The amended tax guidance would affect recalled transactions debt reliefone. When investors want to buy a company, they separately create a corporate entity to acquire it, called in English special vehiclein an SPV.
Money is borrowed into the created SPV, for example from the owners, for whom the desired company is acquired. After the acquisition, the company is merged with the SPV and the money spent on the acquisition is repaid to investors by the merged company as loan repayment with interest.
Importantly, by using such a scheme, investors do not incur tax liability when they withdraw the money used to purchase the company from the purchased company.
Now the Tax Office, in collaboration with the Ministry of Finance, plans to change the system and put an end to this widespread system.
According to the new tax guidelines, money should no longer be withdrawn in this way from the acquired company, Evelyn Liivamägi, vice chancellor for financial and tax policy of the Ministry of Finance and former head of the tax department of the Ministry of Taxes and Customs Council, he told ERR.
Under the new tax guidance it would still be perfectly fine to set up a separate company or SPV to purchase or take over businesses. It would also be perfectly legal to lend money to this company to make a transaction with the borrowed money. At the same time, according to Liivamägi, it would no longer be correct to merge the companies until the borrowed money has been repaid.
In other words, looking into the future, the tax office would see that if investors are interested in withdrawing capital from the acquired company, the acquired company should pay dividends, pay income tax on dividends, and only with that withdrawn capital could be paid the SPV’s loans.
If the loan to the SPV had been repaid, the merger between the SPV and the acquired company would also be perfectly permissible.
Liivamägi could not say exactly how much additional revenue could be expected from the budget change, but estimated the amount at 10 million euros per year.
“This is not the place to cover the entire state budget deficit, which we have to find,” Liivamägi said.
The planned changes have understandably worried venture capitalists and investors. On January 10, the Estonian Private and Venture Capital Association, the financial sector representative organization Finance Estonia and the banks representative organization Eesti Pangaliit sent a letter to politicians criticizing the planned change.
According to representative organizations, the change would immediately have a negative impact on the Estonian investment environment. According to the organizations, buyout investments made with leverage would be affected immediately leveraged buyout transactions.
“As a rule, the investments described above are carried out with the help of borrowed money, so in practice, in certain situations, for example in the case of foreign funds, it can be debt reduction the use of the structure is an inevitable solution for credit institutions to finance the operation”, underline the organizations in their appeal.
Furthermore, according to the organisations, investments of 100-150 million euros per year could be avoided.
Business organizations also say that the change will likely lead to numerous lawsuits, which will further worsen the investment climate in Estonia.
At the same time, Liivamägi said that although the guidance will be changed, the tax office will not apply it to transactions already made.
According to Liivamäe the goal is to set the direction for the future so that these transactions do not happen again in this way.
“In retrospect, nothing will happen. In the future, just don’t combine things on which income tax has not been paid,” Liivamägi said.
This does not mean that Liivamägi claims that all methods of aggressive tax planning are somehow permissible, but that the Tax and Customs Office does not immediately start kicking ass in the case of transactions that previously had an economic content .
“Those who have carried out transactions based on purely commercial objectives and in such a way that the company’s liabilities are covered to the detriment of its own revenue and assets, should not worry. But those who have carried out transactions in such a way that the liabilities of a company could be hedged at the expense of another company’s revenues and assets, they might worry,” Liivamägi said.
Representative organizations of entrepreneurs have also expressed fears that such far-reaching changes may occur when the instructions of the Tax and Customs Office are changed. According to the organizations, such changes should be made by the government and Riigikogu after broader discussion, not by the tax administrator.
According to Liivamägi, the tax office has the full right to interpret the law and communicate it publicly.
“All the rules that might arise in every case of life cannot be written into the law. In many cases, the law contains general principles, and then the tax administrator with their interpretation and the courts with their interpretations complement them,” he called Liivamägi.
Although the Tax and Customs Office has been working on the amendment to the guide for some time, the first version was ready already in the summer, the organizations representing companies and the developers of the guide have not yet met. The contribution was collected by the Bar Association and tax consultants. According to the program, the first meeting with organizations representing entrepreneurs will take place on Tuesday.
2024-01-15 09:48:00
the-state-wants-to-start-collecting-more-taxes-from-acquisition-transactions-economy