Table of contents:
- Are subsidies for medical and life insurance expenses unrelated to business activities?
- What did the Director of the National Tax Administration decide?
Companies that have opted for Estonian corporate income tax (CIT) will not pay tax on expenses unrelated to business activities in the case of subsidies for medical and life insurance for shareholders and their employees. This also applies to training financed in this way, according to the latest individual tax ruling from the Director of the National Tax Administration.
Are subsidies for medical and life insurance expenses unrelated to business activities?
It may seem that subsidizing insurance for employees and shareholders by a company opting for Estonian CIT is not subject to taxation. However, it is necessary to analyze whether such subsidies constitute expenses unrelated to business activities (Article 28m, paragraph 1, point 3 of the Corporate Income Tax Act, further referred to as CIT Act). In such a case, a company opting for the flat-rate tax on corporate income should pay tax at a rate of 10% or 20%.
The company that requested a tax ruling employs family members of shareholders under an employment contract, who are considered related parties under Article 11a, paragraph 1, point 4 of the CIT Act. The company subsidizes private medical insurance and life insurance for them and the shareholders themselves. The terms of this subsidy are defined in the remuneration policy. According to the company, these expenses contribute to maintaining good relations between the company and its employees and enhance work efficiency.
What did the Director of the National Tax Administration decide?
In the interpretation dated February 20, 2024, ref. 0114-KDIP2-2.4010.699.2023.1.IN, the Director of the National Tax Administration concluded that the subsidy is neither a hidden profit (as defined in Article 28m, paragraph 1, point 2 of the CIT Act) nor an expense unrelated to business activities (as defined in Article 28m, paragraph 1, point 3 of the CIT Act). The authority emphasized that the terms of subsidizing private insurance are outlined in the company’s policy, and employees and shareholders are not obligated to use them. Moreover, the expenditure by the company is intended to enhance work efficiency. It was rightly pointed out that if an expense is related to business needs or the benefit is not exclusive to shareholders or related entities but is offered universally to all employees on equal terms, it does not qualify as a flat-rate tax on hidden profit in such a scenario.
