Payments to a company owned by a management body member may create tax risks, particularly where the member receives little or no direct remuneration while their company supplies management, consultancy or similar services.
If the member provides services personally, the client company must pay remuneration-related taxes. Invoicing through the member's company changes the treatment: the client does not pay those payroll taxes and VAT may be deductible. The provider may reinvest the income or distribute dividends, subject to applicable tax rules and possible reclassification.
If the payment is in substance salary routed through a company to avoid tax, the authority may reclassify it under section 84 of the Taxation Act. This may be relevant where payment concerns statutory management duties. However, a professional consultancy may provide management services through a specialist appointed to a client's supervisory board. The substance of the services is therefore central.
The company and member may separately agree additional duties. A management body member is not automatically required to personally resolve specialist matters. Without such an agreement, board duties principally include general management and organising accounting.
The authority generally cannot question outsourcing merely because the business has staff capable of the work. Companies routinely buy specialised advertising or legal services despite internal departments. An IT-qualified board member need not provide specialist IT work as part of their board role. Such services may legitimately be supplied through a separate company.
Case law supports this approach. In a dispute resolved for the taxpayer by Tallinn Circuit Court, company A supplied market research, marketing, consultancy and business opportunity services to company B. Their resources and communications were difficult to distinguish. X performed the work, was A's sole shareholder and board member and also sat on B's board.
The court rejected the authority's assumption that information held by X necessarily had to be treated as his personal information, making payment to A unjustified. Membership of both boards did not prevent X having a relationship with B personally and through A.
The court noted that arrangements in which employees or board members provide particular services through their own companies are not inherently unlawful or unusual. Contractual freedom generally applies, and tax intervention requires findings that the transactions sought to evade tax. Tax optimisation is not automatically an infringement.
Both taxpayers and authorities should approach optimisation reasonably. The Court of Justice and Supreme Court recognise that taxpayers may consider tax consequences and need not choose the most heavily taxed alternative. Lawful tax saving depends on the chosen form matching the actual economic substance.