Income from hidden profits part II – What benefits do not count as hidden profits?
Not all benefits whose beneficiaries are related parties constitute hidden profits. It is first necessary to assess whether the definition of hidden profits has been met, in particular whether the benefit in question has been performed in connection with the right to share in profit, other than distributed profit, the beneficiary of which, directly or indirectly, is a shareholder or an entity directly or indirectly related to a shareholder or taxpayer applying the Estonian CIT.
In addition, the CIT Law provides exemptions for the application of these regulations to certain transactions.
Catalog of exclusions
Hidden profits do not include:
- salaries and social security cash benefits paid to a partner or a related entity of a partner / taxpayer applying Estonian CIT up to the amount of 5x the average monthly salary paid by the taxpayer from the titles indicated by the taxpayer, but not more than 5x the average monthly salary in Poland,
- expenses and depreciation and impairment losses related to the use of passenger cars and other assets:
– in full – when the assets are used exclusively for business purposes,
– in the amount of 50% – if the property components are not used only for business purposes (use for mixed purposes)
- a loan returned by the taxpayer to a related party (excluding interest, commissions, salaries and fees).
Cars for business purposes – documentation issues
The use of a passenger car or other asset exclusively for business purposes must be adequately proven by the taxpayer, as the burden of proof in this case rests with the taxpayer.
The CIT Law does not specify what specific means of proof must be used to document business use, so the taxpayer should be free to do so. For example, the subject matter of the taxpayer’s business or the records he keeps or other evidence may be evaluated to exclude private/personal use. However, we are aware of interpretations by tax authorities requiring mileage records to prove the use of cars for business purposes.