Although the flat-rate tax on corporate income has been in effect since 2021, its practical application still raises doubts. This is evidenced by the constantly published tax rulings. Today, we'd like to present one of them. The questions it raises concern three issues:
- Will remuneration paid to partners for their services to the company constitute hidden profit?
- Can a company opt out of Estonian CIT taxation after the end of any year?
- If the company opts out of Estonian CIT, will it have to pay tax on income allocated to supplementary capital?
According to the company that applied for the interpretation:
- the remuneration paid to partners will not constitute hidden profits and will therefore not be subject to company taxation,
- a company may opt out of Estonian CIT taxation even after the first year of taxation in this form,
- In the event of resignation from Estonian corporate income tax, the company will not be obliged to pay tax on income allocated to supplementary capital.
The Director of the National Tax Information stated that the company’s position was correct regarding the first two questions asked.
The Act defines hidden profits as benefits received in connection with a share in a company's profits. Examples of sources of hidden profits include representation expenses, share capital increases, and the excess of the market value of a transaction over the agreed-upon price. However, remuneration under employment contracts, mandate contracts, contracts for specific work, management contracts, or those paid to members of the management board and supervisory board upon appointment are not considered hidden profits. However, such remuneration cannot exceed five times the average monthly remuneration paid by the company for these purposes, nor five times the average monthly remuneration in the corporate sector.
The Act, however, is silent on the issue of remuneration paid to partners as part of their business activities. Therefore, such remuneration will not constitute hidden profits, but only if the following conditions are met:
- the remuneration will correspond to the market value,
- the partners ensured that the company was equipped with the assets necessary for its business activities,
- the conclusion of the transaction with the related entity would have taken place regardless of the existing connections between the parties to the transaction and the conclusion of the indicated transactions results from the actual business needs of the Applicant.
In terms of question 2, the authority confirmed the already unquestionable practice that a taxpayer may opt out of Estonian CIT after the end of any tax year.
See also How to exit Estonian CIT?
The company's position regarding question 3 was deemed incorrect. The authority justified this by stating that during the Estonian corporate income tax (CIT) tax period, the event that triggers the tax liability is the adoption of a resolution to distribute profits to shareholders. Transferring profits to reserve capital is tax-neutral. However, opting out of this form of taxation is different. In such a case, the sum of net profits generated in each tax year under the lump sum taxation is taxed, to the extent that these profits were not distributed or were not used to cover losses. This means that in the case of opting out of the Estonian corporate income tax, tax is applied to profits that were not taxed during the lump sum taxation period.
Interpretation published on June 9, 2025, 0111-KDIB2-1.4010.342.2021.2.MK
This article is for informational purposes only and does not constitute legal advice.
The law is current as of September 1, 2025.
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