Date of publication: 17 April 2018
Vitali Galitskihh, Head of Tallinn Office
Blitz interview of Vitali Galitskihh, the Head of Tallinn Office of Ilyashev & Partners Law Firm, to the Interfax-Ukraine Agency
– What are the conditions which can make the introduction of distributed profit tax in Ukraine an effective measure?
– In Estonia the distributed profit tax (analogue of the tax on distributed capital – IF) has been effectively levied for 18 years already. It was introduced to bring the businesses out of the shadow. No tax – no need to hide. The income tax compelled Estonian firms to overstate their expenses and show significantly lower profits. At the same time, the replacement of corporate income tax (analogue of the income tax – IF) with the distributed profit tax requires imposition of strict restrictions on transactions with countries from the offshore zone. Such restrictions are introduced in Estonia. In particular, the majority of payments under contracts, where the beneficiary company’s country of residence is the one from the offshore list, are automatically charged with the distributed profit tax at a rate of 20%. However, here are some exceptions, for example, where an offshore company is actually operating and has its customers and supplier, – since people live there and there is an economy. Yet this shall be additionally proved. In most cases banks will refuse the offshore transaction, and the tax inspectorate will impose 20% income tax thereon.
– What is more, there are fears that the usual economic transactions will be equated with the concept of “distributed profit”…
– It is slightly different in Estonia. The corporate curtain in relation to individuals is quite strong. For example, according to Estonian rules, if the company does not distribute its profit, but gives the owner a “loan”, and, as a rule, the company beneficiaries are the individuals, then this contradicts the legislation in force and is treated as a profit distribution. And it is even worse, if payments are recognized as specific privileges. In this case the amount will be subject to all taxes and payments applicable to labor contracts, since such payments will not be considered as expenses related to the economic activities of the company. In this case, the tax burden will be about 46%. Even if it is a cup of coffee paid for with a corporate card. After all, the main aim of the distributed profit tax is to stimulate reinvestment into the economy of the country.
– The President Petro Poroshenko communicated an idea to introduce in the first stages a distributed profit tax for small and medium-size businesses only. Do you think this could work?
– When in Estonia the corporate income tax was replaced with the distributed profit tax, the statistical data changed, became more precise and more transparent. The company’s real earnings became clear and there was no need to issue fake invoices and overstate the expenses. However, the aforementioned may only be possible provided that the income tax is replaced in full and no stop-gap measures are applied. If we theoretically simulate the situation where the distributed profit tax is imposed on small and medium-size businesses only, then it turns out that the income tax actually remains. At the same time, an exception is made for the small and medium-size businesses, since now they shall pay the aforementioned tax when dividends are distributed. However, as a rule, such companies do not pay dividends, thus, there is no point in doing so.
– Ukrainians are among those who most frequently register companies in Estonia with an e-residency card. Why?
– Ukrainians now rank first by the number of such registrations – 423 companies. For comparison, citizens of Finland have registered 315 companies with e-residency cards, citizens of Germany – 311 companies. And the demand for this service is growing. In general, in November 2017 the number of companies registered with e-residency card exceeded 3 thousand, today this number is 3 444. Furthermore, 2 131 citizen of Ukraine obtained the e-residency card. Having regard to this indicator, Ukrainians rank third after Finns and Russians.
The e-residency card does not give the tax residency or the right to enter Estonia, but it allows using all public services, 99% of which may be obtained online. In particular, the company’s registration online, online banking, signing of contracts with a help of electronic signature and ability to file applications online. The e-residency card makes the Estonian public services available worldwide. This is exactly what attracts Ukrainian business. It must be said that bureaucracy in Estonia is reduced to a minimum: where a document was introduced into the public database, there is no need to provide it to the public authorities once again or duplicate it. The e-residency card may be picked up at the embassy and enables using the public services without entering the country. That is why Estonia is called an administrative paradise. However, not all companies registered in this way become operational. Sometimes they are being registered just to see how it actually works.
– Is it true to say that the Ukrainian IT sector uses this service most frequently?
– The Ukrainian IT sector attracts the whole Europe. So yes, most likely, it is. The second industry is the agricultural sector. Agricultural enterprises register companies in Estonia to trade with the EU. In addition, it is engineering and consulting sectors. To register such a company online the authorized capital of EUR 2,500 is required. In this case, individuals are allowed not to contribute the authorized capital during registration, but to do it later, for example, in case of bankruptcy.
– Has the incident with the temporary inclusion of a number of countries, including Estonia, into the list of countries the transactions with counterparties of which are subject to control within the framework of the Transfer Pricing Law (TPL), somehow affected the Ukrainian business in Estonia?
– There are 400 actively operating companies in Estonia engaged in trade between our countries. They were actually affected, although their trade turnover is not very large. The main trading partner of Estonia is Scandinavia. The core problem was that banks shut down transactions between Ukraine and Estonia. They found out that Estonia was put on some list, but nobody really understood what it was exactly. It should be mentioned that for the first two weeks we didn’t know that Ukraine put our country on this list. It is due to the Estonian embassy, which was actively involved, that this problem was resolved. By the way, we advised the Embassy at that time. What actually happened? After the inclusion of our country into the list Ukrainian companies could set off against expenses not 100% of the amount envisaged by the contract, but only 70%, while 30% would be charged with income tax. Plus, the preparation of additional documents for banks was required. Banks did not understand this and suspended all transactions. As a result, the Estonian side carried out the delivery, but received no money. However, due to the rapid elimination of the problem, no serious difficulties cropped up. I’d like to note that the issue was resolved quite quickly. I have never seen that a problem of international dimension was completely resolved within a month. The Estonian and Ukrainian embassies closely cooperated, and even Ukrainian President Petro Poroshenko was involved, claiming that he would solve the issue, – yet even after these words the documents were signed a month later. The public interest was quite strong, but the companies themselves slightly suffered.