Entrepreneurship, ownership, environment

When assessing freedom of entrepreneurship, the viewpoint – either too little or too much freedom – depends on whether someone is an entrepreneur or whether they have to put up with the effects of entrepreneurship. The natural environment and its protection is becoming a bludgeon that is employed relatively rashly, whereas the environment itself seems to be the only actual loser in this. To protect eagles and flying squirrels, it is not sufficient to have the state only exert pressure on owners of land while nothing else is done to protect these birds and animals. 

Freedom and restriction are opposites. Where there is a restriction, full freedom no longer exists. Therefore, a balance must be found between freedom and restrictions imposed for the benefit of all. If we fail to do this, we could find ourselves suffocating under norms in the fervour of administering excessive caution and risks. 

Spatial planning and building

Spatial planning and building combine aspects of ownership, freedom of entrepreneurship as well as the natural human desire to enjoy one’s home and living environment. All these rights can be used simultaneously only when agreements are honoured and solutions to problems are sought.

A spatial plan is a community-based agreement, and reaching it involves weighing different solutions and finding a mutually satisfactory balance between private and public interests. In the case of an established spatial plan, its conditions may be presumed to be complied with and the local authority may be presumed to be following the spatial plan in all its relevant proceedings. 

During the reporting period, the Chancellor dealt with several cases where not all the requirements of the spatial plan – inserted in it for protection of people’s interests – were being complied with. A dispute arose as to whether the noise level in a certain area exceeded norms precisely because the requirements laid down in the spatial plan had not been complied with. A spatial plan is valid as an integrated whole. A local authority cannot afford solutions that are contrary to the spatial plan. 

If a spatial plan allows a choice between several solutions, a local authority should not restrict those conditions when processing a building permit – for example, by requiring only one solution and excluding another. A person interested in a spatial plan (e.g. a developer) is entitled to presume that they are not presented with demands that conflict with the spatial plan or are even unlawful. 

The possibilities for a local authority to influence implementing a spatial plan after it has been established are limited. If a spatial plan lays down several buildings but the sequence of building them is not set, the local authority cannot prescribe which buildings should be built first. A spatial plan grants the right to build something but does not oblige anyone to do so. If a local authority wishes to make the requirements more specific – for example, set the sequence of constructing the buildings set out in the spatial plan – this can be done based on agreement reached prior to establishing the plan.

Several important issues can also be resolved through authorisation for use, which can subsequently be modified if necessary. This means that, at the latest when issuing authorisation for use, a local authority must resolve all inconvenient and conflicting problems that were previously evaded or sidestepped. Dealing with consequences any later could be complicated, so that suitable solutions should be suggested to the local authority, the developer and the local community as soon as possible.

The value of a spatial plan as a community-based agreement lies in its completeness. Even though a spatial plan need not decide on every detail, issues that should only be determined in a spatial plan should not be sidestepped. Under the District Heating Act, the district heating area is determined by a comprehensive plan. On this depends whether and when a building must be connected to a district heating network. Probably due to its ambiguous wording, the provision is implemented in various ways. Many local authorities have determined a district heating area by a regulation, thus depriving local residents of the possibility to be involved in deciding issues affecting their life. Everyone can have a say and submit their proposals during the planning procedure. If proposals are not taken into account, recourse to an administrative court is available for protection of one’s interests. However, if the same issue is resolved by a regulation, people cannot have a say in deciding. Therefore, the wording of the Act should be modified. The Chancellor of Justice also sent a memorandum to the Riigikogu on this.

If a local authority spatial plan authorises an extensive real estate development, the local authority itself also usually assumes more obligations. The local authority must find out how to organise provision of public services to people settling in the spatial planning area and how much money this requires. A complete living environment presumes the existence of access roads, a public water supply and sewerage system, as well as buildings needed to provide public services (e.g. a kindergarten and a school). In new development areas, all this is usually absent. By law, a local authority must ensure the existence of infrastructure needed in the public interest. 

