What is the hidden profit in the Estonian CIT?
The Estonian CIT, or flat rate on corporate income, is a favorable form of taxation, but it comes with the concept of hidden profits, which can be problematic for entrepreneurs. The following is the most important information on this subject.
Definition of hidden profits
Hidden profits are monetary or non-monetary benefits made to shareholders, partners or their affiliates. The regulations are designed to prevent the circumvention of dividend taxation through various forms of transfers of value.
Catalog of hidden profits
The Corporate Income Tax Law points to many forms of hidden profits, including:
- Loans made to shareholders.
- Interest, commissions and fees on loans made by partners to the company.
- Expenses for representation.
- Donations to partners.
- Benefits to a private foundation or trust.
- Excess market value of transactions.
Examples of hidden profits
Examples of hidden profits are:
- Loans made to a partner by the company.
- Salaries, commissions and fees paid to a partner by the partnership.
- Expenses for partners’ private trips unrelated to the company’s business.
- Repairs to fixed assets owned by the partners.
What is not hidden profit?
Some benefits, even if performed for the benefit of partners, are not considered hidden profits, such as:
- Salaries of board members and proxies up to five times the company’s average salary.
- Depreciation and loan repayments.
Loans vs. hidden profits
The amount of a loan given to a partner by the company is a hidden profit. Interest, commissions and fees on loans made to the company by partners are also treated as hidden profits unless the loan has a business justification.
Excess market value of a transaction
The excess of the market value of a transaction over the market value accruing to partners or related parties is also treated as hidden profit. It is important that the consideration for services and goods is within market realities.
Non-business expenses
Companies taxed under Estonian CIT must also pay tax on non-business expenses, such as expenses for partners’ private purposes. Such expenses are treated similarly to non-deductible expenses.
Differences between hidden profits and non-business expenses
The main difference is the entity for which the benefits are performed. Hidden profits mainly apply to partners, shareholders or related parties, while non-business expenses may also apply to persons unrelated to the company.
Hidden profits in Estonian CIT – summary
Estonian CIT is a favorable form of taxation, but it requires a thorough knowledge of the regulations regarding hidden profits. Managing the company’s finances and complying with the regulations is key to minimizing tax risks. If you have questions or concerns, it is a good idea to contact your tax advisor.
If you have questions about hidden profits in Estonian CIT, contact our law firm Martini Tax. Our experts will be happy to assist you in understanding and complying with the legal requirements, ensuring safe and efficient business operations.