The long-awaited Supreme Court decision (3-18-989), concerning the declaration of company’s equity on tax return, entered into force on 12.05.2020. In addition, the Supreme Court considered to clarify whether undeclared equity contributions could be taken into account as a tax deduction in the future.
From 2015, the taxpayers have to declare on TSD annex 7 in addition to taxable payments (e.g. dividends), also the rights that reduce future tax liability. For example, the contributions to the equity and dividends received from abroad must be declared. In addition, based on transitional provision provided, for the rights in past- all equity contributions made before the year 2015 had to be declared in January’s TSD Annex 7 with the submission deadline 10.02.2015. The expiration date of beforementioned declaration was 10.02.2018. The tax authority and the legislator were of the opinion that if the contributions to the equity have not been declared in time, it is not possible to take into account the contributions for reducing the income tax liability from equity distribution in the future, despite of fact that based on Estonian Income Tax Act a resident company shall pay income tax on such portion of payments made from the equity, which exceeds the monetary and non-monetary contributions made to the equity of the company.
The Supreme Court confirmed that if the taxpayer has forgotten to declare the contributions to the equity in time, then it is not possible to declare the equity contribution, if the deadline for declaring has been expired (3 years passed on contribution time). However, the Supreme Court did not support the position of the tax authority or the legislator with regards unfulfilled declaration and future income tax obligation. The court explained that a breach of the obligation to declare does not mean automatically that the taxpayer can not take into account the equity paid in, for reducing future income tax obligations. The breach of the obligation to declare the equity creates a higher burden of proof for the taxable person and gives the tax authority a longer period in which to determine the tax liability.
Therefore, if the equity contribution has not been declared in time, we recommend to collect all the evidence of the contribution to the equity and keep it. The evidence gathered will be the proof that the contribution to the equity has been done, in order to reduce the income tax liability in future while making a payment from the equity (e.g. paying out the liquidation proceed). As the case law on this subject is so recent, there is no practice, how much evidence must be provided and what kind of evidence considers satisfactory for the tax authority. We recommend for the taxpayer to assess itself at first what kind of evidences are sufficiently convincing and commonly understood in order to prove that the contribution to the equity has been done in past.
If you have any further questions, please do not hesitate to contact Leinonen. The contact details are given below.
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