Common law impacts on Estonian legal system

Estonia: Estonian Supreme Court judgment significantly alters an approach uncontested for almost 20 years.

Estonian Supreme Court judgment significantly alters an approach uncontested for almost 20 years.

Estonia is among Continental European legal systems where the law is codified. But the effects of the case law based Anglo-American legal system are more and more seen here, too. So, for example, a recent judgment significantly changes a legal concept which was uncontested for nearly 20 years.

The Tax and Customs Board and others concerned have so far considered (also relying on a Supreme Court judgment of 2001), that when selling inherited property a heir cannot deduct from the sale proceeds the costs which the testator bore in connection with the property (e.g. acquisition or renovation costs). As a result, the proceeds were fully taxed. As there is no inheritance tax in Estonia, it seemed to be a way to tax the inheritance anyway – namely on disposal of the inheritance.

On 12 February 2014 the same court took the opposite position and decided that these kind of costs (if verifiable) are indeed deductible.

The court found that the right to reduce gains accruing on disposal of property by the acquisition cost of the same property is a common property right and is not inextricably linked to the testator. Based on the principle of equal treatment, an heir must be taxed in the same way as the deceased would have been taxed if disposing of the property in their lifetime There is a difference between an inheritance and a gift – the latter is a disposal, resulting in a loss to the donor while the acquisition cost for the receiver is zero so that the right to deduct the acquisition cost cannot be transferred to the receiver. But an inheritance is neither a disposal for the deceased nor an acquisition for the heir: simply, a participant in an existing property relation is replaced by another person.

So from now on with sale of inherited property an heir can with a clear conscience deduct the purchase price paid by the deceased from the proceeds of sale in their tax return. Persons who according to this principle overpaid too much income tax in 2010 or later (approximately a thousand heirs), can now correct their tax returns and claim from the state a refund of income tax paid under the old definition; heirs who sold inherited property earlier are only left with the knowledge that they would have had the same right but would have had to enforce it in court.

Source: Judgment No. 3-3-1-97-13 of the administrative chamber of the Supreme Court of 12 February 2014


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