Income tax exemptions

New procedures for enabling tax exemptions

Kristjan Järve Kristjan Järve

Starting on 10 February 2015, all circumstances that enable a company to make income tax-exempt disbursements to shareholders or partners in the future must be declared.

That means that on 10 February 2015, companies must declare a starting balance (as at 31 December 2014) of the amounts that the undertaking can withdraw from the company income tax-free. Henceforth all transactions related to equity and tax exemptions are to be declared each month – i.e. a transition to an accrual-based system will be made.

For this purpose a new annex to the income and social tax declaration (TSD) – annex 7 – has been issued, and the circumstances (balances) of tax exemptions or reductions accrued, including before 2015, must be declared by 10 February. These circumstances are:

  • dividends received from companies with a more than 10% holding and not paid forward
  •  income tax paid abroad
  • balance of equity contributions.

Although declaring these data in running form seems a reasonable goal, the short timeframe for introducing the change seems not so reasonable. Many companies have a long history of operations, including involvement with different mergers and divisions, and all this has to be taken into consideration in declaring the data now.

Although the explanatory memorandum to the amendment refers to the forfeiture of tax incentives if they are not declared by the deadline, the Taxation Act does specify a general three-year term for making corrections, even when the changes are in the taxpayer’s interests.

As the Tax Board opened the new TSD declaration environment only on 6 February, the tax authority in its notice published on 6 February at allows the possibility of later corrections. That means that companies have the possibility of filing the January declaration until the end of February or later, but the late filing must be cleared first with the tax authority. Regardless of this, the balances for exemptions/reductions for earlier periods will have to be declared as soon as possible.

This change also has a positive side. After the changeover to the accrual-based declaration of tax incentives, taxpayers will have, from now on, a significantly clearer picture of the factors that reduce the company’s income tax obligations.