Not only profit distributions are subject to taxation, but also so-called non-business-related expenses – in accordance with Article 28m(1)(3) of the CIT Act.
Do donations constitute expenses not related to business activity?
Although donations are most often treated as non-business-related costs, exceptions are possible. Individual interpretations issued by the Director of the National Tax Information Service indicate that donations forming part of a CSR (corporate social responsibility) that build the company’s image (e.g. local social assistance, educational, sporting and cultural activities) may be regarded as indirectly related to business activities and are not subject to the Estonian lump-sum tax.
For example, in the individual ruling of 20 November 2024, ref. no. 0114-KDIP2-2.4010.491.2024.2.RK, it was stated that a donation to a foundation supporting educational or sporting objectives, even where the foundation is linked to a shareholder, may not give rise to taxation, provided that the donation is made as part of a CSR policy and not as a transfer to a related entity constituting a hidden profit.
However, in the individual interpretation of 27 February 2025, ref. no. 0111‑KDIB1‑1.4010.16.2025.2.BS, the Director of the National Tax Information Service confirmed that charitable donations (e.g. national charity collections) which are publicly disclosed and form part of a CSR strategy may effectively serve to build reputation and are not subject to taxation.
In any case, however, it is pointed out that the donations made should have a positive impact on the business activities carried out, serve to build and strengthen the entrepreneur’s positive image, as well as the implementation of the adopted corporate social responsibility (CSR) strategy, and may also indirectly contribute to generating revenue.
When do we pay tax on a donation?
- if the donation is not related to business activities (it is not part of CSR nor does it build the image) – it is subject to Estonian CIT (at a rate of 10% or 20%) as an expense not related to business activities (Section 28m(1)(3) of the CIT Act),
- a donation made to a related party (e.g. a foundation in which a partner holds a stake) may be classified as a hidden profit (Section 28m(3)(7) of the CIT Act) and also give rise to a tax liability – even if it formally meets CSR objectives.
Recommendations
It is advisable to have a written CSR policy and documented activities that are communicated publicly (e.g. via social media, reports). It should be borne in mind that donations to organisations linked to shareholders carry the risk of being classified as hidden profit. For larger donations, it is recommended to obtain an individual tax ruling.
Estonian CIT and donations – Summary
Donations may result in an obligation to pay Estonian CIT (10% or 20%) if they do not form part of a CSR strategy or are made to related entities. However, in light of current interpretative practice, donations made as part of CSR initiatives that enhance the company’s image and are transparent may be treated as business-related expenses, and thus not subject to taxation.
In any specific situation, however, it is recommended to analyse the documentation and – if there are doubts regarding the classification of the donation – to apply for an individual interpretation.
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