One of the conditions for lump-sum taxation on corporate income (Estonian corporate income tax) is that the majority of income be derived from operating activities. If more than 50% of income comes from passive sources, such as copyrights or industrial property rights, including the sale of these rights, the company will lose the option of being taxed under Estonian corporate income tax. This excludes companies operating in the IT industry, whose primary source of income was copyrights, from this form of taxation. However, the National Tax Information Service confirmed that, in certain circumstances, the IT industry will also be able to switch to Estonian corporate income tax.
The company Software House filed a request for a tax ruling. The applicant provides its software to customers via the internet. Customers are not required to install or update the application on their own hardware. They are also not authorized to access the software's source code, modify, distribute, duplicate, copy, or reproduce the software, or even access their "own" copy of such software (SaaS model). The applicant does not enter into licensing agreements or copyright sale agreements.
The company asked whether revenues from sales in the SaaS model are passive revenues which, if they exceed 50% of the company's total revenues, will exclude it from Estonian CIT.
In the tax ruling of 16 February 2024, reference number 0111-KDIB1-2.4010.685.2023.2.EJ, the office stated that generating revenues from the indicated source does not constitute a reason for exclusion from Estonian CIT, even if these revenues constitute more than 50% of the company's total revenues.
The classification of revenue under copyright law is crucial. Pursuant to Article 17 of the Copyright and Related Rights Act, copyrights are understood solely as the creator's right to use and dispose of the work in all fields of exploitation, and to receive remuneration for the use of the work.
At the same time, it follows from the content of Article 52 of this Act that the transfer of ownership of a copy of a work does not result in the transfer of the author's economic rights to the work, and the transfer of the author's economic rights does not result in the transfer of ownership of a copy of the work to the acquirer (paragraph 2).
The applicant generates revenue from providing services to the contractor, not from copyrights. No royalties are paid in the SaaS model. The terms of cooperation in this model do not provide for the sale of copyrights or the granting of rights to use them in other fields of exploitation.
The above interpretation therefore confirms the possibility of Estonian CIT taxation of the IT industry.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of April 22, 2024
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