However, according to the tax explanations of 23 December 2021 issued by the Ministry of Finance:
“Expenses unrelated to economic activity shall include public law liabilities of punitive nature e.g., penalties, fines or interest on delayed payment of tax liabilities. Apart from the fact that such expenses are punitive in nature, they also are not incurred for the purpose of generating, securing or preserving a source of income as well as they do not constitute the basis for carrying out economic activity.”
It should be highlighted that in case of classification of expenses unrelated to economic activity, one should refer to Art. 15 section 1 of the Act on corporate income tax instead of Art. 16 section 1 thereof describing non-tax-deductible costs. One needs to assume that not every expense or cost that under Art. 16 section 1 of the Act on corporate income tax would – in case of standard CIT – be excluded from tax deductible costs, will qualify in Estonian CIT to be considered as hidden profits or expenses unrelated to economic activity.
Throughout 2022, there were interpretations in which the tax authorities assumed the stand that expenses related to the use of company cars for mixed purposes by employees who were not entities related to the taxpayer qualified as expenses unrelated to economic activity. Thus, 50% of such expenses is subject to lump-sum tax on income of companies.
The final clarification was provided in point 4a of Art. 28m added since January 2023 to the Act on corporate income tax, which reads as follows:
4a. Expenses unrelated to economic activity, referred to in section 1 point 3, shall not include expenses, depreciation write-offs and impairment write-offs related to the use of passenger cars, means of air transport, watercrafts and other assets:
What is more, it was stipulated that the taxpayer is obligated to provide evidence that the asset is used solely for purposes related to conducted economic activity.
It should be highlighted that the added Art. 28 section 4a does not only refer to passenger cars, means of air transport or watercrafts but also to other assets. It can stand, for instance, for a computer, telephone, device, etc. The question is, then, how the taxpayer is supposed to prove that a laptop and screen provided to an employee for remote work is used solely for the purposes of the taxpayer’s economic activity?
The added Art. 28 section 4a has been effective since 1 January 2023. Nevertheless, it gives rise to another question whether the tax authority, in light of interpretations issued throughout the current year, will give up on year 2022 or will still defend the opinion that expenses related to use of company cars for mixed purposes by employees should be classified as expenses unrelated to economic activity already in 2022.
On 18 October 2022, the Voivodeship Administrative Court in Gdańsk issued a decision (case file no. I SA/Gd 917/22) that was favorable to taxpayers of Estonian CIT. The court decided that due to lack of a relevant regulation, there were no grounds for imposing tax on expenses on company cars used by employees (non-partners) for mixed purposes.
Author: Agnieszka Bojar, Accounting Department Manager at MDDP Outsourcing.
Act of 15 February 1992 on corporate income tax
Tax explanations of 23 December 2021 regarding application of provisions of the act on CIT within the scope of new principles of taxation i.e., lump sum on the income of companies
I SA/Gd 917/22 – Decision of the Voivodeship Administrative Court in Gdańsk