Expenditures of the OÜ company in Estonia. When do you have to pay tax on it?
The Estonian CIT structure, which is collected only at the time of distribution of profits, also required the implementation of mechanisms that counteract hidden dividend payments. Seemingly, it is easy to classify expenses that are necessary to ensure business continuity and work efficiency. However, very often entrepreneurs are not aware at the time of the transaction that they thereby generate a taxable purchase. We decided to facilitate this by preparing a list broken down into those expenses that do not require the payment of taxes and those on which you must pay corporate income tax. We want to stress that our list presented below is general, and expenditure should always be assessed on a case-by-case basis, taking into account the company’s activities.
Untaxed expenditures incurred by the OÜ company in Estonia
Most expenses incurred by the company per month can be included in the group of costs which do not require paying tax.
Briefly, they include:
- company registration costs,
- renting office space,
- costs of materials necessary to provide services,
- work of subcontractors,
- use of professional and support services,
- marketing,
- technological devices and software,
- bank fees and commissions,
- properly documented business travel expenses.
In terms of the law and applicable accounting principles, each company’s expense must be confirmed by an appropriate document (usually an invoice).
Company expenditure on which the tax is payable
However, the above-mentioned expenditures may be subject to compulsory taxation. This is the case when a company does not have a relevant document proving this expenditure, e.g. a lease agreement, invoice, etc. In such a situation, this expenditure is classified as non-business-related and 20% CIT must be paid on it.
Expenditures covered by taxation may include, among others:
- fines, interest and financial penalties.
- environmental charges paid at an increased rate in accordance with the Environmental Charges Act and compensation for environmental or third party damage caused by pollution or violation of the provisions of the Act,
- tips,
- buying a non-business property,
- registration and membership fees paid to non-profit associations, unless participation in such associations is directly linked to the activities of the taxpayer,
- payments to entities registered in countries with harmful tax policies.
Additional benefits subject to social tax in Estonia
Other expenditures of the company can be qualified as additional benefits. They are not directly related to the business activities and additionally provide benefits to individual who is a member of the Board, employee or shareholder. Income tax rate payable on additional benefits is 20% of gross amount (20/80 when accounting net amount). Moreover, one should calculate and pay social tax of 33% from the gross amount.
Example:
Purchase of a birthday gift for an employee worth 100 EUR results in:
- income tax of EUR 25 (100 x 20/80)
- social tax of EUR 41.25 ((100 + 25) x 33%)
Total cost for the company is EUR 166.25 (100 + 25 + 41,25)
Based on the Estonian Act on the Social Tax we can identify a few examples of financial liabilities which always have to be taxed as the additional benefit.
- full or partial covering of residential property expenditures for private use,
- remuneration and expenditures paid for the benefit of the employee,
- free-of-charge exploitation of a vehicle of the employer, or payable exploitation of another property of the employer, or doing so at a better price for the activities unrelated to the employer’s business activities,
- paying social premiums not resulting from a legal obligation,
- compensation for use of a private automobile in so far as it exceeds the limits established by the Income Tax Act.
- transfer free of charge or sale or exchange at a price lower than the market price, of a thing, security, proprietary right or service
- covering of costs of formal education or vocational education except training related to the employment relationship.
What is more, in some cases expenditures for accommodation and transport can be also exempted from taxation on additional benefits. For this to occur, the travel costs have to related to the business activity and be properly documented.
Expenditures on foods and meetings in restaurants are under special scrutiny and by principle are subject to taxation as additional benefits. To avoid this, one has to properly describe the accounting document by including the information about the participants and business purpose.