Table of Contents:
- How to calculate the amount of hidden profits tax?
- How to determine hidden profits tax according to administrative courts?
The Estonian CIT still raises doubts regarding the determination of the taxable base for hidden profits. A problematic issue is whether hidden profits should be calculated based on gross or net amounts. This topic concerns the use of passenger cars by shareholders of companies for mixed purposes and the use of company assets such as laptops and mobile phones used by their employees for personal purposes, with the company incurring leasing fees related to them.
How to calculate the amount of hidden profits tax?
According to Article 28m(1)(2) of the CIT Act, hidden profits (income from hidden profits) are subject to flat-rate tax. Furthermore, under Article 28m(3), hidden profits are defined as “monetary or non-monetary benefits, remunerated, non-remunerated or partially remunerated, made in connection with the right to share in profits, other than distributed profits, of which the beneficiary, directly or indirectly, is a shareholder or partner or an entity directly or indirectly related to the taxpayer or that shareholder, shareholder, or partner (…).” Therefore, for the purposes of calculating Estonian CIT, should hidden profits be calculated based on the net amount from the invoice (included in the financial result) or the gross amount?
It is worth noting that according to the Accounting Act, the concept of cost or purchase price is not synonymous with the concept of expenditure. For example, depreciation allowances are a cost but not an expenditure. Similarly, the purchase of fuel for a car is a cost of materials consumed, which is generally the net purchase price if VAT is deductible. However, “expenditure” is different. It represents an outflow of cash from the company, and the cash outflow occurs in gross amount, including VAT.
The tax authorities demand calculation of the tax based on the gross amount – including VAT – as indicated in the interpretation by the Director of the National Tax Administration on 14 December 2022, file no. 0111-KDIB1-1.4010.696.2022.1.AND, stating that in determining the value of hidden profits from the use of passenger cars for mixed purposes by shareholders of the company, the gross amount, including VAT shown on invoices documenting operating expenses, should be taken into account.
How to determine hidden profits tax according to administrative courts?
In the assessment of the Court in determining the value of hidden profits under the aforementioned Article 28m(1)(2) of the CIT Act and the value of expenditures not related to business activities under Article 28m(1)(3) of the CIT Act in the case of passenger cars used for mixed purposes, the court indicated that the value of expenditures should be considered in gross amount (i.e., including VAT) – as ruled by the Administrative Court in Gdańsk in the judgment of 25 July 2023, file no. I SA/Gd 491/23. Consequently, the Court deemed the authority’s view correct that operating expenses related to cars used by employees of the company/partners of the company, even for personal purposes, constitute expenditures not related/hidden profits from business activities in the amount of 50% of those expenditures in gross value.
A similar position was taken by the Administrative Court in Gdańsk in the judgment of 21 February 2024, file no. I SA/Gd 1054/23.
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