Many entrepreneurs who have opted for a lump sum tax on corporate income (the so-called Estonian Corporate Income Tax) are seeking legal ways to compensate partners for their actual work for the company. The institution of recurring non-cash benefits, regulated by the Commercial Companies Code, seemed ideal. However, the rulings of the Director of the National Tax Information Service show that this solution is a straightforward route to taxing these payments as hidden profits .
What are recurring non-cash benefits?
According to the regulations, if a shareholder is obligated to provide recurring non-cash benefits to the company, the partnership agreement must clearly define the type and scope of such benefits. Furthermore, the shareholder's remuneration for such benefits must be paid even if the company's financial statements do not show any profit.
Many taxpayers believed that since this remuneration is independent of financial results and is determined according to market conditions, it has nothing to do with profit distribution. However, the tax authorities have a completely different view on this matter.
The "other sources" trap in PIT
To understand why recurring benefits are taxed as hidden profits, it is necessary to look at the statutory definitions and exclusions.
Lump sum taxation applies to, among other things, income corresponding to the amount of hidden profits. The legislator has provided for exclusions: hidden profits do not include, among others, remuneration for the purposes listed in Article 12, Section 1, and Article 13, Points 7, 8, and 9 of the Personal Income Tax Act, provided they do not exceed the limits specified in the Act. Remuneration for recurring non-cash benefits constitutes income for partners classified as "other sources" (Article 10, Section 1, Point 9 of the Personal Income Tax Act). As a result, this remuneration is not excluded from the list of hidden profits and must be taxed in its entirety at a lump sum on partnership income.
Market orientation is not a protective shield
Companies often defend themselves by arguing that the remuneration paid for recurring non-cash benefits is set at a market level, meaning the level that unrelated entities would agree to. Why does this argument fail when confronted by tax authorities?
The main reason is that in the case of recurring non-cash benefits, arguments based on market value are irrelevant to the National Tax Information. The partners themselves decide whether a specific partner has been assigned the obligation to perform these benefits, thus creating a mechanism for maintaining their control over remuneration. This, in turn, means that the partner makes decisions on their own, which significantly impacts the operation of the partnership itself.
Summary
If your company uses the Estonian Corporate Income Tax (CIT) and at the same time pays yourself or other partners remuneration under Article 176 of the Commercial Companies Code (or similar provisions for general partners managing the company's affairs), you must be aware of the significant tax risk. The tax authorities may require the company to pay tax
This article is for informational purposes only and does not constitute legal advice.
The law is current as of March 1, 2026.
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