Often local authorities lack money to perform the public functions inherent in a spatial plan. For this reason, and as a precondition for initiating and establishing a detailed spatial plan, local authorities have started to demand that developers should also contribute to creating the public infrastructure either through co-financing or otherwise. These additional expenses are reflected in the sale prices of the development, so that purchasers of a new dwelling also cover the expenses of creating public infrastructure. Such a practice also helps to ensure that development of new real estate does not take place at the expense of all local residents. This also helps to avoid a situation where a developer earns a profit but leaves problems for the local authority to resolve.

Although the solution offered by local authorities is lawful, it is not transparent because agreements concluded between local authorities and developers are not public. Therefore, this entails the risk of unequal treatment and corruption. It may be that some development projects gain an advantage over others because of unjustifiably more lenient conditions. A situation where making these decisions is within the competence of city or rural municipality officials and the municipal council cannot control the process is also lacking in credibility.

Because of these problems, a statutory amendment is worth considering in order to deal with obligations imposed on developers in the public interest. Consideration should be given to the possibility of conferring on local authorities the right to use a legislative act of general application to establish the methodology and conditions for granting so-called development benefits, and why not also establish the benefit rate. In that case, everybody could anticipate with some certainty what obligations may accompany the development, which in turn would ensure transparency of the process and equal treatment. In the interests of transparency, that part of the agreement concluded with a developer whereby obligations under public law are imposed on the developer could be made public, 

Entrepreneurship

Freedom of entrepreneurship means that the state may not create unjustified obstacles to entrepreneurship. Entrepreneurs have the right to be free of state intervention. During the reporting period, the Chancellor analysed two important restrictions on freedom of entrepreneurship. 

With regard to pharmacy reform, the Chancellor found that the law had provided a sufficient transition period (five years) for implementing the ban on vertical integration of a retailer and wholesaler (i.e. a wholesaler may not simultaneously be a retailer) and the requirement for a pharmacy to be owned by a pharmacist. Besides, under the Constitution, the Riigikogu may introduce reforms necessary for reorganising a certain sector for essential reasons (e.g. health protection). Therefore, there exists no reason to consider restrictions on operators to be disproportionate. 

The state has a duty to protect people’s health. The pharmaceutical service is part of the healthcare sector, which differs somewhat from ordinary economic activity. The population of Estonia is small and its population density low, so that simultaneously ensuring a viable pharmacy market, strong competition, and availability of medicines at a reasonable price is difficult. It is for the Riigikogu to decide what measures to use for achieving these objectives. Certainly, restrictions may not be arbitrary and the time for adapting to new rules should not be too short. 

With the ban on connection between retailers and wholesalers and the requirement for a pharmacist to have a majority holding in a pharmacy, the Riigikogu wanted to facilitate competition, the commercial independence of pharmacists, and their occupational accountability for the quality of the pharmaceutical service. Whether the objectives sought would be attained as a result of reorganising the pharmacy market is impossible to say at the moment. Clearly, the state must ensure compliance with the new rules, including preventing concealed participation and de facto influence by wholesalers in pharmacies run by a pharmacist. All market participants must be able to operate honestly. 

Some operating licences have already been issued under the new rules to pharmacies run by a pharmacist. The Estonian legal order has rules necessary to acquire or transfer a holding in a company, so that there is also no reason to speak of absence of implementing provisions. 

In July 2019, a ban on the display of tobacco products will enter into force, meaning that customers visiting a grocery store may no longer see tobacco products on sale or their trademarks. The experience of several countries shows that a tobacco display ban has led to a significant decrease in the number of young people who smoke. Therefore, in the Chancellor’s opinion the restriction is constitutional. 

