The catalogue is open, but does not cover everything

Commenting on the case in the newspaper, Marcin Socha, tax adviser, manager at Thedy & Partners, emphasised that whether a given payment to a shareholder constitutes a ‘hidden profit’ on the grounds of the so-called Estonian CIT has been the subject of heated disputes between the authorities and taxpayers since the introduction of the regulations in question. In this case, the authorities considered that the hidden profit should be the redemption of shares financed from the company’s share capital and reserves (arising from cash and in-kind contributions made by the shareholder). The court opposed this approach, supporting the taxpayer’s position. The court rightly pointed out that the definition of ‘hidden profits’, despite being an open catalogue, in listing exemplary categories of such profits (using the term ‘in particular’) refers to remuneration for the redemption of shares financed from profit. Applying a rational interpretation of the provisions, remuneration for the redemption of shares financed from a reduction in share capital and reserves (and not from profit) cannot then be regarded as ‘hidden profit’. Indeed, if the legislator had wished to tax such redemptions as well, he would not have limited himself in the exemplary list to redemptions financed from profit, but would have referred to the category of redemption in general. It remains to be hoped that the authorities will stop the broadening interpretation of ‘hidden profits’ under Estonian CIT, which will increase the sense of stability and certainty for entrepreneurs choosing this form of taxation.

The entire article can be read in Rzeczpospolita of 9 August 2023, page H7