Renting property or equipment generates hidden profits
Bad news for entrepreneurs who have opted for Estonian CIT taxation. The tax authorities take a very restrictive stance on the classification of hidden profits, taxed with Estonian CIT. This is evidenced by recent interpretations.
The first one dated 4 November 2022 (No. 0111-KDIB1-1.4010.497.2022.2.AND) concerns the rental of real estate by a company from a single shareholder. In the document issued, the director of the KIS stated that the fact that the company does not have its own assets, which are necessary for the business of shipping and transport, and therefore rents an office, warehouse, garage with workshop and a yard forming part of the operating base from one of the shareholders, leads to the conclusion that the company’s shareholder did not take care to equip the company with the assets necessary for the business. According to the representatives of the tax office, the benefit related to the lease of assets leased from the shareholder will constitute hidden profit within the meaning of Article 28m(3) in connection with Article 28m(1)(2) of the CIT Act and the fact that market prices are applied to this lease does not change this interpretation.
The second interpretation is dated 30 November 2022 (No. 0111-KDIB1-2.4010.474.2022.2.DP) and concerns leased equipment. Here, too, we are confronted with a very restrictive position of the tax office, from which it follows that the amount of rent for the lease of movable assets (in the case under consideration, these were: tachymeters, drilling machines, levellers, riveting machines, hammer drills and impact spanners), BUS-type vans and passenger cars will constitute hidden profit within the meaning of Article 28m(3) in connection with Article 28m(1)(2) of the CIT Act, and thus will be subject to taxation with a lump sum on the company’s income. In the justification for the interpretation, the Director of the KIS indicated that: “a rational business entity aims to equip the company with the necessary assets to carry out its business activities, rather than generate additional costs due to the need to lease the necessary components to carry out business activities”.
– It has to be said that the approach of the tax authorities to accounting under Estonian CIT is surprising, to say the least. It was supposed to be a form of taxation that the largest possible group of entrepreneurs was to be encouraged to choose. Meanwhile, the practice of the tax authorities seems to be quite the opposite. Moreover, the arguments of officials presented in these interpretations concerning the provision of real estate or tools are completely absurd. Renting either real estate, cars or tools is a normal market practice and is the provision of conditions for conducting business. In my opinion, such transactions – automatically – should not be equated with a hidden dividend, and unfortunately, this is how interpretative practice is beginning to take shape – explains Łukasz Kupryjańczyk, tax advisor, partner at Thedy & Partners.