Request for opinion regarding the Estonian Seafarer Scheme

European Commission Our Ref: 14.11.2022 No 5-6/2022/6982-1 Request for opinion regarding the Estonian Seafarer Scheme (State Aid decision no SA.53469) Dear Mr Eduardo Martinez Rivero On 1 July 2020 a new legislation1 entered into force in Estonia by which Estonia introduced a tonnage tax regime and a special regime of seafarers’ labour taxes (the Seafarer Scheme) in accordance with EU State aid rules and based on the Commission’s State Aid decision SA.53469 of 16 December 2019. The Seafarer Scheme consists of 0% income taxation and the partial exemption from the contribution for social protection which only applies to Community seafarers employed on eligible vessels flying the EEA flag and carrying out international maritime transport activities. The Scheme will expire on 30 June 2026. During the implementation of the Seafarer Scheme a question has arisen on how to interpret certain provisions of SA.53469 in the light of Estonian law. In paragraph 128 of the SA.53469, the Commission states that „The 0% income taxation and the partial reduction of social security contributions in respect of qualifying seafarers constitute foregone State revenue and thus involve State resources. Moreover, since the measures are implemented through national legislation, they are imputable to Estonia. The measures also grant a selective advantage to the shipping companies hiring these seafarers as they benefit from lower labour costs in comparison to companies not benefiting from the scheme (e.g. because not at least 60% of the net tonnage of their fleet flies the flag of a Member State of the EU/EEA) which would be otherwise comparable.“ Estonian employers have the general obligation to withhold income tax from the employee’s earnings and to pay social tax and the employer’s part of the unemployment insurance premium on their earnings. Employers must also withhold the employee’s unemployment insurance premium and compulsory funded pension contribution. 1 Amendments to the Income Tax Act, the Funded Pension Act, the Social Tax and the Unemployment Insurance Act). Suur-Ameerika 1 / 10122 Tallinn / ESTONIA Phone: +372 625 6342 / Fax: +372 631 3660 / E-mail: [email protected] / http://www.mkm.ee To receive the benefits of the Seafarer Scheme the State aid recipient – an Estonian employer2 who complies with the conditions provided for in the Income Tax Act3 – submits an application for the implementation of the scheme. Seafarers whose qualified employers have not applied for the benefits of the Seafarer Scheme can by submitting income tax return still get 0% income tax rate for their salaries. In both cases the confirming information about qualified employer needs to be available for tax authorities. We are on the position that no matter if the Seafarer Scheme benefits are applied by the qualified Estonian employer or if the 0% income tax rate for the salary received from the qualified employer was applied by seafarers submitting their income tax return, the Estonian employer gets a selective advantage, and therefore in both cases such tax incentives constitute State aid. Both the Estonian Income Tax Act as well as treaties for the avoidance of double taxation provide certain tax exemptions for employment income received from abroad no matter if in maritime sector or elsewhere. Tax exemptions provided for employees depend either on the duration of the time that such employee has stayed in the foreign state for the purpose of employment or on employee’s tax obligation in source state and does not depend on the employer who is not a tax subject in Estonia. We are on the position that even if by hiring Estonian seafarers foreign shipping companies indirectly benefit from lower labour costs, such distant benefit cannot be regarded as State aid provided by Estonia. Estonia hereby kindly requests the Commission’s opinion in the following position in order to ensure full compliance with the State Aid decision SA.53469 and EU State aid rules: „Foreign shipping companies that are not subject to tax in Estonia cannot be considered to receive State aid from Estonia even if tax exemptions provided for resident employees indirectly lead to lower labour costs.” With best regards, (signed digitally) Kaupo Läänerand Deputy Secretary General for Maritime 2 According to the subsection 7 of § 13 of the Income Tax Act the State aid recipient is a resident legal person, state or local government authority, sole proprietor, employer who is a natural person, or non-resident with a permanent establishment or operating as an employer in Estonia, who makes payments subject to income tax pursuant to Chapters 3, 5 or 51 of the Income Tax Act. 3 Conditions related with responsibilities and the scope of activities are provided for in subsection 5 and in clauses 4 and 5 of subsection 3 of § 521. 2 (3) Hana-Maarja Helinurm +372 639 7663 [email protected] Copy to Estonian Transport Administration Ministry of Finance 3 (3)