Benefits in kind without hidden profits in Estonian CIT

świadczenia niepieniężne

Table of contents:

  1. Are non-monetary benefits hidden profits?
  2. What individual interpretations confirm the absence of hidden profits?

Non-monetary benefits have gained immense popularity with the introduction of the Polish Deal. The inability to deduct health insurance contributions for most entrepreneurs’ income has sparked particular interest in all types of income not subject to health insurance contributions. Benefits specified in Article 176 of the Commercial Companies Code (KSH) are not subject to health insurance contributions, allowing for significant economic benefits. This provision allows for the inclusion in the company’s contract of an obligation for a partner to provide recurring non-monetary benefits to the company in exchange for remuneration. However, in the case of a company that has chosen Estonian CIT, an analysis is necessary to determine whether such remuneration specified in Article 176 KSH will be considered hidden profits. If so, the payment of these remunerations will be subject to additional taxation for the company.

Are non-monetary benefits hidden profits?

Provisions of the CIT Act regarding Estonian tax indicate the need to tax not only classical dividends paid to shareholders, but also other transfers to shareholders that lead to similar economic consequences – hidden profits. According to the latest tax interpretations, the Director of the National Tax Information does not consider payments under Article 176 KSH as “hidden profits”. An example is an individual interpretation dated February 24, 2023 (ref. no. 0114-KDIP2-2.4010.291.2022.2.ASK). In the factual situation, the applicant indicated that it is a limited partnership with a managing partner who is also its shareholder. Through the role of shareholder, he was obligated by the company’s agreement to provide recurring non-monetary benefits for remuneration, including sourcing new suppliers, quality control of goods, and website updates. In addition to these tasks, he also receives remuneration for managing the company as a managing partner. In this context, the applicant queried whether the remuneration received by the managing partner, who also acts as a shareholder, would be considered hidden profits.

The Director of the National Tax Information did not identify hidden profits on the side of the applicant company. If the conditions of services provided by the managing partner to the company as part of recurring non-monetary benefits are market-based and necessary as supportive services for the company’s operations, it should be concluded that the remuneration paid to the managing partner for such recurring non-monetary benefits does not constitute hidden profits as referred to in Article 28m(3)(3) of the CIT Act. Therefore, this remuneration will not be subject to flat-rate tax on corporate income under Article 28m(1)(2) of the CIT Act. These conclusions are also supported by provisions in the KSH, which indicate that the remuneration to the managing partner for recurring non-monetary benefits is paid independently of whether the company generates a profit, thereby leading to the conclusion that this remuneration does not constitute a payment equivalent to profit distribution by the company.

Jak przejść na estoński CIT w trakcie roku?

What individual interpretations confirm the absence of hidden profits?

It is worth noting that the above interpretation is not the only one regarding hidden profits from non-monetary benefits paid under Article 176 KSH. The Director of the KIS has also taken a position on this matter in interpretations:

  • dated September 8, 2022, ref. no. 0111-KDIB2-1.4010.337.2022.2.AR
  • dated July 18, 2022, ref. no. 0111-KDIB2-1.4010.216.2022.2.AR