Estonia’s transfer pricing laws are based on the Guidelines set by the Organization for Economic Co-operation and Development (OECD) and within the Income Tax Act, Subsection 50 (4), and the Transfer Pricing Regulation.
Arm’s Length Principle
Subsection 50 (4) of the Income Tax Act stipulates that if a company in the country does business with a related party and the price differs from the market price, the tax authority will adjust the taxable income. The company will be taxed as if the transaction had been done at market value, either by increasing its income or reducing its deductible expenses. These transfer pricing rules apply both to domestic and international situations.
Related Party Definition
Relationship in the context of the transfer pricing regulations is determined as including family members such as spouses, partners, and close relatives, as well as companies within the same corporate group. Individuals or groups holding at least 10% of a company’s shares or voting rights are also considered associated, along with companies controlled by the same person or related persons if they own more than 50% of shares or profit rights. Businesses with the same individuals on the management board, as well as employers and their employees (including close relatives), also fall under this category. Board members and their close relatives are likewise considered associated. Transactions between these parties must reflect market value, and if there is a discrepancy, taxation rules apply. Additionally, permanent establishments of companies are treated as associated with their parent entity.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Estonia are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
Estonia follows the “most appropriate method” approach, meaning the method that provides the most reliable result should be used. This decision depends on the details of the transaction, the quality of available data, and how similar comparable transactions are. If the usual methods for determining market value don’t work for a specific transaction, a different method can be used. However, the company must explain why the alternative method was chosen.
Comparability Analysis
When comparing transactions, Estonia prefers to use local data over foreign data. It also gives priority to data from transactions between a company and an unrelated party, rather than data from transactions between two unrelated third parties. The authorities do not use hidden or undisclosed data for comparison, both companies and authorities must have access to the same information.
If a transaction price falls within a reasonable market range, it is considered acceptable. If it falls outside that range, adjustments may be made to bring it in line with market values. If the range is too broad, a more detailed analysis or a different method may be used. Adjustments can also be made to ensure a fair comparison between transactions, following international standards.
Documentation Requirements
Transfer pricing documentation requirements in Estonia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Estonian tax authorities:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Companies in Estonia must document their pricing methods for transactions with related entities, following general rules for economic transactions. Detailed documentation is required for certain businesses, such as banks, insurance companies, stock-listed firms, large enterprises, or those dealing with high-risk tax jurisdictions. This set includes one big document that touches on stuff for everyone (group-level data) and then a smaller one specific just to Estonia.
Companies should provide all the requested information when it’s time, and they need at least 60 days to get ready and comply with tax authorities asking for data.
Country-by-Country Reporting
Estonia has implemented CbC which applies to multinational enterprise (MNE) groups with a consolidated turnover of at least 750 million euros. For the ultimate parent company that calls itself home in any one of the EU member countries, they must file an annual report of consolidated cross-border profits known as CbC to the relevant tax authority directly. They have to report on their global performance, showing revenue, profits, taxes paid, and how many employees.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA)
Right now, taxpayers can’t negotiate Advance Pricing Agreements (APAs) with the tax authorities. If there is a dispute between a taxpayer and the tax authorities, they try to resolve it directly. If they can’t agree, the taxpayer can take the issue to an administrative court.
Mutual Agreement Program (MAP)
Estonia allows the use of the Mutual Agreement Procedure (MAP) to sort out differences in tax matters related to things like transfer prices, abuse in treaties, and double taxation. MAP is like a way of resolving disputes in an amicable way between two countries who have signed a tax treaty so they can sort out issues equitably and sensibly. To begin a MAP request, taxpayers must contact the Estonian Tax and Customs Board (EMTA), and there is no fee for making such requests. When it comes to deadlines for filing taxes, they are usually decided by tax treaties and they usually range from two to three years, give or take.
MAP can address various tax treaty-related concerns, including transfer pricing adjustments and double taxation from foreign adjustments. It also works when domestic audits have already led to some kind of settlement or deal. If a MAP agreement is reached, it may result in either additional taxes being paid or tax refunds, and taxpayers must amend their tax returns accordingly. If MAP isn’t enough to settle disputes MAP is there as part of certain treaties like ones with Luxembourg and Bahrain. Guidance on the process is available online, and the Estonian Tax and Customs Board provides further resources for taxpayers.
Approach to Transfer Pricing Audits
In Estonia, the Tax and Customs Board (TCB) is responsible for conducting transfer pricing audits. The TCB is particularly interested in cross-border transactions between related parties, as these can sometimes be used to shift profits in ways that may not comply with tax rules. The TCB uses annual reports, which provide financial information about companies, to identify transactions between related parties. These reports can signal potential issues that may lead to a more detailed audit of transfer pricing practices.
Penalties
There are no separate fines for incorrect transfer pricing in Estonia. Instead, if a company sets incorrect prices in transactions with related parties, the tax authorities adjust the taxable income accordingly. The company must then pay corporate income tax on the amount it underreported or overdeducted. The tax rate is 20% on the gross amount (or 20/80 on the net difference), increasing to 22% (or 22/78) from January 1, 2025. Additionally, an interest of 0.06% per day (equal to 21.9% per year) applies to the unpaid tax.
Taxation at a Glance
Estonia’s tax system is governed by the Constitution and the Taxation Act, which includes various laws for different types of taxes like income tax, VAT, social tax, and excise duties. Local taxes are managed by local governments. Estonian companies don’t pay corporate income tax on retained earnings. Tax is only due when profits are distributed or certain payments are made. This makes tax administration simpler, as there is no need for tax depreciation or loss carryovers. Both companies and folks in Estonia pay tax on income earned anywhere in the world at the same rate. Corporate and personal taxes, as well as VAT, are handled by the Estonian Tax and Customs Board.
In Estonia, the currency is the Euro (EUR). The official name of the Estonian tax authority is the Estonian Tax and Customs Board.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 22% |
VAT | 22% |
Withholding tax on dividends to non-residents | 0/7% |
Withholding tax on interest to non-residents | 0% |
Withholding tax on royalties to non-residents | 0/10% |
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