The procedure for issuing advance rulings against the GAAR (General Anti-Avoidance Rule) is regulated in Section IIIa of the Tax Ordinance and allows taxpayers to obtain formal confirmation that planned or completed activities will not be considered tax avoidance within the meaning of Article 119a of the Tax Ordinance. In turn, the provisions on the obligation to report tax schemes (MDR) are contained in Section III, Chapter 11a of the Tax Ordinance. Although the GAAR procedure and MDR (Mandatory Disclosure Rules) obligations are separate institutions, the Head of the National Revenue Administration (KAS), as the authority issuing advance rulings, should ensure a uniform interpretation of tax regulations. This applies in particular to the interpretation of the main benefit test, which plays a key role both in the assessment of tax avoidance and in the obligation to report tax schemes.
Basis for common interpretation
Common objective
Both mechanisms serve to prevent tax avoidance:
- GAAR (Articles 119a–119zd) – allows the authority to challenge the tax consequences of actions if the achievement of a tax advantage as a result of those actions, contrary in the given circumstances to the object or purpose of a tax law or its provision, was the main or one of the main objectives of those actions, and the manner of acting was artificial.
- MDR (Articles 86a–86o) – imposes an obligation to report arrangements that may lead to a tax advantage in the cumulative fulfilment of the general hallmarks of a tax scheme.
Main benefit test
This is a key point of contact:
- In MDR – determines the reporting obligation (if a general hallmark is present)
- In GAAR – determines the applicability of the clause (if the tax benefit is the main or one of the main objectives of the arrangement)
Assessment of artificiality and economic justification
- In MDR – indirectly through analysis of documentation and hallmarks,
- In GAAR – directly, as a condition for applying the clause.
Role of the Head of the National Revenue Administration
- In MDR – supervises the reporting system, assigns numbers to tax schemes, analyses information in order to take control or legislative measures
- In GAAR – conducts proceedings under the GAAR clause, issues protective opinions.
A common interpretation ensures consistency in the actions of the tax administration.
Statutory definition (MDR – Article 86a § 2 of the Tax Ordinance)
The main benefit test is met if, based on the existing circumstances and facts, it can be assumed that:
A reasonable entity pursuing legitimate objectives other than obtaining a tax advantage could reasonably have chosen a different course of action that would not have resulted in a tax advantage, and the tax advantage is the main or one of the main advantages that the entity expects to obtain in connection with the implementation of the arrangement.
Three key elements of the main benefit test
In order for the criterion to be met, all three elements must be present:
- Tax benefit – the arrangement leads, among other things, to:
- no tax liability arising,
- its postponement,
- a reduction in its amount,
- the occurrence of an overpayment, loss, tax refund, etc.
- Taxpayer motivation – the tax benefit was the main or one of the main reasons for choosing a particular course of action.
- Alternative course of action – there was another reasonable option that would have led to similar economic results but without the tax benefit
Practical significance
- In MDR: even legal and compliant actions may be reportable if the tax benefit was the main or one of the main motives and there was an alternative without that benefit.
- In GAAR: the action must be artificial, sham or not economically justified, and the tax benefit must be the sole or one of the predominant objectives.
What does no alternative means?
In the context of MDR, the main benefit test is not met if:
- There is no other reasonable course of action that would lead to similar economic results but without the tax benefit.
- This means that the taxpayer had no real choice – the chosen structure was natural, rational and economically justified, and the tax benefit was secondary.
Practical example 1: Family foundation – if the founder wants to secure assets and ensure succession, then:
- Establishing a foundation and contributing assets to it is the only sensible option.
- There is no alternative that would achieve these objectives as effectively, but without the tax benefit.
- In this case, the lack of an alternative means that the main benefit is not met, even if there is a tax benefit (e.g. tax deferral).
Summary
The lack of an alternative course of action means that the tax benefit was not the main motive for the action, but a consequence of a rational economic choice. In this case, there is no MDR reporting obligation when only one or more general characteristics are met, even if there is a tax benefit.
No artificiality:
- The activities are consistent with the purpose of the law – e.g. a family foundation operates within the statutory succession and investment objectives.
- The tax benefit is not the main purpose – it is a side effect, not the main motive.
- The activities are economically justified – e.g. reinvestment of funds, asset protection, succession.
- The foundation’s statutes and operating procedures are transparent – in accordance with the ratio legis of the Family Foundation Act.
Artificiality:
- The foundation served solely as a “vehicle” – an intermediary for obtaining favourable tax treatment.
