X

Laadi alla uus Eesti Raadio äpp, kust leiad kõik ERRi raadiojaamad, suure muusikavaliku ja podcastid.

Estonia wants to collect more tax on mergers and acquisitions

Evelyn Liivamägi.
Evelyn Liivamägi. Source: Arp Müller/ERR

The Estonian Tax and Customs Board, in collaboration with the Ministry of Finance, is in the process of revising the tax guide to increase income tax payments for mergers and acquisitions. Entrepreneurs argue that this proposed change would harm Estonia's business environment.

The revised tax guide targets transactions known as "debt pushdowns." When investors intend to purchase a company, they establish a separate entity for acquisition, known as a Special Purpose Vehicle (SPV).

Funds are loaned into the created SPV, often from the owners, to acquire the desired company. After acquisition, the company merges with the SPV, and the funds spent on the acquisition are paid back to the investors as loan repayments, along with interest.

Importantly, using this scheme does not create a tax obligation for investors when withdrawing money used for the purchase from the acquired company.

Now, the Tax and Customs Board, together with the Ministry of Finance, plans to change the system and end this common scheme.

According to the new tax guide, withdrawing money in such a manner from the acquired company should no longer be allowed, stated Evelyn Liivamägi, the deputy secretary general for financial and tax policy at the Ministry of Finance and former head of the Tax and Customs Board's tax department.

Under the new rules, it would still be entirely proper to establish a separate company, an SPV, for buying or acquiring companies. It would also be allowed to loan money to this company for the transaction. However, Liivamägi noted that merging companies would no longer be correct until the borrowed money is repaid.

Thus, in the future, the Tax and Customs Board envisions that if investors wish to extract capital from the acquired company, the acquired company should pay dividends, pay income tax on the dividends, and only then can the SPV repay its loans with the withdrawn capital.

Once the loan taken into the SPV is repaid, merging the SPV with the acquired company would be entirely permissible.

Liivamägi could not specify the exact additional revenue expected from this amendment but estimated it to be around €10 million per year.

"This is not going to cover the entire deficit that we need to find in the state budget," she commented.

The planned changes have understandably caused concern among venture capitalists and investors. On January 10, the Estonian Private Equity and Venture Capital Association, the financial sector representation organization Finance Estonia, and the banking representation organization Estonian Banking Association sent a letter to politicians criticizing the proposed amendment.

According to these organizations, the change would immediately and negatively affect Estonia's investment environment. They believe that leveraged buyout investments would be directly impacted.

"Such investments are typically made with borrowed funds. Therefore, in certain situations, like with foreign funds, the use of a debt pushdown structure may be an unavoidable solution for financing the transaction," the organizations state in their appeal.

They also estimate that investments of around €100–150 million per year could be lost.

Business organizations also say that the amendment is likely to lead to numerous legal disputes, further deteriorating Estonia's investment climate.

However, Liivamägi stated that although the guidance is being amended, the Tax and Customs Board will not apply it retrospectively to transactions already made.

The goal, according to Liivamägi, is to set a direction for the future, to prevent such transactions from happening again.

"Nothing will happen retrospectively. In the future, just don't merge things without paying the income tax," Liivamägi remarked.

This doesn't mean, the deputy secretary general said, that all aggressive tax planning methods are somehow permissible, but rather that the Tax and Customs Board will not immediately act on transactions that previously had economic substance.

"Those who have conducted transactions purely for business purposes and covered the company's obligations with its own revenues and assets shouldn't worry. But those who have done transactions so that one company's obligations could be covered by another company's revenues and assets should be concerned," Liivamägi advised.

Entrepreneurial organizations also expressed concern about whether such significant changes should occur through an amendment of the Tax and Customs Board's guidance. They believe such changes should be made after broader discussions by the government and the parliament, not by the tax authority.

Liivamägi stated that the Tax and Customs Board has complete authority to interpret the law and communicate it publicly.

"One cannot write every rule that might arise in every life situation into the law. Often, the law contains general principles, and then the tax authority with its interpretation and the courts with their interpretations fill them in," Liivamägi explained.

Although the Tax and Customs Board has been developing this amendment for a long time, with the first version completed in the summer, representatives of business organizations and the developers of the guidance have not yet met. Input has been taken from the Bar Association and tax advisors. The first meeting with representatives of business organizations is scheduled for Tuesday.

--

Follow ERR News on Facebook and Twitter and never miss an update!

Editor: Marcus Turovski

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: