The Distribution Tax Regime Paradox - Compatibility of Estonian Tax Treatment of Non-Residents’ Capital Gains from Alienation of Immovable Property with European Law

Abstract: The four fundamental freedoms granted to residents in the Community have become the pillars for fairness between economic operators and persons within the internal market. The aim of the freedoms is to prohibit any restriction or discrimination toward residents of another Member State and endorse equal treatment. Subsequently, tax laws of Member States have been scrutinised before the Court of Justice of the European Union on many occasions in this regard. However, the jurisprudence of the Court clearly indicates that there is a line, although often subjective and circumstantially contingent on specifics such as purpose and aim of the legislation. Likewise, the Estonian income tax legislation can be inspected in this regard as it confers resident companies the incentive to indefinitely defer their profits, including capital gains from sale of immovables, whereas non- resident corporate taxpayers are subject to immediate taxation. At first glance, the situation seems to constitute a textbook fundamental freedoms infringement case, whereby different rules are applied to the same, comparable situation. However, many nuances are relevant in this regard, which are discussed in more detail in the analysis conducted herein. Although, with careful and supervised planning, corporate non-residents might not always suffer from the disadvantage, a restriction is nonetheless present. Despite the need to protect the balanced allocation of taxing rights might be a valid justification for such national provisions, especially considering that most bilateral double tax conventions confer the Contracting States the right to tax gains realised by economic operators from sale of immovable property located on their territory. Nevertheless, the Court has thus far been reluctant in finding similar measures to be proportional. Correspondingly, due to the availability of less restrictive methods, it is difficult to deem the Estonian rule for taxation of non-residents on real estate income to be proportional in attaining the aim and purpose of the provision.