Permanent Establishment in Estonia – a Tax Law Jungle
If a foreign company wishes to start a business in Estonia by selling goods or providing services, the creation of a Permanent Establishment (PE) may cause severe taxation implications.
However, identifying the point at which a PE is created is rather difficult for business owners.
Impact on the tax obligations
When a PE is created, all the profit brought home through the PE must be taxed according to the laws of the country in which the PE is located instead of the company's registered location.
Furthermore, the creation of a PE will trigger an obligation to file reports and tax declarations separate from the company. It must be kept in mind that a PE can affect also the value-added
tax obligations. For example, according to the section 3 sub-section 4 clause 2 of the Estonian VAT Act, the reverse charge liability is possible only if there is no PE of a foreign company.
Criteria for the creation of a PE
A PE is a place through which, whether fully or partly, permanent economic activities of a non-resident are carried out in Estonia. According to the Estonian Income Tax Act, the following
circumstances indicate that a PE is present: a branch; a centre of management or an office, factory or workshop, a building site or a place of construction, or an installation or assembly
project, a place where the examination or extraction of natural resources is carried out, as well as any supervisory activities related thereto or a place for provision of services. Moreover,
according to the special rules for construction works, a PE will be considered to be created if the works in Estonia last longer than 6 months.
In case a company decides to use agents in Estonia, a PE can be created due to the activity of those agents. Still, the agents do not create a PE if they are independent and do not act
(principally) fully in the name of the company.
Having a server placed in Estonia also indicates that a PE is present. So, for example, if a Finnish gambling operator wishes to provide gambling services to the Estonian market via the
Internet and the physical location of the server (at least its mirror) is located in Estonia (which it must be according to the Estonian Gambling Act), then a PE will be created in Estonia
following the guidelines of the Estonian Tax and Customs Board.
The distinction whether or not a PE is present is unclear. If an undertaking has not identified that a PE is created in Estonia and therefore has not fulfilled the registration obligation in
time, then the Estonian Tax and Customs Board may register the PE retroactively from the date when the registration obligation actually arose. Due to this, failure to identify that a PE is
created can cause retroactive tax obligations as well as interest claims against an undertaker.
In some cases, the length of the period of retroactive registration is unclear even for the Estonian Tax and Customs Board officers. For example, a foreign undertaking concludes a construction
contract with an Estonian client. The execution of the contract begins with applying for a construction permit and does not include any construction works or agent activities in Estonia. Even
if the circumstances of the PE (e.g. a construction site) will occur only after 9 months after the construction permit was acquired, the PE must be registered retroactively. But from which date?
There is no certain answer, even for the Estonian Tax and Customs Board.
Associate at MAQS Law Firm Advokaadibüroo in Tallinn
Tel: (+372) 66 76 440
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