Hidden gains in the draft amendment for 2026 – what may change in Estonian CIT?

The draft amendment to the income tax laws of September 16, 2025, provides for changes in the regulations concerning the lump sum tax on company income. The recent amendment to the definition of “hidden profits” has generated significant controversy, as it effectively determines which benefits between a company and its shareholders are subject to additional taxation. While this change is driven by the objective of enhancing the system’s integrity, it is anticipated that there will be substantial repercussions for the day-to-day operations of companies that opt for Estonian CIT. This may result in the emergence of several new concerns.

No “connection with the right to share in profits,” i.e., tax where there was none before

According to the current definition of hidden profits, in order for a given benefit to be classified as a hidden profit, it must be “connected with the right to share in profits.”

In practice, transactions related to the right to participate in profits are considered to be those that do not result from objective economic needs, may constitute a substitute for dividends, or have no economic justification. The proposed regulations provide for the removal of this condition.

As stated in the explanatory memorandum, this condition was the source of the largest number of interpretation disputes. Furthermore, the tax authorities have indicated that there is potential for optimisation. In order to demonstrate a connection with the right to participate in profits, tax authorities were often required to examine the economic background of transactions. Consequently, following rulings by administrative courts, the tax authorities frequently had to concede to taxpayers, resulting in the non-taxation of hidden profits.

Following the amendment of Article 28m(3) of the CIT Act and the elimination of the phrase “in connection with the right to share in profits,” any transfer of funds or benefit to a partner or related entity will potentially be considered a hidden profit, without the need to prove a connection with the right to share in profits.

Will every transaction become a hidden profit?

The literal wording of the proposed regulations may lead to such a conclusion. Following the removal of the ‘connection with the right to share in profits’ premise, it is now theoretically possible for every payment to a shareholder to be subject to a lump sum tax.

It is evident that the negative effects of the amendment may have a detrimental impact on companies conducting transactions with a related entity for legitimate business reasons.

The justification for the draft amendment leaves open the question of whether the tax authorities intended to tighten the system or to include the widest possible range of benefits in the catalog of hidden profits. This is clearly an indication of a pro-fiscal legislative initiative. The concept of “connection with the right to share in profits” was a necessary compromise between fiscal interests and the real economic needs of taxpayers. The current wording of Article 28m(3) of the CIT Act allows for the taxation of hidden forms of profit distribution to partners, while at the same time not resulting in taxation if the taxpayer can demonstrate the economic justification and marketability of the agreement concluded with a related entity.

Extension of the list of hidden profits

The draft explicitly includes the following in hidden profits:

• rents and fees for lease, tenancy or similar agreements concluded with partners,
• receivables for the use of intangible assets included in the partner’s assets (e.g., licenses, know-how, trademarks),
• remuneration for intangible services – in particular consulting, legal, advertising, management, or intermediary services,
• recurring non-monetary benefits provided by partners.

The legislator therefore determines that even if a given service is actually performed on market terms, there is still a risk that it will be classified as a hidden profit.

A particularly sensitive area – loans

The issue of loans granted by companies to partners has given rise to concerns regarding the application of Estonian CIT regulations. In accordance with the prevailing legal framework, the assessment of such matters is contingent on their association with the right to share in profits. The significance of this premise is of particular relevance to administrative courts. The removal of this requirement will result in any loan to a shareholder – even those bearing market interest and secured by collateral – potentially being classified as a hidden profit.

MDDP comment

The proposed amendment to the CIT Act could lead to a fundamental shift in the approach to hidden profits. Rather than examining the actual justification for concluding an agreement with a related entity, the draft proposes a broad catalogue of benefits. The Estonian tax authorities have announced a series of measures aimed at streamlining the system, including a substantial increase in the taxation of entities subject to Estonian CIT.

The changes to the definition of hidden profits mean that each payment to a partner should be assessed to determine whether or not it constitutes a hidden profit. Taxpayers planning to apply and applying Estonian CIT should therefore assess their agreements with partners, prepare for new documentation obligations, and potentially revise their business models.