The investment account is a cash account (standard bank account) opened with a resident credit institution of a member state of the Organisation for Economic Cooperation and Development (OECD) or in the permanent establishment of a credit institution located in the OECD country.
Estonian credit institutions and the affiliated branches of foreign credit institutions operating in Estonia can be found in the Register of Supervised Entities of the Financial Supervision Authority.
A securities account is not an investment account.
Only Estonian residents are allowed to use the investment account because gains from financial assets are taxed in the residency state. Thus, if residency of the investment account user changes, investment account should be marked as closed in the annual tax-return, arising income tax should be paid to Estonia and further transactions with financial assets be declared in the new residency state.
A person may have one or several investment accounts. In order to postpone the income tax liability, transactions with financial assets shall be concluded through the investment account.
The definition ’financial assets’ includes, for example, the publicly traded securities, shares and units of an investment fund, bank deposits and contributions made under unit-linked life assurance contracts (subsection 171 (2) of the Income Tax Act).
The definition ’financial assets’ does not include insurance contracts for a funded pension and units of pension funds, life assurance contracts, on the stock exchange non-marketable holdings in companies, the money granted on the basis of loan agreements, derivative instruments, which underlying are not financial assets and currency investments, as well as immovable property and precious metals.
Investment account and acquisition of financial assets
§ 17² (1) of the Income Tax Act imposes the general rule of acquisition of financial assets. According to the general rule in order to postpone income tax liability of resident natural person, financial assets shall be acquired for the money in the investment account and the money obtained from the sales of financial assets or the income received on financial assets shall immediately be transferred to the investment account. General rule must also be followed when the services of an investment firm (or brokerage firm) are used for the investment.
§ 17² (8) of the Income Tax Act imposes an exception to the general rule. In certain cases, it is possible to include financial assets that have not been acquired for the money in the investment account into the investment account system. The purpose of the exception is to prevent situations where a natural person is forced to use the so-called regular and investment account system at the same time, because of some of financial assets was impossible to acquire regarding the conditions of the general rule.
The acquisition of financial asset received as an inheritance, a gift, a liquidation proceeding or a share options can be regarded as an exception to the general rule, since there was no contract of sale and it was impossible to pay for the transaction without changing the substance of the transaction.
The exception stipulates that the acquisition cost of a financial asset, which was not acquired with money due to the substance of the transaction, should be declared in income tax return as a contribution to the investment account in order to postpone the income tax liability.
For the successor, who received financial asset as an inheritance, the acquisition cost of a financial asset are only the expenses incurred by him(-) or herself (subsection 38 (1) of the Income Tax Act). The successor has the right to declare the expenses incurred in acquiring financial assets as a contribution to the investment account.
The acquisition cost of a financial asset received as a gift, liquidation division or share option may be the amount taxed with income tax on the basis of §§ 48, 49 and 50 of the Income Tax Act or the amount taxed with income tax in a foreign state on the basis of § 38 (8) of the Income Tax Act.
As an example, we bring out the acquisition of a financial asset with a share option. A resident natural person has the right to consider as an acquisition cost of a financial asset and declare in the income tax return as the investment account contribution:
- the amount, which was the subject to income tax paid by the company as a fringe benefit on the basis of § 48 of the Income Tax Act;
- the exercise price of an option paid by a natural person him/herself;
- the option premium paid upon concluding an option agreement, i.e. the amount paid for the option.
Investment account and currency conversions
§ 17² (5) of the Income Tax Act stipulates that currency conversion in the investment account is not considered to be investment account outpayment.
From the investment account it is permitted to invest only into instruments that belong to financial assets within the meaning of § 17¹ of the Income Tax Act. Acquisition of another financial instrument is considered as an investment account outpayment, which will give rise to income tax liability.
Due to the fact that currency is not included in the definition of a financial asset, it is not possible to invest in currencies using the investment account. However, part of the financial assets can only be acquired for a currency other than euro. Therefore, acquisition of a currency other than euro from the investment account is in some cases unavoidable and is not performed for currency investing purposes.
Under this provision, a person has the right to convert currencies on and off the investment account. This type of transactions shall be declared neither as contributions nor as outpayments, in case the sold currency originates from the investment account and the purchased currency is immediately transferred back to the investment account.
Declaring an investment account
The data about the investment account and the income on financial assets shall be declared in a resident natural person’s income tax return (hereinafter income tax return) in table 6.5. In the income tax return shall be declared only contributions to the investment account and outpayments from the investment account. If the outpayment exceeds the payment to investment account, the tax liability shall arise.
In table 6.5 of the income tax return, in general, the following shall be declared only:
- the money transferred to the investment account (cash account) and
- the money outpayments from the investment account (cash account).
No purchase/sale of financial assets (for example, the securities which are traded publicly, units of investment funds, bank deposits) or the movements between the investment account, securities account and the deposit account shall be declared in table 6.5.
The following amounts of contributions to the investment account shall be declared in table 6.5 of the income tax return as well:
- upon opening an investment account, the amount of balance in the account,
from financial assets the dividends received from abroad and has taxed in a foreign state (these shall be declared in addition in table 8.8),
from financial assets the interests received from abroad and has taxed in a foreign state (these shall be declared in addition in table 8.1),
from financial assets the dividends received in Estonia and has taxed in Estonia (are in the pre-completed table 5.1 or 7.1),
from financial assets the interests received in Estonia and has taxed in Estonia (are in the first part of the pre-completed table 5.1).
The amount of contribution is not non-taxed dividend and interest, received from financial assets.
The following outpayment from the investment account shall be declared in table 6.5 as well:
- the income received on the financial assets which is not immediately transferred to the investment account.
Remittances between the investment accounts shall be declared neither as contributions nor as outpayments.
In table 6.5 the balance of the account shall be calculated after each contribution to the investment account and outpayment. The taxable amount shall arise, if the outpayment made from the investment account exceeds the balance of the contribution. If there are several investment accounts, then the taxable amount shall arise, if the outpayments made from all the investment accounts exceed the balance of the contributions.
If the balance of the investment account is 2000 euros, the taxable amount shall arise if the outpayment from the investment account exceeds 2000 euros.
If during a calendar year neither contributions to the investment account nor outpayments from the investment account have been made, then the corresponding notation shall be made in table 6.5 and the balance of the contribution shall be carried forward to the following calendar year.
You can read more about the taxation of income from securities in general on the page "Transfer of securities".