Redemption of shares under Estonian CIT

When applying Estonian CIT, the question arises as to whether remuneration for the redemption of shares financed from pre-lump sum profits should be treated as hidden profit.

This is not an abstract issue – it affects many entities that accumulated significant reserve capital before choosing the lump sum and are now planning to redeem shares. Recently, we have noticed a clear difference in approach between the tax authorities and the administrative courts. The Director of the National Tax Information Service (KIS) consistently interprets the legislation as requiring such payments to be included in the scope of hidden profits. However, the established case law of provincial administrative courts tends to protect taxpayers from double taxation.

Position of the Director of KIS

The Director of KIS consistently adopts a restrictive position, interpreting the regulations literally. In his opinion on 3 September 2025, he stated that Article 28m(3)(5) of the CIT Act refers to ‘remuneration paid from the profit on the redemption of shares’, and does not distinguish between current and historical profits. According to him, any payment for redeemed shares constitutes hidden profit, even if financed from profits prior to the selection of the lump sum. The interpretation emphasised that the essence of Estonian CIT is to tax all forms of distribution to shareholders, not just classic dividends. The fact that the funds have already been taxed once under the classic CIT system is irrelevant. Consequently, the company’s position was deemed incorrect.

Position of the Provincial Administrative Court in Krakow

The recent ruling by the Provincial Administrative Court in Krakow is one of the most important in the ongoing debate about how to classify remuneration for redeemed shares in Estonian corporate income tax (CIT).

The case concerned a company that financed the redemption of shares from funds accumulated in its reserve capital. These funds had been generated from profits earned before the company entered the lump-sum system. The tax authority considered such payments to generate hidden profits and therefore taxable. However, the court disagreed.

In justifying the judgment, the Provincial Administrative Court in Krakow stated that a systematic analysis of Article 28m(1) and (3) of the CIT Act should be the starting point. According to the court, the concept of ‘remuneration for the redemption of shares paid from profits’ should be linked exclusively to profits generated during the lump-sum taxation period. To extend this provision to historical profits would mean treating the same funds as tax-neutral if they had been paid out as dividends from prior years and as hidden profit when used to redeem shares. According to the court, such differentiation would be incompatible with the legislator’s principle of rationality.

The court also clearly emphasised the risk of double taxation. Profit from the period before the lump sum was taxed once under the standard rules and then transferred to reserve capital. Imposing a tax obligation a second time when it is distributed would, in practice, penalise taxpayers for choosing Estonian CIT. This would be inconsistent with both the purpose of the regulation and the constitutional principle of single taxation.

According to the Provincial Administrative Court in Krakow, the logic of the Estonian CIT is also important. The legislator intended for taxation to occur at the time of the actual distribution of profits, but only those generated during the period in which the lump sum was applied. Historical profits should not be subject to re-taxation.

This judgment aligns with an increasingly evident line of jurisprudence, which criticises tax authorities for erroneously applying a literal interpretation that ignores the broader systemic context and purpose of the regulation. The interpretation adopted by the Provincial Administrative Court in Krakow protects taxpayers from double taxation and points towards an approach that could be pivotal in future Supreme Administrative Court rulings.

Established line of jurisprudence

A number of rulings have been issued in similar cases, which resolved the issue of CIT taxation of Estonian share redemptions. These include, among others, the judgments of the Provincial Administrative Court in Warsaw of June 7, 2023 (III SA/Wa 739/23), October 12, 2023 (III SA/Wa 1358/23) and January 30, 2024 (III SA/Wa 2581/23), as well as the judgment of the Provincial Administrative Court in Lublin of July 10, 2024 (I SA/Lu 203/24).

The line of rulings of the Provincial Administrative Court on the treatment of remuneration for redeemed shares financed from historical profits is therefore already well established, and the courts consistently protect taxpayers from double taxation. This means that the position presented by the Director of the National Tax Information Service, although literally based on the content of the provision, is increasingly diverging from the prevailing court practice.

MDDP comment

A comparison of the positions of the tax authority and the administrative courts reveals a clear discrepancy. The authorities consistently adopt a fiscal approach, maximizing the scope of the concept of hidden profits. The courts, on the other hand, apply a systemic and purposive interpretation. In practice, this means that companies that have accumulated significant capital from periods prior to the lump sum tax can effectively defend themselves against attempts to re-tax it. At the same time, however, until the case is decided by the Supreme Administrative Court, the risk of a dispute with the tax authorities remains real.

Disputes over the taxation of remuneration for the redemption of shares demonstrate how ambiguous regulatory wording can result in tax authorities and administrative courts reaching completely different conclusions.

The courts’ position means that there is a real possibility of defending against unfavourable decisions by the authorities. Although the final decision will be made by the Supreme Administrative Court, taxpayers should already be making use of this line of jurisprudence when planning changes to the ownership structure relating to the redemption of shares.

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^[1] Individual interpretation of September 3, 2025, ref. no. 0111-KDIB1-3.4010.479.2025.1.DW.

^[2] Judgment of the Provincial Administrative Court in Krakow of August 8, 2025, ref. no. I SA/Kr 397/25.