Is the remuneration for the redemption of shares subject to Estonian CIT?

Can the payment of remuneration for the redemption of shares, financed from profits earned before the implementation of Estonian CIT, result in lump-sum taxation of company income? Although it may appear that profits once subject to taxation should not be subject to further taxation, tax authorities’ practices demonstrate otherwise.

For the tax authority, it does not matter when the profit was generated

The case presented in the individual interpretation[1] concerned a company subject to Estonian CIT which, during the period of lump-sum taxation of corporate income, concluded agreements with two of its shareholders to purchase their shares for voluntary redemption. The company’s doubts concerned whether, in a situation where the transaction constitutes a so-called redemption from pure profit and the source of financing is profits generated in the years preceding Estonian CIT taxation, the company may generate income from hidden profits. The company argued that since the funds came from profits already taxed under the standard CIT model, the payment should not be treated as hidden profits.

In the individual interpretation issued, the Director of the National Tax Information Service took a position unfavourable to the taxpayer. The authority has stipulated that ‘hidden profit’ is defined as any form of remuneration

for the redemption of shares paid out of profit, regardless of whether the remuneration was earned before or after the transition to Estonian CIT. In the opinion of the Director of the National Tax Information Service, since the provision does not introduce such a distinction, there are no grounds for differentiating the tax consequences depending on when the profit was generated. Director of the National Tax Information Service believes that the fact that the profit is used to finance the redemption remuneration during the application of the lump sum – regardless of when it was generated – determines the need to tax it.

This approach raises serious doubts, especially in light of the purposive interpretation of the provisions regulating the lump sum tax on company income. Since the Estonian CIT system is based on the taxation of actual profit distribution, it seems logical to limit its application to profits generated during the period covered by the lump sum. As a rule, this interpretation does not raise any doubts on the part of the authorities with regard to the payment of profits in the form of dividends, and therefore, from the perspective of the function of the provisions, these situations should not be differentiated.

Position of the Provincial Administrative Court: Estonian CIT applies only to profits generated during the flat-rate period

In contrast to to the position of the tax authorities, administrative courts consistently adopt a different interpretation. In the courts’ view, only that part of the remuneration for the redemption of shares which comes from profits generated during the period of lump-sum taxation of company income is subject to lump-sum taxation[2]. Payments made from capital originating from previous years, including reserve capital, do not constitute hidden profits.

In particular, the courts emphasise that a rational legislator deliberately used the phrase ‘paid out of profits’ in the provisions regulating lump-sum taxation in order to narrow the scope of taxation to a specific type of payment. Assuming that Estonian CIT also covers payments of previous profits, a different approach would lead to unacceptable double taxation of the same income – once according to the general CIT rules and then again under the lump sum.

MDDP comment

The differences in the approach of the authority and the administrative courts are not merely an academic dispute over interpretation – they have real significance for businesses applying Estonian CIT.

The courts’ approach is consistent with the purposive interpretation of the provisions governing lump-sum taxation of company income. It is a logical and economically justified interpretation of the provisions, consistent with the spirit of Estonian CIT, which is to support investment and capital accumulation.

Although the direction set by the administrative courts gives hope for a change in the line of interpretation, the current practice of tax authorities, which may still pose risks in the taxation of profits generated before the introduction of the lump-sum tax on corporate income, should not be overlooked.

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[1] Individual interpretation of 5 May 2025, ref. no. 0111-KDIB2-1.4010.104.2025.1.DKG

[2] This position was clearly expressed, inter alia, in the judgment of the Provincial Administrative Court in Poznań of 26 November 2024, ref. no. I SA/Po 552/24, the judgment of the Provincial Administrative Court in Warsaw of 31 January 2024, ref. no. III SA/Wa 2581/23, the judgment of the Provincial Administrative Court in Wrocław of 21 December 2023, ref. no. I SA/Wr 513/23, the judgment of the Provincial Administrative Court in Krakow of 29 September 2023, ref. no. I SA/Kr 593/23, and the judgment of the Provincial Administrative Court in Gliwice of 27 December 2022, ref. no. I SA/Gl 1122/22.