The Chamber supports the European Commission’s plan to establish uniform income tax system for small and medium-sized companies HQs

The European Commission has drawn up a proposal for a Directive on the income tax system of the head office of small and medium-sized enterprises operating cross-border, which allows small and medium-sized enterprises (SMEs) operating in other Member States through one or more permanent establishments to apply only the income tax system of the head office, i.e. the state in which the enterprise is established. The Chamber supports the proposal for the Directive.  

Positive changes facilitating the cross-border activities of SMEs  
Under the proposal for the Directive, an SME may apply the income tax system of the State in which its head office is situated to permanent establishments situated in other Member States if, during the last two financial years, the turnover of its permanent establishments has not exceeded twice the turnover of its head office and it has maintained tax residence in the Member State of its head office during the same period.

An SME must submit an income tax return and pay income tax to the tax authority/office of the State in which the head office is located in accordance with the tax liability incurred in the Member State of the permanent establishment. The tax authority/office shall apply the corresponding national tax rate levied by the SME and, as a result, the tax authority shall transfer the tax revenue received to each Member State in which the SME has a permanent establishment and the SME is no longer required to submit it to the tax authorities of the Member States in which its permanent establishment is situated.

For example, if an Estonian small enterprise also has a permanent establishment in Germany and the Estonian enterprise has not violated the above criteria, the Estonian enterprise could, according to the proposal for a directive, apply the Estonian income tax system to the permanent establishment located in Germany, i.e. the Estonian enterprise may submit an income tax return to the Estonian tax and Customs Board and pay income tax to the Tax and Customs Board, which applies the German income tax rate to the income related to the permanent establishment and transfers the amount due to the German tax authority. Thus the Estonian SME no longer has to submit or pay anything to the German tax authorities.

The Chamber supports the proposal that gives SMEs the option of filing a tax return only with the tax authority of the Member State of their headquarters. Although the implementation of the proposal may result in some increase in the workload and costs of the tax administrations of the tax and Customs Board and other Member States, the positive effects of the change on companies outweigh some increase in the burden on tax administrations.

The proposal does not apply where an Estonian company has opened a branch or established a subsidiary in another Member State. Therefore, the proposal will only facilitate the activities of companies established in Estonia that operate through a permanent establishment in other Member States. In addition, the planned change may simplify the activities of Estonian companies that do not yet have a permanent establishment in another Member State, but plan to do so.  

Read more on the proposal for the Directive of the European Commission here.