- There was no real economic justification – e.g. no reinvestment plan, no actual activity.
- The activities were sequential and superficial – e.g. rapid contribution of shares, their sale and disbursement of funds.
- The tax benefit was the main objective – not a side effect of succession activities
Conclusions – how the Head of the National Revenue Administration understands artificiality
| Criterion | Positive opinion | Refusal |
| Purpose of the action | succession, investment | fiscal, optimisation |
| Economic justification | current and documented | none or apparent |
| Method of operation | in accordance with the law, transparent | sequential, apparent |
| Tax benefit | side effect | main objective |
Practical example 2: Contribution of receivables and reverse merger
Description of the situation: a limited liability company, acting jointly with two limited joint-stock partnerships (SKA1 and SKA2) and their partners, planned the following set of activities:
- Contribution of loan receivables to the limited liability company by SKA1 and SKA2 in exchange for shares.
- Reverse merger of the limited liability company with SKA1 and then with SKA2, resulting in the redemption of own shares.
Basis for refusal to issue an opinion
- The tax benefit was the main purpose of the transaction – to avoid revenue from the redemption of loans and the issue value of shares.
- No real economic change – the ownership structure and assets remained unchanged.
- The actions were artificial – planned in a sequential, technical manner, without economic justification.
Assessment in the context of MDR
In accordance with the MDR provisions, the reporting obligation arises when:
- The arrangement meets the general hallmark (e.g. sequentiality, lack of transparency),
- The main benefit test is met.
In this case:
- The tax benefit has been identified as the main objective.
- There was no alternative course of action that would have led to similar economic results without this benefit.
- The activities were artificial and technical in nature, which meets the general distinguishing feature.
Conclusion (MDR): Since there was no alternative without the tax benefit and the activities were sequential and artificial, is the arrangement not reportable as a tax scheme?
Practical comment
In this case, the lack of an alternative course of action may work in favour of the taxpayer, hence the draft amendment to the MDR rules clarifies the definition of the main benefit test by eliminating this condition. The chosen structure had no economic justification and the sole purpose was to obtain a tax advantage:
– The limited liability company will avoid income from the redemption of loans and from the merger,
– SKA1 and SKA2 and their partners will avoid taxation of the issue value of shares,
– As a result, no tax liability will arise, which constitutes a tax advantage within the meaning of Article 3(18)(a) of the Tax Ordinance.
This differs from a situation where the lack of an alternative results from natural economic needs (e.g. family succession).
Although CIT and PIT regulations provide for tax neutrality for contributions in kind and mergers, it was pointed out that:
– The set of activities had no economic justification other than obtaining a tax advantage,
– The activities were artificially separated and planned in such a way as to exploit loopholes in the regulations,
– There was no real economic change – the assets and ownership structure remained essentially unchanged.
Estonian CIT and transformations
No artificiality:
- The division of the company in order to separate different areas of activity was economically justified – e.g. risk separation, increased management efficiency.
- The tax benefit resulting from the application of Estonian CIT (tax deferral, lower PIT burdens) was not contrary to the purpose of the Act.
- The measures were transparent and compliant with the regulations – they were not fictitious or artificial in nature.
Artificiality:
- The reorganisations were complex and multi-stage, and their main purpose was to adapt the capital group’s structure to the conditions of Estonian CIT.
- There was no real economic justification – e.g. the transformations did not lead to operational changes, but only to tax benefits.
- The actions were artificial because they had no other purpose than tax optimisation – e.g. removing the general partner only to meet the conditions of Estonian CIT.
General conclusion:
The following actions are not considered artificial:
- have a real economic justification,
- are in line with the rules and their purpose,
- and the tax benefit is not the main motive.
However, protection is denied when the actions:
- are fictitious or sequential,
- lack economic rationale,
- and the sole purpose is to obtain a tax advantage.
Final conclusions – The main benefit test in the context of GAAR and MDR
Although MDR and GAAR function as separate legal institutions, their common denominator is the prevention of tax abuse. MDR is a tool that not only acts preventively by imposing an obligation to report potentially risky arrangements, but GAAR also allows tax authorities to eliminate the tax effects of actions deemed artificial. In both cases, the main benefit test and the analysis of economic justification are of key importance. As the supervisory authority, the head of the National Revenue Administration should ensure a uniform interpretation of these provisions, which is important for legal certainty and taxpayer protection.
Proposals – GAAR and MDR provisions can and should be interpreted jointly, even though they are formally separate legal regimes in the Tax Ordinance. Their joint interpretation stems from their purpose, structure and functional links.
