One of the conditions for qualifying for lump-sum taxation on corporate income (Estonian CIT) is an appropriate revenue structure. Specifically, this means that a company's passive income cannot exceed 50% of its total revenue. But is this always the case?
A company trading in gas fuels, subject to Estonian corporate income tax, has raised such concerns. To hedge its operations, it transacts futures contracts. These are derivative financial instruments, and therefore must be included in the calculation of revenue structure for Estonian corporate income tax purposes. Futures contracts hedge the transaction price and are not traded on an organized trading platform. Therefore, they are not speculative in nature, but rather mitigate currency risk in gas trading.
The Company believed that passive income refers to a category of income that:
- is not related to the taxpayer's core business activity,
- is speculative in nature,
- applies to taxpayers who do not actively and effectively conduct business activities.
None of these conditions were met in the company's case. Furthermore, the company indicated that the regulation aims to prevent entities that do not conduct actual business activity from benefiting from the Estonian corporate income tax. Passive income that excludes this form of taxation cannot be income generated as part of active business activity.
The interpretative body disagreed with this position. It stated that a literal interpretation of the provisions leaves no doubt in this regard. The legislator did not decide to make any exceptions regarding the exclusion of certain categories of income from the revenues referred to in Article 28j paragraph 1 item 2 letter f of the CIT Act, e.g., revenues related to the taxpayer's core business or instruments securing the taxpayer's financial result (interpretation of March 27, 2025, reference number: 0114-KDIP2-2.4010.46.2025.1.SJ).
The company appealed the issued ruling. The Provincial Administrative Court in Warsaw, hearing the case, agreed with the company. It pointed out that a literal interpretation of the regulations is intended to protect taxpayers. However, in this case, the literal interpretation leads to conclusions that have nothing to do with protecting taxpayers. In this case, a purposive and systematic interpretation is justified. The legislator's intention in implementing the Estonian CIT regulations was to support operating activities, not activities based on passive income. Therefore, passive income related to securing operating activities (i.e., the primary source of income) should not be relevant to determining whether the condition for taxation in the form of Estonian CIT is met (judgment of 9 July 2025, file reference: III SA/Wa 1037/25)
Although most Estonian corporate income tax payers likely do not have the option of securing their operating activities with forward contracts, the ruling is nonetheless significant for the interpretation of the regulations on the lump sum tax on corporate income. The court indicated that a literal interpretation applies when it protects the taxpayer. Otherwise, other interpretations should also be applied. In particular, it is necessary to examine the rational legislator's intention.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of September 22, 2025.
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