Commercial associations in Estonia are required to take into account the tax consequences of their actions, especially those that are not directly related to their main business activities. One of these cases may be the provision of a loan to another company, whether it is a related party or not, illustrating the taxation of non-business expenses.
In this article, we will look at exactly what terms of the transaction can lead to tax obligations, and how to calculate taxes related to non-business expenses correctly in various situations.
Basic principles of taxation of expenses not related to entrepreneurial activity
According to the Estonian Income Tax Act, any payments or expenses made by commercial associations that are not related to their business activities are subject to income tax at the rate of 22/78. This includes taxation of non-business expenses.
Lending as a type of non-entrepreneurial expenditure
One of the most common types of such expenses is the provision of a loan. The question of whether such a loan is considered related to entrepreneurial activity or not depends on a number of factors within the framework of the taxation of these non-business expenses:
- Connection with entrepreneurial activity. Lending is considered to be related to entrepreneurial activity if it brings income to the company. This income can be expressed in the form of interest, or in any other way. For example, if a company benefits from the use of funds received as a result of lending, this can be considered income.
- The interest rate. The absence of interest on a loan by itself does not automatically make it unrelated to entrepreneurial activity. However, if the loan is granted on preferential terms (for example, with a zero or very low interest rate), this may indicate that the loan is not related to entrepreneurial activity.
- The usual interest rate. According to article 397 of the Law of Obligations, if the contract does not specify a specific interest rate, then the usual rate applicable at the time of the conclusion of the contract is applied. If there is no such rate, the rate provided for in article 94 of the Law of Obligations is used. This provision must be considered when dealing with the taxation of these types of non-business expenses.
It is worth noting that the Tax and Customs Department does not require mandatory compliance with the latest rule, and its violation does not automatically lead to tax obligations.
Taxation of loans provided to related parties
When it comes to providing a loan to a related party, additional aspects of taxation of non-business expenses need to be considered.:
- Market conditions. If the loan is granted on terms that differ from market conditions (for example, the interest rate is significantly lower than the market rate), then it becomes necessary to adjust the tax base. In this case, income tax will be charged either on lost income (if the rate was underestimated), or on excessively incurred expenses (if the rate is overestimated).
- Parts 4 and 5 of Article 50 of the Income Tax Act. These provisions provide for the possibility of adjusting the tax base depending on the terms of the loan. If the loan is provided on non-market terms, the difference between the real and market value of the loan will be taken into account when calculating income tax, thereby considering the taxation of related-party non-business expenses.
Special attention should be paid to situations where a loan is provided to a related party. In such cases, special rules are applied aimed at preventing tax evasion through manipulation of the terms of loan agreements.
Summarizing
Proper understanding and compliance with the rules of taxation of expenses not related to business activities plays a key role in ensuring financial stability and legal security of companies. Strict adherence to legal regulations, timely documentation of transactions and the involvement of qualified specialists can minimize tax risks associated with the taxation of non-business expenses.