Estonian CIT and transfer pricing

Estonian CIT is an attractive form of taxation that can bring tangible tax benefits to companies. We discussed its advantages in more detail in our previous article: https://www.mddp.pl/zamkniecie-roku-dobry-czas-na-przejscie-na-cit-estonski/

In order to benefit from estonian CIT, taxpayers must meet certain conditions and operate in accordance with the principles of lump-sum taxation of corporate income. One of the key areas to consider is transfer pricing, i.e. the rules for settlements between related parties.

Estonian CIT and transfer pricing – why is the connection important?

Both the entry into the estonian CIT regime and its subsequent application involve, among other things, the analysis of transactions carried out with related parties. The proper identification and analysis of these transactions can impact not only on operating under the estonian CIT regime, but also on the very maintenance of the right to estonian CIT.

Conditions for benefiting from estonian CIT – what is worth checking?

One of the basic requirement for entry into the estonian CIT regime is that less than 50% of the company’s revenue must come from related party transactions, unless they generate significant added value.

So ask yourself the following questions:

• What is the structure of revenue from related party transactions?
• Does revenue from controlled transactions exceeding 50% of total revenue exclude the possibility to benefit from estonian CIT?
• How is the revenue ratio condition imposed affected by the characteristics of the transactions carried out with related parties?
• Should the revenue structure of controlled transactions be monitored on an ongoing basis?

In addition, a company cannot hold (i) shares in other companies, (ii) investment fund titles, or (iii) property rights related to foundations, trusts or other fiduciary structures.

Questions to consider:

• Is short-term ownership of such titles acceptable?
• Is it possible to purchase shares with a view to reselling them quickly?
• Is it possible to acquire such titles if they do not generate links?

Operating rules under the estonian CIT regime and transfer pricing

Companies that apply estonian CIT do not keep classic tax records – they rely on balance sheet data. Under estonian CIT, lump-sum taxation is applied to, inter alia, (i) non-business expenses and (ii) hidden profits (i.e. benefits to partners or related parties).

This raises additional questions regarding the scope of transfer pricing:

• Is an exemption from the documentation obligation possible for domestic transactions?
• How to demonstrate that related party transactions are related to business activities?
• How to determine which entities are related for the purposes of estonian CIT?
• Should all related party transactions be documented?
• Does every controlled transaction have to be concluded in line with the arm’s length principle?
• What are the consequences of not showing hidden profits?

Why is transfer pricing so important in estonian CIT?

Incorrect application of estonian CIT rules, including incomplete analysis of related party transactions, may lead to loss of the right to a lump sum for 3 years and/or additional sanctions.

Do you want to learn #MORE about estonian CIT?

Considering opting for estonian CIT or have questions about transfer pricing and documentation obligations?

Sign up for our newsletter to receive up-to-date information, advice and interpretations: