Estonia - New Provisions in the Income Tax Act

On 3 June 2010 the Estonian Parliament (Riigikogu) passed the Act Amending the Income Tax Act and Family Act. The objective of the amendment is to promote the equal treatment of natural persons and legal persons in the taxation of profit from securities transactions. Provisions regulating income from financial assets and investment accounts are added to the Income Tax Act.

A system based on the use of an investment account is established, allowing certain income derived from investments to be re-invested without triggering a tax obligation. Thus a possibility is created for deferring the taxation of investment income until such time as the income is used for other purposes. In order to defer the income tax liability a person must set aside a bank account as an investment account and acquire securities and other financial instruments. In order to be released from the obligation to pay tax, the proceeds from the transfer of the securities must also be deposited in the investment account.

Income tax liability is created when the amount of money withdrawn from the investment account exceeds the amount paid into the account. The amendment allows more flexibility in changing investment objects. As a result of the above amendment, the taxation rules applicable to natural persons are brought considerably closer to the taxation principles of companies (only income taken out from business activities is subject to taxation). The amendments set the conditions for using an investment account and list the types of financial assets that can be used in connection with an investment account scheme.

The current blanket exemption of interest from savings is also repealed. Under the new rules interest payments on savings related to the movements of certain assets or other indicators (financial indices, foreign exchange rates etc), i.e. essentially interest on investment deposits is taxable. Interest derived from regular bank accounts, time deposits, demand deposits and savings deposits continues to be exempt. The tax exemption shall not apply to interest received from an investment account. The act will enter into force on 1 January 2011, except for those provisions that enter into force at other times as prescribed by the act.

Raidla Lejins & Norcous