Investment fund as tax cost

Amendment law dated 28 November 2020 amending the Corporate Income Tax Act and some other laws 30 November 2020, item 2122), from 1 January 2021 introduces as an alternative to a lump sum on the income of capital companies (i.e.

the so-called Estonian CIT) the possibility to include in the cost of obtaining revenues of write-downs on a special investment fund (account). In an economic sense, this allows for a faster settlement of depreciation of fixed assets in tax costs, taking into account existing (classical) tax rules.

If the option is chosen using an investment fund, there is no interference with the existing accounts and the taxpayer can continue to benefit from the preferences provided for in the ‘classic’ CIT system.

New investment fund – inclusion in revenue costs

According to newly added Article 15(1hb) CIT Act, Taxable Persons, except those listed under Article 28k (excluded from the possibility to benefit from the ‘Estonian CIT’), meeting the conditions laid down in the tax year under Article 28j(1)(1-6) (‘Estonian CIT’ tax conditions may include the costs of obtaining revenue offsettings on the reserve capital-segregated fund set up for investment purposes in question. Under Article 28g(1) and 2, where the following cumulative conditions are met:

1. the fund is created from the profit realised for the year preceding the tax year;
2. the cash equivalent corresponding to the value of the write-down on that fund shall be paid, no later than the date on which that write-down was made, to be deducted for that purpose only:

(a) the clearing account in question under Article 49(1)(1) Act dated 29 August 1997 - Bank law, qualified entity within the meaning of Article 119zg(4) Tax Ordinance either

(b) the account of a cooperative member of a credit and savings bank that is a qualified entity within the meaning of Article 119zg(4) Tax Ordinance;

1. cash in question Under point 2, they do not come from loans (credit), grants, subsidies, subsidies or other forms of financial support;
2. the funds collected in the tax year of that fund shall be spent for those investment purposes no later than the tax year following the year in which that write-down was made, unless:

(a) the taxable person shall submit to the competent head of the tax office information on the planned investments indicating the year of the fund's expenditure for these investment purposes; and

(b) expenditure of these appropriations shall take place no later than In the third the tax year following the year in which that copy was made, each tax year of which 3 years may not exceed 12 months.

If before the establishment of the fund in question Under section 1hb, the taxpayer has been subject to a flat-rate tax on the income of capital companies, he may charge the deductions made to that fund for the costs of obtaining revenue under that provision not earlier than after the expiry of 24 months after the end of application of the tax on the income of capital companies.

Amount of the contribution to the fund in question Under section 1hb, is de minimis aid granted to the extent and on the basis of the rules laid down in directly applicable European Union law concerning de minimis aid. The taxable person shall inform the competent head of the tax office of receipt of the assistance within the time limit and in accordance with the rules laid down in this Regulation. Act dated 30 April 2004 on State aid proceedings (Journal of Laws of 2020, item 708).

If in the tax year:

1. the taxpayer spent the funds from the fund in question Under section 1hb, for purposes other than investment purposes referred to under Article 28g(1) and 2, or the funds of that fund have been financed or reimbursed to the taxpayer in any form whatsoever; or
2. the taxable person has not fulfilled the conditions in question under Article 28j(1)(1-6), either
3. expenditure of the Fund in question Under section 1hb, not spent according to section 1hb point 4

• from the following year onwards, the taxpayer loses the right to make write-offs on the basis of the section 1hb for a period 3 tax years, but not less than a period 36 months

In addition, a taxable person wishing to benefit from the deduction of revenue for the fund set up for investment purposes set aside in the reserve capital must demonstrate as income to be taxed with income tax (Article 12(6b-6d) CIT Act:

6b) the equivalent previously included in the cost of obtaining revenue from amounts written off or paid from the fund in question under Article 15(1hb), for purposes other than investment purposes referred to under Article 28g(1) and 2, or for those investment purposes but financed or reimbursed to the taxpayer in any form;

6c) the equivalent of the funds raised for the Fund in question under Article 15(1hb), previously included in the cost of obtaining revenue if, in the tax year, the taxpayer failed to fulfil the conditions in question under Article 28j(1)(1-6);

6d) the equivalent of the funds raised for the Fund in question under Article 15(1hb), previously included in the revenue costs corresponding to the amount not spent in accordance with Article 15(1hb)(4), Unless these funds are included in revenue on the basis of point 6c

New investment fund – showing revenue

Revenue referred to above Under points 6c and 6d, arise on the last day of the tax year on which the taxpayer has not fulfilled the conditions in question under Article 28j(1)(1-6) CIT Act or deadline for investment expenditure specified under Article 15(1hb)(4) CIT Act.

If revenue is generated, specified Under point 6b-6d The taxpayer is obliged to pay to the tax office on the date of their formation the amount of interest calculated from the date on which they were credited to the cost of obtaining the income of the write-downs on the fund until the date on which that income was generated, at the rate of interest on late payment in force on the date of the write-down.

The interest charged shall be shown by the taxable person in the annual statement referred to under Article 27(1) CIT Act.

New investment fund – expenditure excluded from revenue costs

The consequence of introducing the possibility of using a special fund (an investment account) is also the addition of new inclusions on the cost of obtaining the specified revenue under Article 16 CIT Act:

• 48a) expenditure on acquisition or production of fixed assets or write-downs for the use of fixed assets on the basis of Article 16a-16m from that part of their value which has been financed by the Fund in question under Article 15(1hb);
• 48b) deductions to the fund in question under Article 15(1hb), in the part spent on fees, commissions and other costs associated with the account in question under Article 15(1hb)(2);

Under the transitional provision, Article 6 a bill amending, corporate tax payer whose tax year is different from the calendar year and started before the day 1 January 2021, and ends after a day 31 December 2020, apply until the end of the tax year adopted by them the provisions of the Corporate Income Tax Act, as they have been adopted.