The Estonian Corporate Income Tax (CIT) is an alternative taxation method regulated by Chapter 6b of the Corporate Income Tax Act. This system defers taxation of distributed profits until they are actually distributed or payments equivalent to distributions, known as hidden profits, are made.
Since its introduction, the aspect that has raised the greatest doubts among taxpayers is hidden profit, one of the taxable items. Thousands of tax rulings have been issued regarding what constitutes and what does not constitute hidden profit. One of the controversial issues in the practical application of the Estonian Corporate Income Tax Act is the remuneration paid to partners for recurring non-cash benefits, regulated by Article 176 of the Commercial Companies Code. In his tax rulings, the Director of the National Tax Information Service consistently maintains that such benefits, despite their market nature, are subject to lump-sum taxation as hidden profit.
The essence of recurring non-cash benefits (Article 176 of the Commercial Companies Code)
Recurring non-monetary benefits are a legal institution that allows the imposition of recurring non-monetary obligations on the partners of a limited liability company for the benefit of the company.
The key features of these benefits arising from the Commercial Companies Code are:
1. Obligation in the Company Agreement: The type, scope, and frequency of services must be specified in the company agreement. Examples of activities may include, for example, providing accounting services, IT support, or establishing contact with clients.
2. Remuneration Not Dependent on Profit: The shareholder's remuneration for these benefits must be paid by the company even if the financial statements do not show a profit.
3. Market Price Requirement: The remuneration cannot exceed prevailing market prices or rates. In the future events described, the Applicants ensured that the remuneration was set at market prices, in accordance with Article 11c of the Corporate Income Tax Act.
Recurring benefits experienced a renaissance following the health insurance contribution reform. Remuneration for providing such services is not included in the health insurance contribution base.
Definition of hidden profit in Estonian CIT
In the Estonian CIT system, lump sum taxation applies to, among others, income corresponding to the amount of hidden profits (Article 28m, paragraph 1, item 2 of the CIT Act).
Hidden profits are defined as monetary or non-monetary benefits (paid, gratuitous, or partially paid) provided in connection with the right to participate in profits, other than distributed profits. The beneficiary must be a shareholder, stockholder, partner, or an entity related to them. A benefit deemed hidden profits may be assessed in the context of a dividend-equivalent benefit.
However, the CIT Act provides for a catalogue of exclusions from the definition of hidden profits in Article 28m, paragraph 4.
A key exclusion in the context of partner remuneration is the exclusion of remuneration under an employment contract or a contract for specific work.
This exclusion applies only to the extent that the sum of these remunerations and benefits in a given month does not exceed five times the average monthly remuneration paid by the taxpayer for the above-mentioned reasons (or the average monthly remuneration in the corporate sector).
The position of the tax authorities regarding Article 176 of the Commercial Companies Code
In applications for tax rulings, applicants most often indicate that their payments do not constitute hidden profits because:
1) are established on market terms;
2) are paid regardless of the profit made;
3) are necessary for the company's operations.
Although remuneration is paid independently of profit, the authorities recognize that the institution of Article 176 of the Commercial Companies Code is linked to the shareholder's right to participate in profits. This is treated as an indirect tool for informal profit distribution. The decision to impose the obligation and pay remuneration stems from the ownership relationship and influences the company's operations, which is impossible for an outsider. This benefit constitutes a payment other than profit distribution and is linked to the right to participate in it.
Therefore, since these are benefits provided in connection with the right to participate in profits and do not constitute remuneration under an employment contract or a contract for specific work, this means that they constitute entirely hidden profit.
In this context, arguments regarding the market nature of remuneration remain irrelevant for the tax qualification under the Estonian CIT.
In summary, in light of the interpretation currently presented by the Director of the National Tax Information (KIS), the key factor determining the taxability of benefits under Article 176 of the Commercial Companies Code is their classification under the Personal Income Tax (PIT). If these benefits are not remuneration for a purpose explicitly excluded (employment, vocation, civil law contracts), they are deemed to meet the basic definition of hidden profit (as a benefit associated with the right to profit sharing) and are subject to Estonian Corporate Income Tax (CIT).
See also:
Hidden profits in Estonian CIT
Dividend in kind in a company with Estonian CIT
Passive income in Estonian CIT
Invoicing of the company by a partner and Estonian CIT
How to get out of Estonian CIT?
This article is for informational purposes only and does not constitute legal advice.
The law is current as of November 24, 2025.
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