As of 1 July 2021, in addition to the term “low-tax territory”, the term “non-cooperative jurisdiction” has appeared in the Income Tax Act. The amendment is related to the European Union's safeguard measures aimed at preventing tax evasion in transactions with companies located in so-called tax havens.
A new term coming into force
As the definitions are similar in content, they are not applied in parallel, but as of 1 July 2021, a term low-tax territory has been replaced by a non-cooperative jurisdiction for tax purposes for legal persons. From 1 January 2022, the new definition will also apply to natural persons (for natural persons, the tax period is a calendar year, therefore the change applies to them from the beginning of the new year).
Natural person is obliged to pay income tax and report the profits of a legal person located in a low-tax territory under his control on Form MM on annual basis. Legal persons are obliged to withhold income tax from the service fees paid to a company located in a non-cooperating jurisdiction and pay corporate income tax on certain payouts related to such jurisdictions. It is also not possible to benefit from the participation exemption on dividends received from a company located in a non-cooperating jurisdiction.
Changes make easier to apply tax haven regulations
For taxpayers, the change will make it much easier to implement tax rules. In case of a low-tax territory, the taxpayer had to determine whether it is a territory which does not tax the profits of a legal person or where the amount of such tax is less than 1/3 of Estonian income tax, but also check whether the territory is not in the “whitelist”, despite the low tax rate. In case of non-cooperative jurisdictions, the EU has compiled a list of territories considered as non-cooperative jurisdictions for tax purposes on which the taxpayer can simply rely on.
The list is updated twice a year: in February and in October. As of October, the list of non-cooperating jurisdictions includes American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, the US Virgin Islands and Vanuatu.