Taxman takes ax to «acting OÜ»

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Photo: Toomas Tatar

Tax Board id targeting the enterprises which pretend to offer services while actually working for other business for wages. 

In Estonian lore they call it «OÜtamine» i.e. acting like OÜ – a private limited company. Essentially, a company pays another for services but the person is working for it. This allows skipping labour taxes and take out money as dividends.

Tax Board control unit deputy head Kaido Lemendik said it was too early and unfair to assess the scope of said behaviour and how much tax money has been missed.

«Anyway, in near future we will contact companies where we are seeing clear signs of OÜtamine, in order to bring clarity,» he said, adding this would bring a better picture. On its website, the board has also published instructions to help avoid being controlled.  

An initial characteristic of such company is sales deals with other companies with same people in board or owners. Tax Board will identify these by certain risk analyses based on declarations submitted. Once a business like that is identified, Tax Board will contact them to explain the contact must correspond to nature of the work.

«If the businessman will still disagree we will try to apply tax measures to find out the actual situation,» said Mr Lemendik. By press release dated yesterday, Tax Board said this would also spell review of tax behaviour during former periods.

To get better results, it is important that entrepreneurs cooperate. Estonian Employers’ Confederation head Toomas Tamsar said there were issues with taxation of private limited companies and board members that Tax Board had to deal with. «It makes sense to begin with a positive programme,» he said. «Hopefully the understanding – that their role is to help and provide advice and not to assume tax fraud – will also spread to tax officials.»

Mr Tamsar said OÜtamine is an unfortunate word which would imply that smaller businesses are involved with tax avoidance. The reverse cannot be believed either. «It cannot be assumed that an entrepreneur would pay as many taxes as possible – optimising taxes within legal framework has its place and is prudent,» he said.

For the Tax Board, clarity has come via various Supreme Court decisions which have awarder the board the rights to intervene in certain instances and to tax deals according to their actual economic nature.

In September, Supreme Court ruled that public limited company Sirowa pay close to €167,000 of back labour taxes. On October 6th, the board forced Bauhof to pay labour taxes for almost €152,000. In both cases, the court ruled that the companies were not offering services but employment contracts were replaced by service contracts.  

«For tax administrator, employment relationship was visible by there being bosses and subordinates, use of assets of the company providing management service, the coinciding working times of seller and buyer of service, and lack of accounting characteristic to authorisation agreement,» said KPMG lawyer Elvira Tulvik.

Due to that, payments to companies were regarded as net profit for employee, and labour taxes were thus calculated from them. The lawyer said that would not mean that any service provided by a company would count as employment relationship. She said what matters are the essence and conditions of the service, independence of service provider, diversity of operations by the provider, and lots of other factors.

Employment Contracts Act

§ 1.  Definition of employment contract

 (1) On the basis of an employment contract a natural person (employee) does work for another person (employer) in subordination to the management and control of the employer. The employer pays to the employee remuneration for such work.

 (2) If a person does work for another person which, under the circumstances, can be expected to be done only for remuneration, it is presumed to be an employment contract.