Specifications upon taxation with income tax

To reduce the overall tax burden, corporations have increasingly resorted to profit shifting through excessive interest payments.

To prevent such activity, the tax payer's deduction of the surplus borrowing costs is limited.

Considering the particularity of the Estonian income tax system, where the profit is taxed only when it is distributed, in Estonia, a restriction on the deduction of interest cannot be established, and therefore the surplus borrowing costs [1] are taxed similarly to other costs not related to business.

On the basis of subsection 1 of § 54² of the Income Tax Act, income tax is charged on the residual borrowing costs of a resident company, other than a financial undertaking, in excess of

• 3 000 000 euros and
• 30 per cent of the interest, tax and profit before depreciation of a resident company (hereinafter profit before depreciation)

in the portion exceeding the losses of the resident company, unless:

1. a resident company is not part of a consolidated group for financial accounting purposes and has no affiliated company or permanent establishment, or
2. the loan is used to finance long-term infrastructure projects of public sector involving both the project promoter, borrowing costs, assets and income in the European Union, or
3. a resident company that is a member of a consolidated group for financial accounting purposes will choose to apply subsection 8.

Therefore, a financial entrepreneur and a company that is not part of a consolidated group for financial accounting purposes and does not have an affiliated company or a permanent establishment do not have to pay income tax on the surplus borrowing costs. Also, in a situation where the loan is used to finance a long-term public sector infrastructure project.

Note

[1] Explanatory memorandum of the Income Tax Act, RT I, 28.12.2018, 44 – entry into force 01.01.2019. Back to text