A free of charge surety in Estonian CIT is not a hidden profit

Does a free of charge surety granted to a taxpayer subject to Estonian CIT give rise to a tax obligation to recognise income as hidden profits or revenue from free of charge benefits? The conclusions of the latest individual tax ruling[1] indicate that it does not.

Hidden profit or income from a free of charge benefit?

The tax ruling referred to concerned, among other things, the applicant’s doubts as to whether sureties granted by a related entity to secure loan agreements would generate income from hidden profits (in accordance with Article 28m(1)(2) of the CIT Act) or income from free of charge benefits under general rules (Article 12(1)(2) of the CIT Act).

The company used overdraft facilities, investment loans, working capital loans, revolving loans and bank guarantees. The above loans were secured, inter alia, by sureties for the loans granted by related entities, as a result of which these entities became liable for the obligations incurred under the loan agreements. Historically, the related entities received remuneration for the sureties granted.

The applicant questioned whether, in the case of similar collateral for loan agreements, but without remuneration, they would give rise to a tax liability as hidden profits or free of charge benefit received by the Company from related entities.

The company took the view that the surety would not constitute income from hidden profits, arguing that 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. The company pointed out that the list of hidden gains does not include a benefit in the form of a free of charge surety granted by a related entity to a company/taxpayer.

Thus, in the company’s opinion, a free of charge surety of a bank loan or a guarantee line by a related entity will not generate income for the company from hidden profits referred to in Article 28m(1)(2) of the CIT Act.

On the issue of whether, in the absence of remuneration for sureties agreements, the company should determine the revenue from the free-of-charge benefit on general principles, the company referred to the Guide to Lump Sum Tax on Company Income of 23 December 2021, indicating that the provisions of Article 12(1)(2) of the CIT Act do not apply to Estonian CIT taxpayers. Thus, according to the company, a free of charge surety of a bank loan or a guarantee line by a related entity will not give rise to revenue from free of charge benefit on general principles, as referred to in Article 12(1)(2) of the CIT Act.

Position of the tax authority

The tax authority fully agreed with the taxpayer.

MDDP comment

The conclusions drawn from the ruling in question confirm that for taxpayers subject to Estonian CIT in transactions with related entities, it is crucial who the recipient of the benefit is and whether the benefit in question is included in the catalogue of hidden profits.

Free sureties granted by related entities have long raised doubts under the CIT Act. This is more likely to be the case for taxpayers subject to Estonian CIT, for whom the interpretation practice is still evolving.

We agree with the conclusions presented in the individual tax ruling referred to above.

Firstly, it should be emphasised that in the situation analysed, the surety is granted by a related entity to a taxpayer settled under the Estonian CIT regime. The provision on hidden profits does not apply to a situation where the beneficiary of the benefit is the taxpayer itself – it is therefore difficult to find an obligation to recognise income on this account.

In addition, it is important that in the case of Estonian CIT, taxpayers should not fear the consequences of the general provisions of the CIT Act. The tax ruling clearly confirms that a taxpayer subject to Estonian CIT should not apply the general rules in parallel – a different interpretation would lead to double accounting and the keeping of two sets of records, which would be contrary to the assumptions of the Estonian CIT regime.

We therefore agree with the conclusions that a free of charge surety of a bank loan or guarantee line by a related entity will not result in the company generating income from hidden profits (Article 28m(1)(2) of the CIT Act), or revenue from free of charge benefit on general terms (Article 12(1)(2) of the CIT Act).

The tax ruling in question raised an additional issue, namely whether the company in the situation described would be obliged to comply with transfer pricing obligations.

We will discuss this topic in the next entry on the MDDP blog.

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