The Compatibility of the Estonian Tax Treatment of Real Estate Income with EU Law

Abstract

The European Court of Justice (ECJ) has made a number of important judgments regarding the tax treatment of dividends on outbound situations, whether received by non-resident legal entities or foreign funds. The article analyses a similar issue - the tax treatment of real estate income received by non-residents. Based on an infringement procedure by the Commission of European Communities against Estonia on the discriminatory treatment of real estate income received by foreign investment funds (No. 2008/4851) and a pending dispute before the Tallinn Administrative Court on taxation of gains from liquidation of an Estonian real estate company at the hands of Austrian parent company (No. 3-10-25), the article questions whether indirect discrimination may be caused by applying different tax rates to the residents and non-residents, including an option granted to the resident companies to choose their tax rate; whether the unequal treatment may be a result of different computation of the taxable base (gross or net comparison) or due to the specific characteristics of the Estonian corporate tax system, the cash flow disadvantage might be such cause. The author concludes with some suggestions on changes to be made to bring Estonian legislation in line with European Union (EU) law.