Assessing the extent and intensity of interference by the display ban with freedom of entrepreneurship should take into account that several exceptions have been laid down for implementing the ban (e.g. separate shops for sale of tobacco products) and use of trademarks will not disappear – a trademark can still be found in text format on a price list and/or in a catalogue. Although this would limit the possibility to display a trademark – presumably decreasing the profit gained from a trademark – but since using a trademark to a limited extent is still possible, interference with the fundamental right to property and freedom of entrepreneurship is moderate. 

According to the explanatory memorandum to the Draft Act, advertising at a point of sale and display of tobacco products in retail stores affects purchasing decisions. According to the 2014 survey of health behaviour among adults and schoolchildren in Estonia as well as general health data, tobacco consumption among young people at school is a serious problem. Smoking begins at an early age – both boys and girls take up smoking on average at the age of 12. 

In conclusion, in view of the public interest, the objective of public health protection (in particular protecting the health of minors) outweighs the restrictions imposed on undertakings. 

The aim of undertakings is to earn a profit from their investment. It is mandatory for commercial associations to accumulate a legal reserve, which must be done continuously because the law does not allow them to act differently. The Constitution does not preclude imposing somewhat different rules on commercial associations in comparison to other companies. At the same time, all distinctions must be justified and every limitation must serve a certain objective. In this connection, the Chancellor of Justice asked the Riigikogu to form an opinion that takes into consideration the realities of life. 

The Chancellor sent a memorandum to the Riigikogu Rural Affairs Committee concerning late interest calculated on agricultural support to be recovered. The rate of late interest (0.1% a day, 36.5% a year) laid down by the European Union Common Agricultural Policy Implementation Act is high, and interest charged for a long period may place persons unable to repay the support by the deadline in an economically difficult situation. The agency reclaiming the support has no option to reduce or cancel the interest. After debating the issue, the Riigikogu Rural Affairs Committee preferred the solution based on the 2014-2020 Structural Assistance Act, under which only interest (3% of the amount of debt a year) would be charged in the event of postponed repayment of debt by instalments. The Rural Affairs Committee tasked the Ministry of Rural Affairs with preparing the legislative amendments. 

Taxes

Undertakings and employers’ representatives have repeatedly expressed concern about hastily introduced tax amendments, underlining how important a stable tax environment is for them. Undertakings also expect the state to analyse all tax policy changes more thoroughly than so far. 

During the reporting period, the Chancellor had to reply to numerous enquiries about a change in the principles for calculating tax-free income and restrictions on income tax incentives and tax exemptions. 

Dissatisfaction was caused by the fact that calculating the amount of the basic exemption for tax-free income also takes into account, for example, dividends, income earned abroad, savings account interest, and lump-sum payments of supplementary funded pension. Several petitioners found this to amount to double taxation, in particular if the same income had already been previously taxed either abroad or by the entity paying the dividends. However, this does not constitute double taxation because income already taxed previously is not taxed again. Dividends are taken into account only when deciding on the amount of basic exemption deductible from income.

In the Chancellor’s opinion, the parliament is entitled to decide that calculation of the basic exemption deductible from income takes into account, inter alia, lump-sum supplementary funded pension payments, i.e. so-called third-pillar pension payments. Since a person is refunded the income tax paid on sums invested in the so-called third pension pillar, taxation of money so invested is deferred until disbursement. As taxation of payments into the third pension pillar is deferred to the moment when a person receives the income, it is problematic to argue against the fact that taxable disbursements are taken into account in calculating the basic exemption similarly to other taxable income. Lump-sum disbursements from the so-called third pension pillar are mostly also taxed at a more favourable 10% income tax rate. Regular pension payments made under a lifelong pension contract are tax-exempt and do not affect the amount of tax-free income. The Riigikogu is entitled to direct people to use their money collected in the third pension pillar in such a way as to ensure that they have a steady supplement to their pension in the form of regular disbursement during retirement. 

