Does a gratuitous guarantee under Estonian CIT mean no transfer pricing obligations?

Does a gratuitous guarantee granted to a taxpayer subject to Estonian CIT by a related entity give rise to a transfer pricing documentation obligation? According to DKIS [1] – yes – if the value of the guarantee exceeds the threshold of PLN 10 million, the taxpayer will be required to prepare transfer pricing documentation.

A gratuitous guarantee under Estonian CIT does not mean hidden profit or income from free services

A limited liability company, which is an Estonian CIT taxpayer, uses various forms of credit, including investment, working capital and revolving credit. In order to secure these loans, the company has, among other things, received guarantees from related entities. Historically, related entities have received remuneration for the guarantees granted. However, the company questioned whether, in the case of similar collateral for loan agreements, provided without remuneration, would give rise to a tax liability in the form of hidden profits or gratuitous benefits and, consequently, whether the company would be required to fulfil transfer pricing obligations for such transactions.

With regard to hidden profits, the authority dispelled the company’s doubts as to whether gratuitous guarantees granted by related entities to secure loan agreements would give rise to income from hidden profits or income from gratuitous benefits under general rules. The Director of the National Tax Information Service confirmed the company’s position that, since the definition of hidden profits refers to benefits whose beneficiary (directly or indirectly) is a shareholder or an entity related to the taxpayer or its shareholders – and not the company itself – a gratuitous guarantee of a bank loan or guarantee line by a related entity for the company’s benefit will not generate income from hidden profits for the company, nor will it give rise to income from gratuitous benefits under general principles.

This topic is discussed in more detail in our latest article entitled ‘A free of charge surety in Estonian CIT is not a hidden profit’ >>

https://www.mddp.pl/a-free-of-charge-surety-in-estonian-cit-is-not-a-hidden-profit/.

What about transfer pricing documentation?

The company says: NO!

The company’s doubts did not end there. The company asked whether, assuming that a gratuitous guarantee does not give rise to obligations to recognise hidden profits or income from gratuitous benefits, it will be required to prepare transfer pricing documentation (provided that the value of the transaction exceeds the applicable documentation thresholds).

In the company’s opinion, if the gratuitous guarantee does not trigger obligations related to lump-sum taxation of company income or to the recognition of income from gratuitous benefits under general rules, it will not be required to prepare transfer pricing documentation. The company argued that since, in accordance with the regulations, the receipt of goods or rights or other benefits constituting income free of charge (or partially against payment) only requires recognition of income for transfer pricing purposes where such income is taxable, and the provision on the recognition of income from gratuitous benefits does not apply to taxpayers under the Estonian CIT regime, the company is not subject to transfer pricing regulations.

The company referred to the judgment of the Provincial Administrative Court in Wrocław [2], according to which the purpose of introducing transfer pricing regulations was to prevent the erosion of the tax base through harmful transfer of profits between related entities. The company boldly concluded that in the case of the transaction in question, due to its gratuitous nature, there is no transfer of profits between related entities, which means that there is no risk of tax avoidance, either on the part of the company or its shareholders.

Authority: YES! There are no grounds for exemption from TP obligations

DKIS disagreed with the company’s position, ruling that in the case of a gratuitous guarantee granted by a related entity, there is an obligation to prepare transfer pricing documentation if the value of the transaction exceeds the PLN 10 million threshold. The tax authority pointed out that in the case of financial transactions, such as a gratuitous guarantee, the obligation to prepare local transfer pricing documentation applies even if the value of the transaction as a whole does not permanently constitute revenue or a tax-deductible cost.

According to the regulations, the obligation to prepare transfer pricing documentation does not apply to controlled transactions whose value in its entirety does not constitute revenue or a tax-deductible cost, with the exception of, among others, financial transactions. As a result, if the transaction in question had concerned a type of benefit other than a financial transaction, the company would probably be able to benefit from this exemption, provided that the transaction did not generate revenue or a tax-deductible cost. In the case of a guarantee, which is treated as a financial transaction, this exemption does not apply.

In addition, the authority emphasised that transfer pricing rules are not excluded for taxpayers subject to the lump-sum income tax regime, even though the general rules on income and lump-sum taxation do not apply.

As a result, the authority concluded that in the presented circumstances, the company is required to prepare local transfer pricing documentation for transactions involving the receipt of gratuitous guarantees.

Comment

The conclusions drawn from the individual tax ruling in question are important for taxpayers subject to Estonian CIT, who often carry out transactions with related parties, including the use of guarantees. The fact that a given settlement or gratuitous benefit does not meet the criteria for being considered a hidden profit does not automatically mean that an Estonian CIT taxpayer is exempt from transfer pricing obligations.

This is particularly relevant given that transfer pricing regulations may be mistakenly equated only with taxable transactions, which in the case of Estonian CIT, due to the lump-sum nature of this form of taxation, are practically limited. The individual tax ruling clearly emphasises that the exclusion of certain provisions of the CIT Act for Estonian CIT taxpayers does not automatically mean that transfer pricing obligations do not need to be analysed.

It should be noted that financial transactions, including those involving collateral, are subject to particular attention by the tax authorities due to the risk of these transactions being used to transfer profits between related entities, which may lead to an unjustified reduction of the tax base in a given country (as confirmed by the latest audit statistics). Gratuitous guarantees require particular attention from taxpayers. The absence of remuneration does not automatically mean that there are no documentation and reporting obligations in the area of TP, nor does it automatically mean that the transaction is at arm’s length.

In the case of financial transactions, particular attention should be paid to ensuring that the terms of these transactions are at arm’s length and economically justified. It is worth remembering that the absence of a documentation obligation does not exempt a taxpayer from arm’s-legth complianece! Any transaction between related parties (including Estonian CIT taxpayers), even those below the statutory thresholds, may be verified by the authorities for arm’s-length conditions. If certain transaction value thresholds are exceeded, the entity will be required to comply with documentation and reporting obligations, but this will only be a formality if the market character of the transaction has been appropriately ensured in advance.

***

[1] Individual tax ruling of 9 May 2025, ref. no.: 0111-KDIB1-3.4010.75.2025.1.PC.

[2] Judgment of the Provincial Administrative Court in Wrocław of 22 July 2020, ref. no. I SA/Wr 269/20.