Examples of payments that trigger corporate income tax

Under the Estonian corporate income tax system, all non-business-related payments trigger corporate income tax (CIT) on the net amount of the payment. It becomes payable already in the next month from making the payment. Compared to classical corporate income tax systems, then such payments are essentially “non-deductible” expenses.

If in doubt, you can always ask yourself one question: “Is this expense necessary or appropriate for maintaining or developing my business activities?”

Although the nature of the payments (whether being sufficiently related to business activities or not) should be decided on a case-by-case basis, then the law provides some examples of types of costs which are always taxable. 

• Fines and penalty payments are imposed on the basis of law and interest paid on tax debts.

  Note that this rule does not apply to contractual fines or penalties, but only such imposed by law. Tax late payment interest always incurs a CIT cost as well.

• The cost of property seized from the taxpayer.

  Confiscation of property and assets is regulated under the Criminal Code.

• An environmental charge paid at an increased rate pursuant to the Environmental Charges Act and compensation paid for damage caused to the environment or a third party by pollution or through violation of requirements prescribed by law.

  Considering the nature of business for most e-residents (small entrepreneurs selling their services online, it is unlikely that your company’s activities are regulated by the Environmental Charges Act.

• Gratuities and bribes.

  It is not only illegal to give bribes, but it also results in a tax charge due to the amount paid either in Estonia or abroad.

• Buying property not related to business.

  For example, there would have to be very solid business reasons for an IT consultancy firm to purchase a yacht without paying CIT for it.

• Enrolment and membership fees are paid to non-profit associations unless participation in such associations is directly related to the business of the taxpayer.

  Participation in trade associations and unions is voluntary and should align with the business activities as provided by the Articles of Association of the company.

• Payments for which there is no source document in compliance with the requirements of accounting regulations

  For example, payments for which there is no invoice or there is an incorrect invoice or if no goods or services have been received, then these should be declared and taxed. Therefore, always remember to take and maintain correct expense documents.