Parliament Adopts Corporate Income Tax Reform Bill

Parliament passed on May 13 with its third and final reading bill on corporate income tax reform, known as Estonian model.

According to the bill, corporate income tax (a regular rate is 15%) will only apply to distributed profit; undistributed profits, reinvested or retained, will not be subject to income taxation starting from January, 2017.

But unlike other businesses, the rule will apply to banks, insurance companies, microfinance institutions and pawnbroking businesses starting from 2019.

The 2016 state budget targets revenues from corporate income tax at GEL 980 million, accounting for more than 11% of budget expenditures and 12.3% of total tax revenues of GEL 7.98 billion planned for this year.

According to the Finance Ministry’s estimation the state confers will get GEL 600 million less in corporate tax revenues next year when the reform goes into force and there will be GEL 300-400 million less in 2018.

“On the third and fourth year of the reform, this loss is expected to be fully compensated at the expense of economic growth,” which this reform should stimulate, Deputy Finance Minister Lasha Khutsishvili told lawmakers in April.

Government’s initial draft envisaged enacting the new rule from July, 2016 but decided to delay it until 2017 citing the request of some business lobby groups, which said that applying of the reform in the middle of the tax year would be “quite problematic for implementation.”

According to the bill a calendar year, which is now the tax period for corporate income tax, will be replaced by a month.

In other amendments to the tax code, only the Finance Ministry’s Revenue Service will remain authorized to carry out tax inspections; Finance Ministry’s Investigative Service, or financial police as it is known informally, as well as other law enforcement agencies will no longer have these powers.

Currently existing legislation allows relevant authorities to order freeze of bank accounts of business entities in case of tax disputes. The Revenue Service will retain this power, but decision on freezing bank accounts will require authorization from court within 48 hours. If the request is declined or if the court fails to consider the request within 48 hours, freeze on bank accounts should be removed, according to the bill.