Tax customs & excise /

Loans to partners a trap in estonian CIT

Loans granted to partners by companies that have opted for Estonian CIT will be taxed even if the partner returns the loan. According to the law, a loan granted to a partner constitutes a disguised profit, i.e. it is a monetary benefit made in connection with the right to share in the profit. The idea of taxing hidden profits is a valid approach by the tax authorities, as it prevents abuse, but nevertheless the Ministry of Finance did not take into account the fact that the partner may return the loan. Such a return does not, under the current wording of the legislation, involve an adjustment of the Estonian CIT and thus a tax refund. Similarly, when a company takes a loan from a partner, then the interest paid by the company is also a hidden profit. Therefore, it seems to be the correct approach of Companies taxed under Estonian CIT rules not to take out such loans from partners, nor to grant them.

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