Estonian CIT and bond purchases – hidden risk of losing the right to a lump sum regime

Estonian CIT conditions

One of the conditions of Estonian CIT is the appropriate structure of the company’s revenues.

Passive income may not exceed 50% of total income. Passive income includes, in particular, income from receivables, interest, sureties, guarantees, copyrights, industrial property rights, as well as the sale and exercise of rights arising from financial instruments.

In practice, determining the scope of passive income may raise doubts, and the tax authorities’ restrictive approach often results in taxpayers losing the right to apply the lump-sum regime.

Income from zero-coupon and variable-coupon bonds under Estonian CIT

In the ruling of 27 August 2025[1], the Director of the National Tax Information Service referred to zero-coupon and variable-coupon bonds in the context of determining the value of passive income generated upon their redemption.

Zero-coupon bonds are purchased below their redemption (nominal) value, therefore, at the time of purchase, investors know the amount of the future profit, which is the difference between the purchase price and the nominal value. By contrast, variable-coupon bonds return the nominal value of the bond plus the interest due.

Regardless of the classification of bonds, they are securities used by investors to provide financing to bond issuers. Economically, bonds perform a function similar to loans.

In the latest individual interpretation, the Director of the National Tax Information Service presented the position that the income from the exercise of rights attached to bonds is the entire amount received upon their redemption. For zero-coupon bonds, this is the nominal value including the discount. For variable-coupon bonds, it is the nominal value plus the accrued interest.

According to the authority, the legislator used the term “revenue” from the sale and exercise of rights from financial instruments, not “income”. Therefore, there is no basis for limiting revenue to profit (discount or interest) only. Consequently, when determining the revenue structure, the full amount received from the issuer as part of the bond redemption should be counted.

The tax authorities’ approach implies that operating companies investing surplus cash in bonds may lose access to the lump-sum regime. The pro-fiscal interpretation adopted by the authority means that passive income includes not only the profit generated from such an investment (discount or interest), but also the full amount of capital returned upon bond redemption.

This approach is surprising and inconsistent, because according to the established line of interpretation based on the classic CIT model, only the profit generated from the bond purchases (discount or interest) is recognised as taxable income.

It is hoped that the authorities’ interpretation will not be accepted by the administrative courts. The Provincial Administrative Court in Poznań has already ruled on a similar case, overturning the negative individual interpretation of the Director of the National Tax Information Service in its judgment of 27 May 2025 (ref. no. I SA/Po 121/25).

MDDP comment

Companies investing in bonds should bear in mind that, according to the authorities, passive income includes not only profit in the form of a discount or interest, but the full redemption amount.

This means that even short-term investments with a high nominal value can significantly affect the structure of income and, consequently, the possibility of benefiting from the Estonian CIT. In practice, companies applying the Estonian CIT should systematically calculate the ratio of passive to operating income, ensuring that passive income does not exceed 50%.

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[1] Individual interpretation of 27 August 2025, ref. no. 0111-KDWB.4010.79.2025.1.KP.