Estonian CIT – Expenses not related to the taxpayer’s business activity

Estonian CIT taxation is subject to, among other things, income corresponding to the amount of non-business expenses. The CIT Act does not define what expenses fall into this category. The Guide to Lump Sum Tax on Corporate Income[1] and the practice of the interpretative authorities may provide some guidance.

General concept
The Guide indicates that in qualifying a given expense as non-business related, one may be assisted by case law and interpretive practice regarding the classification of expenses as deductible expenses under Article 15(1) of the CIT Law. This is due to the fact that both categories of expenses are incurred for the purpose of generating revenue for the taxpayer. However, these concepts – although similar – are not the same, i.e. a non-deductible expense does not automatically have to be a non-business expense.

As examples of non-business expenses, the Guide identifies expenses of a sanctioning nature, such as penalties, fines or interest on late payment of a tax liability, for example.

Application of regulations
The Director of the National Tax Information Service began to pronounce on non-business expenses and in the interpretations he issued stated that they should not include:

  • payments to PFRON[2],
  • expenses for organizing training and integration events for employees and colleagues[3],
  • expenses related to business trips[4],
  • expenses incurred for fruits, beverages, coffee and tea provided for free use by employees[5],
  • expenses incurred on the purchase of gifts for contractors, including in the form of alcohol[6],
  • expenses incurred for flowers and gifts for employees[7],
  • expenses for funeral wreaths for employees, former employees and their families[8].

Individual approach
The qualification of a given expense as business-related or non-business-related depends on the company’s individual facts. This is particularly illustrated by individual interpretations issued with regard to donations made by taxpayers subject to Estonian CIT. These interpretations indicate that the donor in connection with the donation cannot obtain any equivalent from the beneficiary, and therefore the expense is not related to the business. However, other interpretations are known indicating that making donations can contribute to building a positive image and thus increase the company’s revenue, and the expense itself was considered business-related.

[1] Guide to Lump-Sum Income of Companies dated December 23, 2021.

[2] Individual interpretation ref. 0111-KDIB1-3.4010.599.2022.1.JKU dated November 16, 2022.

[3] Individual interpretation ref. 0111-KDIB1-2.4010.521.2022.1.ANK of December 8, 2022.

[4] Individual interpretation ref. 0111-KDIB1-3.4010.641.2022.3.JKU of December 19, 2022.

[5] Individual interpretation ref. 0111-KDIB1-3.4010.641.2022.3.JKU of December 19, 2022.

[6] Individual interpretation ref. 0111-KDIB1-2.4010.447.2022.1.DP of December 8, 2022.

[7] Individual interpretation ref. 0111-KDIB1-2.4010.447.2022.1.DP of December 8, 2022.

[8] Individual interpretation ref. 0111-KDIB1-2.4010.447.2022.1.DP of December 8, 2022.