When establishing the graded basic exemption system, the Riigikogu overlooked several technical tax issues as a result of which the basic exemption cannot be used immediately. For example, a low-paid person with several places of employment receiving less than 500 euros remuneration from each employer must wait until filing their tax return in order to fully use the basic exemption to which they are entitled. An application for basic exemption can be filed only with one employer. If basic exemption for the whole year had not been exhausted when income tax was withheld, any income tax overpaid is refunded on the basis of the tax return. Working pensioners would have been in a similar situation. After intervention by the Chancellor, the Riigikogu amended the Income Tax Act at the end of 2017. Pensioners can now file an application for basic exemption both with the Social Insurance Board and their employer. This enables them to use the 500-euro basic exemption to the maximum extent immediately and not a year later when reclaiming tax on the basis of their income tax return. 

No possibility was established for low-paid workers to divide the basic exemption between different employers. The reason is the current Social Tax Act, which places the minimum obligation for social tax on the employer who computes a person’s basic exemption for income tax. In order for an employee to be able to file an application for basic exemption with several employers, the issue of the employer required to execute the minimum social tax obligation should have been resolved. A possible solution is seen through an information technology development in the Tax and Customs Board system, which would allow employees themselves to choose how to compute the basic exemption. The new system cannot be expected before 2020. On the other hand, people with several places of employment have the opportunity to get ‘credit’ from the state in certain cases. If the employer paying the lowest wage (e.g. 500 euros) were to be chosen as the entity executing the basic exemption, the income tax obligation could be deferred until filing the tax return and until the obligation to pay extra tax arises on the basis of the return. A person with one place of employment and earning the same amount of income has no such option. The Chancellor found that the deviations described above are inevitable in the case of a new system and are not unfair because, when taking the entire taxation period into account, people are nonetheless taxed fairly. As at July 2018, according to information from the Tax and Customs Board, approximately 36 000 people had used their basic exemption to an extent exceeding the entitlement available to them based on their annual income. These people will later incur an obligation to pay additional income tax.

The Chancellor dealt with a case where a pensioner did not receive the pension amount to be delivered to their home at the right time. They received the money one month later together with the next month’s pension. Due to the larger amount, the system automatically also calculated income tax which would not have been withheld if the pension had been paid in time. In the Chancellor’s opinion, the system could be more flexible because in this case the state actually knew that the pensioner had two months’ pension delivered to their home, which falls under the basic exemption if calculated separately for each month. The law can also be interpreted so that pension that is to be delivered to a person’s home, but is not delivered, is actually deposited with the state until disbursement, and taxation is not deferred to the actual time of disbursement. Unfortunately, this is not currently technically possible; a change in the IT systems of the Social Insurance Board and the Tax and Customs Board is needed. In a situation similar to this one, the state should apply the principle of good administration. The Social Insurance Board is checking every month whether the pension that has not been disbursed can be delivered to the person within the same month. Recipients of a pension to be delivered to their home are also notified that upon receiving several months’ pension the pension could be temporarily smaller because of the month-based threshold for calculating the basic exemption. 

As of 2018, the Riigikogu abolished the tax exemption for savings account interest paid to natural persons. In this connection, the Chancellor received several petitions in which people pointed out a possible violation of their rights. When opening a savings account, they had not taken into account the fact that by the time of payment of interest, the tax law may have changed and the expected income could be smaller due to taxation. Because the law has not laid down a fixed-term tax exemption and no other assurance exists either as to how long the tax exemption would last, the amendment is not unconstitutional. 

In 2018, a maximum amount of 300 euros of housing loan interest is deductible from taxable income. Just as in the case of savings account interest, the Chancellor acknowledged that the Income Tax Act does not lay down a fixed-term tax exemption with regard to housing loan interest nor have any other assurances been given that the tax exemption would remain unchanged for decades. Thus, a borrower has not developed a legitimate expectation that the right of deduction of loan interest could be used without change during the whole period of loan repayment. The parliament decided to increase the basic exemption for lower-income people and at the same time to limit other tax exemptions and incentives ‒ a choice that has been made within the boundaries of the Constitution. 

