Although Estonia plans to apply an exemption and not impose a 15 percent minimum tax on large companies from next year, this will not save large Estonian companies operating outside the Baltic States – they will still have to declare their income tax paid in the other country and even pay more if necessary.
The European Union's Minimum Tax Directive requires the profit of the large multinational and domestic groups or companies with a combined annual turnover of at least €750 million will be taxed at a minimum rate of 15 percent.
Estonia plans to take advantage of an exemption that allows small countries to delay the introduction of a minimum tax until 2030, when it implements the directive. Mainly because its implementation would increase the administrative burden and is not expected to generate much revenue, Helen Pahapill, deputy secretary general for tax and customs policy at the Ministry of Finance, explained.
It is not yet clear whether Estonia will actually postpone the minimum tax implementation until 2030 - it is up to the government and parliament to decide, Pahapill said.
However, five Estonian companies that are large enough to be subject to the minimum tax will not be spared by the use of the exemption.
In fact, if companies have subsidiaries in countries that apply the minimum tax, they will still have to file minimum tax returns and pay a surcharge there, if applicable.
As things stand, in addition to Estonia, Latvia, Lithuania, Slovakia and Malta do not plan to apply the minimum tax regulation next year. For example, NG Investeeringud, the owner of the Tallinn Kaubamaja Group, and a number of other well-known Estonian companies could escape the administrative burden if they do not have subsidiaries outside the Baltic States.
On the other hand, Infortar or Eesti Energia, which have subsidiaries outside of the Baltic States, would not be able to escape the new tax calculation.
However, Pahapill said it is unlikely that companies headquartered in Estonia will have to pay additional taxes in other countries because if they are profitable, they can simply pay dividends and income tax in Estonia.
For example, in the case of Estonia, at a tax rate of 22 percent, if a company paid out 53.2 percent of its annual profits in dividends, it would meet the 15 percent effective tax rate requirement.
The International Minimum Tax is an initiative of the Organization for Economic Cooperation and Development (OECD) to reduce the ability of multinational corporations to reduce their tax liability by operating in multiple jurisdictions.
EU member states agreed on a minimum tax rate for large companies last December. At the request of Estonia, the directive includes an option for countries with up to 12 large multinationals not to implement the minimum tax obligation immediately from 2024.
Pahapill said that the implementation of the directive will create a lot of new administrative burdens for both the state and companies, and the question is how many countries will be able to adopt the directive by next year, when the system is supposed to be in place. Large companies will have to submit information on their effective tax rate for 2024 for the first time by June 2026 at the latest.
Moreover, not everything about minimum tax is agreed upon in the OECD.
"The details are coming out all the time, and we have had enough of the international scandal here as well. It's no secret that the U.S. is not going to have a minimum tax comparable to what we agreed to in the OECD," Pahapill said.
"There has also been a pretty strong signal from the U.S. that if you in Europe now think you are going to tax our companies with a minimum tax, there will be retaliation. So it's a bit of a mess right now," she said.
However, in the draft transposition of the EU directive, the Ministry of Finance estimates that the introduction of a minimum tax, even if Estonia does not introduce it, will most likely increase tax revenue in Estonia.
Estonia's position on the minimum international corporate tax rate has been negative during the previous governments, but this has now changed.
Editor: Huko Aaspõllu, Kristina Kersa