Estonian CIT and the employment condition – tax authorities versus the Supreme Administrative Court

Several weeks ago, this blog provided commentary on the Supreme Administrative Court ruling of 15 May 2025 (ref.). II FSK 163/25 [1] provided a clear definition of the interpretation of the employment condition in Estonian CIT. The Supreme Administrative Court ruled that the requirement of 300 days of employment per year should be applied to employment as a whole, rather than to individual jobs treated separately.

It appeared that this interpretation would resolve the ongoing disputes; however, the latest individual interpretation of the Director of the National Tax Information Service of 28 July 2025[2] demonstrates that the tax authorities are maintaining their pro-fiscal interpretation and adopting a different approach, which is not aligned with the economic reality.

Outline of the case

The company, which is a small taxpayer, opted for lump-sum taxation of corporate income. In the first shortened tax year, it met the minimum employment requirement – it had one full-time employee. In 2024, the company’s employment structure was as follows:

• • the first employee was employed for the entire year, from 1 January to 31 December (366 days),
  • the second started work on 1 February and also worked until the end of the year (335 days),
  • the third performed his duties from 1 March to 31 October (245 days),
  • the fourth joined on 4 September and remained with the company until the end of December (119 days).

Therefore, between 1 March and 31 December 2024 (306 days of the tax year), the entrepreneur will have employed at least three full-time employees. The company has concluded that this constitutes full compliance with the requirement under Article 28j(1)(3)(a) of the CIT Act.

The company has concluded that the provision’s literal wording does not necessitate each full-time position to last for a minimum of 300 days. The key metric is the total level of employment (in relation to all employees combined), rather than the status of individual employees.

Position of the Director of the National Tax Information Service

The authority considered the company’s position to be incorrect. In its opinion, since the legislator refers to ‘at least three persons converted into full-time positions for a period of at least 300 days’, each of the three required positions must be maintained for a minimum of 300 days. According to the Director of the National Tax Information Service, it is not permissible to add up the periods of employment of different employees. Consequently, the authority concluded that the company did not meet the minimum employment requirement in 2024 and thus loses the right to apply Estonian CIT from 2025.

This approach is not only overly formalistic, but above all, it is inconsistent with economic realities and, in addition, contrary to what the Supreme Administrative Court had indicated a few months earlier.

The Supreme Administrative Court’s interpretation – rationality over formalism

In its judgment of 15 May 2025, the Supreme Administrative Court emphasised that tax law provisions should be interpreted in accordance with their purpose and linguistic interpretation. The phrase ‘for a period of at least 300 days in a tax year’ refers to the level of employment, not to the individual period of employment of each person. The court acknowledged that a rigid interpretation could result in unreasonable consequences, such as requiring employers to guarantee the continued employment of individuals for 300 days, which is impractical in real-world scenarios. Any natural turnover, employee resignation or disciplinary dismissal would result in the automatic loss of the right to the lump sum. The Supreme Administrative Court has also emphasised that the objective is not to penalise entrepreneurs for circumstances beyond their control.

MDDP comment

The latest interpretation by the Director of the National Tax Information Service demonstrates that the tax authorities are maintaining their pro-fiscal approach. This engenders considerable legal uncertainty, compelling entrepreneurs to consider the potential challenge to their right to a lump sum, even in circumstances where they maintain the requisite level of employment.

It is important to emphasise that the Supreme Administrative Court’s ruling is a significant point of reference for taxpayers in disputes with tax authorities. The court has indicated that the 300-day condition should be interpreted on a global scale rather than in relation to individual roles. This provides entrepreneurs with a solid foundation for their arguments in the event of disputes with the tax authorities. However, it should be noted that in practice, the protection resulting from this ruling may require a decision by an administrative court.

In practice, this means that although the line of administrative court rulings is moving towards protecting taxpayers, entrepreneurs must remain vigilant, maintain meticulous records and be prepared to defend their position. It is vital that the consistent application of the interpretation adopted by the Supreme Administrative Court is implemented if predictability and stability in the application of Estonian CIT is to be restored.

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[1] The NSA has adopted a more flexible approach to the Estonian CIT, reducing the requirement for rigid formalities to 300 days of employment.

[2] Individual interpretation of 28 July 2025, ref. no. 0111-KDIB2-1.4010.266.2025.1.AS.