Estonia: Estonia Introduces Advance Tax Rulings

Introduction

On 15 February 2007, Estonian parliament (in Estonian Riigikogu) made amendments to the Taxation Act. Among other amendments, a new advance ruling institution was introduced into legislation. Request for an advance ruling from a tax authority will be made available on 1 January 2008.

An advance ruling represents a binding assessment issued by the Estonian Tax and Customs Board regarding taxation of a specific transaction or set of transactions completed in the future by a specific taxable person. It is essential that the assessment be enquired prior to performing the operation (i.e. transaction). Furthermore, the enquiry should not be theoretical; the taxable person should intend to factually complete this transaction. The assessment issued by the Tax and Customs Board is binding to the board, that is, in the case of later tax control of the taxable person, in the same circumstances a tax authority must follow taxation described in the advance ruling.

However, the advance ruling is binding to a tax authority only under the following conditions:

• when the transaction has been completed by the deadline fixed in the advance ruling,
• the completed transaction is in compliance with that described in the advance ruling regarding all circumstances relevant to taxation, and
• prior to the completion of the transaction, legal provisions relevant for taxation purposes of the transaction have not been significantly amended.

For the taxable person, the advance ruling is not binding. That is, sanctions are not imposed when the taxable person fails to pay a tax on the transaction according to the advance ruling, and the taxable person is also certainly not obliged to complete the transaction, with regard to which the advance ruling was requested.

An advance ruling is not an administrative act; it is a measure taken by a tax authority, which is subject to several formalities of an administrative act. As the advance ruling neither confers rights nor imposes obligations on the taxable person, the latter has no right to challenge the ruling. The taxable person will certainly retain the right to challenge the notice of assessment issued pursuant to the advance ruling, and upon declaration of invalidity of the notice of assessment, the advance ruling will also lose its legal force.

A tax authority has the right to refuse to issue an advance ruling when:

• objective circumstances show that the application of the laws, regulations or administrative provisions regulating the taxation of the transaction is evident,
• the transaction is speculative, or
• the purpose of the transaction is tax evasion.

It is possible to challenge the refusal to give an advance ruling. An appeal may be filed with the Tax and Customs Board or with the administrative courts.

An application to request an advance ruling must be in writing. The tax authority has the right to request the submission of additional documents. As a rule, the tax authority is obliged to issue an advance ruling within 60 days of receipt of the application.

Compared to current law, introduction of an advance ruling represents significant progress in applying the legitimate expectations principle, as current law does not accord binding force to written answers issued by the tax authority (a taxable person has the right to apply for non-calculation of interest only if the tax authority has failed to follow its previous answer). At the same time, we do not expect widespread use of the advance ruling institution, due to, among other reasons, the fact that in order to get the ruling, a legal person shall pay a state fee in the amount of EEK 12 000, (EUR 770) and a natural person in the amount of EEK 3 000 (EUR 190).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.