Is a company using Estonian CIT required to prepare transfer pricing documentation? This question may arise after analyzing the regulations regarding the lump sum tax on corporate income. The provisions of Chapter 6b of the Corporate Income Tax Act, titled "Lump-sum tax on corporate income," exhaustively and comprehensively regulate the subject of taxation, the object of taxation, the tax base, tax rates, and the terms and deadlines for payment of the lump sum. It could therefore be concluded that it fully governs all structural elements of the tax. In such a situation, it could also be concluded that a rational legislator excluded reliance on other provisions of the Act regarding Estonian CIT, if the provisions of Chapter 6b do not explicitly refer to them. However, the regulations on Estonian CIT do not refer to the provisions regarding transfer pricing documentation (Articles 11k–11t of the Corporate Income Tax Act). Furthermore, the legislator indicated that entities subject to lump-sum tax on corporate income are not subject to taxation under the principles specified in Article 11k. 19, Article 24b, Article 24ca and Article 24d of the Act.
However, the tax authorities disagree with this position. They argue that an entity benefiting from Estonian corporate income tax must meet certain conditions, including that less than 50% of the operating income earned in the previous tax year may come from transactions with related entities within the meaning of Article 11a, paragraph 1, item 4 – if these transactions do not generate any economic added value or if this value is insignificant. Meeting this condition obliges the taxpayer to monitor transactions with related entities. Furthermore, the provisions of the Act do not explicitly exclude the application of transfer pricing regulations by companies subject to flat-rate taxation. There should be no doubt that in transactions between related entities, the form of income taxation of these entities cannot exclude the application of general provisions (Article 11k – Article 11t) without an express reservation from the tax legislator. Such an express reservation is absent from the provisions of Chapter 6b of the Corporate Income Tax Act.
Despite the doubts arising from the systematic interpretation of the provisions of the Corporate Income Tax Act, the legislator's intent in the provisions under review should be understood. This intent is not to exclude the obligation to document transfer pricing for taxpayers subject to lump-sum taxation on corporate income. To answer the question posed at the beginning, a company using the Estonian Corporate Income Tax is obligated to prepare transfer pricing documentation, just like any other entity meeting the statutory requirements.