The Chancellor drew attention to the fact that the Tax and Customs Board was not following the law when deducting housing loan interest from taxable income. Under the Income Tax Act, housing loan interest may be deducted from taxable income in the case of existence of a building permit as well as a construction project. This tax incentive can be used in the case of a housing loan taken for building and installation work for the purposes of erecting, expanding or reconstructing a building, changing the division of space in a building, as well as technological modification of a building. Under the Building Code, no building permit or filing of a building notice is required for some of these works. Thus, to do these works, a construction project need not always be entered in the building register or otherwise approved by the local authority. A project drawn up by persons themselves is also legitimate if it meets the general requirements and if building is possible according to it. The Chancellor was contacted by an individual whom the tax authority had barred from deducting housing loan interest from taxable income because the construction project submitted to the Tax and Customs Board had not been approved. In actuality, the construction project conformed to legal requirements. The Chancellor has to explain once again to the Tax and Customs Board that the activity of an administrative authority must be in conformity with the law and the Board must take into consideration amendments introduced in legislation. Administrative authorities may not restrict statutory rights or change their substance. Unfortunately, the Tax and Customs Board did not agree to change its implementing practice, so that taxpayers must protect their rights in court if necessary.

In the opinion of several people contacting the Chancellor, the maximum limit for deduction of training expenses from taxable income is not in conformity with the principle of equal treatment. A uniform exemption applicable for everyone restricts deduction of expenses for children’s hobby education. In the opinion of the petitioners, a parent should have the right of deduction separately for each dependant within the applicable limit. The Chancellor found that the Riigikogu has the right to decide on the issue of supporting families with children. In view of the fact that other tax incentives have been granted to parents (e.g. additional basic exemption per child as of the second child) and that family benefits are paid to cover expenses related to children, parents are not in a disadvantaged situation as compared to other taxpayers.

Taxing the income of people with reduced capacity for work raised the issue of different treatment. The Chancellor was asked why work ability allowance is tax-exempt and is not taken into account when calculating a person’s basic exemption, whereas incapacity for work pension is taxable and is taken into account in the formula for calculation of the basic exemption. Work ability allowance was also exempt previously, but because additional basic exemption was then also applicable to pensions (236 euros a month in 2017; the average incapacity for work pension was 229 euros a month in 2017, i.e. mostly tax-exempt), this did not lead to such a markedly different tax burden for allowance recipients and pension recipients as now. For example, a person whose incapacity for work pension is 200 euros a month and remuneration 1100 euros a month pays 613 euros more income tax in 2018 than a person receiving the same amount of work ability allowance and remuneration. 

The Chancellor was asked why people with reduced capacity for work need to be taxed differently, depending on when and on what basis the state assessed their capacity for work. Considering the possibility that the Riigikogu may have overlooked the issue when discussing changes to the basic exemption for tax-free income at the end of 2016, the Chancellor asked for an opinion from the Riigikogu Finance Committee. After having listened to the opinion of the parliamentary Social Affairs Committee, the Finance Committee found that different treatment could be justified by several arguments, even though initially the Riigikogu had no intention to tax recipients of the incapacity for work pension and work ability allowance differently. In view of the wide margin of appreciation enjoyed by the Riigikogu with regard to social policy issues, and taking into account the opinions of the Riigikogu committees, the Chancellor of Justice acknowledged that no conflict with the Constitution existed. When granting tax incentives, the Riigikogu is entitled to direct people to behave in a manner that facilitates attaining the objectives of capacity for work reform. 

Several people asked the Chancellor’s assessment of the road toll imposed on goods vehicles, the collection of which began as of 1 January 2018. For some goods vehicles, the road toll, the heavy goods vehicles tax, as well as the special carriage fee has to be paid. The Chancellor found that taxing the same object of taxation with several taxes is not prohibited by the Constitution and the heavy goods vehicle tax, the road toll and the special carriage fee are also different financial duties by their nature and purpose.

