“The minister of finance doesn’t understand that in the attempt of solving a problem he in fact would tax businesses’ everyday activities. This again has a negative effect on the Estonian tax environment, which because of the minister’s latest initiatives is quickly getting worse anyway,” Tamsar said.

Tamsar is of the opinion that the proposed deposit tax would make it difficult for connected companies to use each other’s means to invest, and instead force them to pick up business loans, which again came with interest to pay. “The result would be that investments would decrease, and that the business environment on the whole would suffer,” Tamsar added.

The two organizations agree that the most worrying part was that once again, the government was taking steps to influence the business environment without a preceding thorough analysis of the potential consequences.

Closing a popular loophole

Companies have been able to move very large amounts of money out of the country not by means of paying out dividends, but by giving loans to parent companies abroad. This way, e.g. an Estonian subsidiary of a Swedish company has been able to transfer much of its undistributed profits out of the country without paying so much as a cent in taxes.

The Ministry of Finance’s proposal is to introduce a deposit tax. Every loan granted by an Estonian business to a parent company, or another company outranking it in an international business structure, would be taxed at 20%. The money would be withheld by the state for the period of the loan agreement, for example for two years.

If after two years the loan has been paid back, the state pays back the 20%. If the loan has not been paid back, the state keeps the money as a tax on redistributed profit.

According to the ministry’s proposal, loans to companies higher up in an international business structure are not the only means by which companies are moving their profits out of the country. Other instruments used include various collaterals, savings deposits, and overdrafts, which legally would have to be put at the same level with loans.

Also, transfers out of corporate accounts that are obviously used to move profits out of the country should be counted as loans that fall into the same category, the ministry’s proposal stated.

The ministry finds the measure is necessary because of companies’ attempts to dodge income tax, and because the current legislation had turned into a very busily used loophole businesses used. Loans were granted a very large amount of which was never paid back.

In connection with the intent to move money out of Estonia, agreements were often concluded spanning very long periods of time, loans got extended repeatedly to avoid having to pay anything back, and in reality little to no interest was ever paid.