. In some cases, we even pay more."

"Given that today we are paying the same amount as would be the case with a traditional income tax system and if taxes rise higher, then I think that Estonian businesses simply could not stand it. Considering our changed economic and the political position in Europe, I think this would be sending a very wrong message and signal," Palts went on.

Evelyn Liivamägi also said that any proposal for the abolition of the tax exemption on reinvested profits has not been discussed in detail at the Ministry of Finance. 

This means the precise calculations as to how much revenue could be added to the state budget via this source have not been conducted.

Estonia, and also neighboring Latvia stand out from the bulk of other Western nations in their approaches to corporate income tax. Whereas in the former case, corporate profits are taxed regardless of whether they are retained by the business or not, in Estonia, revenue that remains as a reserve is not taxed.

Profits extracted from the company, for instance in the form of dividends, are taxed in Estonia, however.

The coalition Social Democrats (SDE) have, alongside a proposal to tax banks' profits, suggested a return to a "classic" corporate income tax, in order to generate some much-needed revenue towards the state budget.


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Editor: Andrew Whyte

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