There is a Chance of No Hidden Profits from Loans under the Estonian CIT

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Table of Contents:

  1. Does Every Loan Constitute Hidden Profit under the Estonian CIT?
  2. Is it Possible to Exempt a Loan from Tax under the Estonian CIT?

There are no legal restrictions on the ability of a company that has chosen the Estonian CIT to grant loans; however, the tax consequences of such a loan remain disputed. Some administrative courts argue against taxing hidden profits from loans disbursed by companies under the Estonian CIT to related entities—provided the loan disbursement is not a form of profit distribution and the loan is economically justified.

Does Every Loan Constitute Hidden Profit under the Estonian CIT?

According to the CIT Act, hidden profits are benefits performed in connection with the right to participate in profits other than distributed profit, whose beneficiary is a shareholder (or partner) or a related entity. The regulations also list an exemplary catalog of benefits that may constitute hidden profits, including the amount of a loan granted by the company to a shareholder (or partner) or related entities. Generally, therefore, granting a loan by a company taxed under the Estonian CIT to a related entity—such as a subsidiary or shareholder—entails the necessity of paying tax on hidden profits (on the loan value!) at a rate of 10% or 20%, depending on whether the taxpayer qualifies as a small taxpayer.

Is it Possible to Exempt a Loan from Tax under the Estonian CIT?

Administrative courts have not developed a consistent view on the issue of tax on hidden profits in relation to loans granted to related entities. In issued tax interpretations, the authority assumes that since loans are listed in the exemplary catalog of benefits that may constitute hidden profits, automatically every such loan will entail the necessity of paying tax. This has been confirmed by administrative courts—for instance, the Regional Administrative Court in Poznań in its ruling of April 25, 2024 (I SA/Po 122/24) and the Regional Administrative Court in Łódź on January 26, 2023 (I SA/Łd 838/22).

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Against this interpretation, the Regional Administrative Court in Gliwice (ruling of May 12, 2023, case no. I SA/Gl 93/23) argued that to assess whether a given benefit actually constitutes hidden profit, it is not sufficient to refer to the exemplary catalog; it is necessary to analyze each case to determine whether the benefit is related to the right to participate in profits and whether it is a kind of substitute for profit distribution in the form of a dividend payout. Therefore, not every loan granted by a taxpayer under the Estonian CIT to shareholders or related entities constitutes hidden profit. Factors against such qualification may include established market conditions for loan repayment or the very purpose of the loan and how the loan is actually used.