Environment

The principle of good administration means, inter alia, that state and local government officials communicate with people politely and to the point. State and local authorities must also organise their work so that no one is left uninformed or in a simply confusing situation as a result of action or inaction by the state. 

If the state is unable to establish a protected area around the nesting tree of a flying squirrel and protects only the nesting tree, this goes against the principles of good administration. As a result of delay in dealing with the issue, the owner of land has no clarity for a long time as to whether and within what borders and under what protection scheme their property will be taken under protection. This may lead to violation of the rights of the owner.

As a counterweight to the state’s occasional passivity, officials often eagerly present people with new requirements. For example, the Environmental Board requested cattle farmers to provide detailed information on forming manure stacks on fields even though no such obligation is laid down by law. No one doubts that ground and surface water need protection against pollution. The Riigikogu has also set out the relevant requirements in law, and compliance with them is being monitored. Therefore, self-initiative on the part of state agencies does not particularly contribute to fulfilling legal requirements. This is burdensome on persons submitting information as well as on officials who have to analyse it. If detailed information requested about manure stacks is not substantively used, the result is waste of time and people’s nerves. Officials maintain the right to ask additional information in the event of reasonable suspicion, but no such information should be collected just in case.

Guidelines prepared by an agency should not restrict a legal norm or change the substance of the norm. This is not compatible with the principle of good administration, under which people should be able to trust guidelines given by the state. For example, guidelines drawn up by the Agricultural Registers and Information Board, and their rigid technical interpretation, which the Chancellor analysed at the request of a farmer, qualified a seaside pasture with occasional small junipers in it as being forest ineligible for support. 

Activities by state and local government may not mislead persons or raise false expectations. Opinions expressed by officials must also be intelligible. If no assistance can be offered, the authorities must say so. Good administration means that a state agency should resolve a matter swiftly and reasonably, while avoiding causing people inconvenience and costs. 

The principle of good administration and the investigative principle laid down by the Administrative Procedure Act require that an agency should ascertain all the facts necessary to form an opinion. This means that, for example, if registers contain conflicting information concerning an immovable, then the actual situation should be ascertained. The Chancellor dealt with a case where the Environmental Board had concluded that construction was impossible on a plot of land because forest was growing on the immovable, and in that case the building exclusion zone overlaps with the limited management zone on the lake shore. The petitioner assured that in actuality there is no forest on the immovable and this was also indicated by the land cadastre. However, according to the information in the forest register, the immovable was covered in forest. The Environmental Board was aware that there was no forest according to the land cadastre, but nevertheless relied on the information in the forest register without ascertaining the facts, thus reaching the conclusion that construction on the immovable was impossible. The matter could have been clarified by a responsible official in the Environmental Board who should have ascertained the actual situation. 

During the reporting year, it was found that in the process of organising waste transport Tallinn city had created an opportunity for itself to collect a separate fee from residents for settling accounts and for keeping the register of waste holders. Since such fees can only be laid down by law (and not by local government regulations), the Chancellor proposed that Tallinn City Council should bring the waste management regulations into line with the Constitution and stop collecting the unlawful fee from residents. Tallinn did not consider it necessary to change the contested norm and the Chancellor of Justice lodged an application with the Supreme Court to annul some provisions of the Tallinn waste management regulations on account of their unconstitutionality. 

When organising waste transport, neither Tallinn city government nor Maardu town government have complied with the rules laid down by the municipal council for waste containers. This meant that even though people’s waste containers conformed to the requirements of waste management regulations, the waste transporter considered them to be inappropriate and refused to empty them. For some reason, neither the city nor the town governments have considered it necessary to organise a tender to find a waste transporter under conditions where the transporter should in reality be able to empty containers that meet the requirements established by the local authority. Having considered the Chancellor’s recommendations, the waste transporter provided new waste containers to residents free of charge.