Distributable profits are determined based on financial statements drawn up in accordance with Estonian GAAP or IAS/IFRS, and there are no adjustments to accounting profits for tax purposes (e.g. tax depreciation, tax loss carryforward or carryback).
Employers operating in Estonia (including non-resident companies that have a PE or employees in Estonia) are liable to Estonian taxation on any fringe benefits granted to their employees (including directors).
Fringe benefits are subject to an exceptional tax treatment in Estonia, as only the employer is obligated to pay taxes on the fringe benefits furnished to the employee. Taxable fringe benefits received by a resident employee are generally not included in the taxable income of the employee for Estonian tax purposes. Fringe benefits are subject to 20/80 CIT and 33% social tax. For example, where the amount of the benefit is EUR 100, the CIT due by the employer would be EUR 25 (20/80 x 100) and the social tax due EUR 41.25 (0.33 x 125), for a total fringe benefit tax charge of EUR 66.25.
Sports and health costs of an employee are to be exempted from income and social tax in the sum of up to EUR 100 per employee in one quarter. Previously, if the employer bore such costs without a respective obligation deriving from law, the costs were deemed fringe benefits.
Gifts, donations, and representation expenses
The 20/80 CIT is generally due on gifts and donations. Gifts and donations made to certain qualifying recipients are only subject to 20/80 CIT if such expenses exceed one of two limitations:
- 3% of the calculated social tax base for the existing calendar year or
- 10% of the profit of the last financial year according to statutory financial statements.
Representation expenses, those expenditures whose character and primary purpose is for representational or entertainment related activities, are generally subject to 20/80 CIT only if they exceed the threshold of EUR 32 per month plus 2% of the calculated social tax base of the calendar month in which the expenses are paid.
All taxes paid are deductible for CIT purposes. In certain circumstances, domestic or foreign taxes may be creditable against the 20/80 CIT charge under domestic law or an applicable tax treaty.
Other significant items
The 20/80 CIT is generally due on expenses and payments that do not have a business purpose and that are regarded as deemed profit distributions. These may include, for example, late payment interest on tax arrears, penalties imposed by law, bribes, purchase of services or settlement of obligations not related to the taxpayer’s business, and acquisition of assets not related to the taxpayer’s business.
Furthermore, there are specific anti-tax haven rules treating certain transactions and dealings with tax haven companies as deemed profit distributions, which are therefore subject to 20/80 CIT. These include the following:
- Acquisition of securities issued by a tax haven entity (exception for certain listed securities).
- Acquisition of an ownership interest in a tax haven entity.
- Payment of fines or penalties to a tax haven entity, unless settled by court or arbitrage.
- Granting loans or making prepayments to a tax haven entity or otherwise acquiring a claim against a tax haven entity.
From 2018, a new anti-tax avoidance clause entered into force, which obligates a resident company to pay income tax on a loan issued to a shareholder or a partner if the 'circumstances of the transaction indicate that it might be a hidden profit distribution'. If the due date of an outbound loan exceeds 48 months, then the Ministry of Finance assumes that certain loans issued to related parties may constitute hidden profit distributions, and, once the deadline is met, the burden to prove the opposite lies with the taxpayer. This amendment is applicable on qualifying loans granted onwards from 1 July 2017.
Payments to foreign affiliates
Payments to foreign affiliates are deductible for tax purposes (i.e. not subject to 20/80 CIT as deemed profit distributions) if the payment serves a business purpose, provides a benefit to the payer, is at arm’s length, and is substantiated by sufficient documentation.
Payments to foreign affiliates may also be subject to various WHTs. Certain payments to affiliates located in tax haven countries are always subject to 20/80 CIT or a 20% WHT rate.