Date of publication: 31 May 2018
Vitali Galitskihh, Head of Tallinn Office
Source: Economichna Pravda
The left hand doesn’t know what the right hand is doing.
This is the only conclusion that suggests itself in the context of the inclusion of Estonia, Latvia, Georgia and Moldova to the list of offshores by the Ukrainian Government. Ukrainian officials decided that this should be done as the corporate income tax in Ukraine is 18%, while in Estonia – 0%.
Yes, there is no corporate income tax in Estonia, but there is a distributed profit tax, which is a tax on distributed capital.
The absurdity and the oddity of situation lie in the fact that Ukraine itself plans switching to the same taxation system starting from 2019. Will the Ukrainian Government then add Ukraine to the offshore lists?
What is even more absurd is that Tallinn, Tbilisi, Riga and Chisinau have belatedly and accidentally learned that they were on the offshore list.
The Estonian office of Ilyashev & Partners Law Firm has immediately started lobbying to revoke this illogical decision of the Ukrainian Government.
We contacted the Ambassador of Estonia to Ukraine and prepared the legal arguments to confute this decision. Based on such arguments a note was prepared for the Ukrainian Government.
Together with the Ukrainian Ambassador in Tallinn the consultations with the Governments of both countries were held. After several rounds of communication between the heads of the Governments, this erroneous decision of the Cabinet of Ministers of Ukraine has been revoked.
Why did Estonia sound the alarm?
First of all, more than 400 Estonian companies working with Ukrainian partners found themselves in the mire. Being an “offshore”, they had to submit additional reports and pay additional taxes.
Secondly, Estonia is the member state of European Union, with which Ukraine has entered into an association agreement, and this step of the Ukrainian Government was not only economically unjustified, but also clearly unfriendly and beyond the scope of the treaty.
We are happy that due to the rapid actions taken by the Ambassadors and Governments of both countries the Estonian and Ukrainian businesses did not suffer significant losses, and some businessmen hardly felt uncomfortable because of this situation.
However, supposing the situation had not resolved so quickly, it would have resulted in losses. It would be unprofitably for Ukrainian companies to work with their Estonian counterparts.
A few words about the history behind. Estonia became an “offshore” – in the meaning misinterpreted by the Ukrainian Government – not this fall, but 18 years ago. The country has cancelled the corporate income tax (old and familiar to Ukraine) and introduced the distributed profit tax. This means that the profit targeted at business development is tax exempt.
However, the profits distributed as dividends are subject to taxation. This is done to stimulate reinvestment into Estonian enterprises. This experience has been taken over by several of the abovementioned countries and several more European states, including Ukraine, are planning to introduce it in future.
Nevertheless, Estonia is not a “tax paradise”. The overall tax burden on enterprises in Estonia is higher than in Ukraine: 48.7% vs. 37.8%. However, Estonia, with its 99% electronic state, is a true administrative paradise. Ukrainians highly appreciate the ease of doing business in the country: they rank third by the number of issued e-residency cards.
According to the data I’m armed with, there are more than fifteen hundred pending applications for e-residence, filed by Ukrainians with the Police and Border Guard Department of Estonia.
It is Ukrainians who rank first by the number of registered legal entities in Estonia. As many as 314 Ukrainian companies have already changed their registration for Estonian.
It is an obvious and well-known reality: the business changing Ukraine for Estonia strives not to avoid taxes, but to work in the stable conditions.
And we are talking not about some mega-corporations with a lobby in the Government and Parliament. It is the small and medium-sized businesses, including start-ups that received no support from the Ukrainian Government, which “emigrate” to the Estonian jurisdiction.