Donations for charitable purposes during the holidays without Estonian CIT.

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Table of contents:

  1. Is a donation subject to Estonian CIT taxation?
  2. Can a donation be subject to Estonian CIT taxation?

It turns out that all forms of donating to charitable purposes, such as giving a holiday package (Noble Box) for various foundations and charitable organizations during Christmas, do not incur additional taxation in companies that have chosen Estonian CIT as their method of taxation.

Is a donation subject to Estonian CIT taxation?

It may seem that donating by a company that has chosen Estonian CIT incurs “hidden profits” to be taxed. One might also wonder if the outflow of funds for making a donation – even for charitable purposes – constitutes expenses unrelated to economic activity (Article 28m, paragraph 1, point 3 of the Corporate Income Tax Act). In both cases, theoretically, a company opting for the flat-rate taxation of corporate income (commonly referred to as Estonian CIT) should pay tax at a rate of 10% or 20% on the value of the donation. However, it turns out that the National Tax Board does not share such reasoning, and donations will not be subject to Estonian CIT taxation.

An example of a favorable stance for companies and charitable organizations is the individual interpretation by the Director of the National Tax Board dated May 10, 2023, ref. 0111-KDIB1-1.4010.139.2023.2.BS. In it, the Tax Authority argues that donations have an impact on the conducted economic activity, and thus are related to it. Therefore, a company that has chosen Estonian CIT does not pay tax on them. As stated by the interpretive body: Building a positive perception in society, and thereby increasing the trust of employees and customers in the future, will translate into achieving financial goals, thus increasing revenues. The costs of donations will therefore be in line with the goal of achieving, securing, or obtaining sources of income; thus, they will be related to the economic activity of the Applicant and not subject to flat-rate taxation.

Can a donation be subject to Estonian CIT taxation?

However, it should be noted that in some cases, making a donation should be considered in the context of “expenses unrelated to economic activity,” which leads to their taxation. This will be the case especially when donations are made without a clear purpose and cannot be linked to activities within corporate social responsibility (CSR). The same applies when donations are made to related entities because in such cases, the donation may meet the criteria of “hidden profits” as referred to in Article 28m, paragraph 3 of the Corporate Income Tax Act.