Repeated services provided by a partner in Estonian CIT

The tax authorities have changed their position on the so-called repeated non-monetary services provided by partners in limited liability companies with Estonian CIT, based on Article 176 of the Commercial Companies Code.

Repeated benefits result from the shareholders’ obligation, specified in the articles of association, to perform activities of a remunerated and repetitive nature for the company. Do such benefits constitute hidden profit distribution in Estonian CIT? The tax authorities have decided that they do, even if the remuneration for them is market-based.

Services provided under Article 176 of the Commercial Companies Code do not constitute dividend payments, and their payment is not dependent on the company making a profit. The benefits are equivalent in nature – the company would incur the same cost if it used similar services provided by a third party. Why, then, do the tax authorities consider them to be hidden profits? In one interpretation[1], a limited liability company that is an Estonian CIT taxpayer asked whether the payment of remuneration to two shareholders for recurring non-monetary benefits – performed pursuant to Article 176 of the Commercial Companies Act – would be taxable as hidden profit.

The company argued that the benefits were actually provided, had economic justification, and the remuneration was determined on the basis of market prices. Furthermore, payments to partners constituting remuneration for services rendered are made independently of the profit achieved, which, in its opinion, excludes their connection with the distribution of profit and precludes them from being considered hidden profit.

The status of a partner determines lump-sum taxation

The tax authority was aware that the mere fact that the services result from the provisions of the articles of association and are performed by a partner determines their connection with the right to share in profits. Furthermore, the lack of a link between the remuneration and the level of profit achieved is irrelevant if the service is directly related to participation in the company.

Importantly, the authority pointed out that Article 28m(4) of the CIT Act provides for a closed list of benefits that are not treated as hidden profits. It includes, among other things, remuneration for employment, management contracts or civil law contracts, but does not refer to benefits provided under Article 176 of the Commercial Companies Act. Even if they are paid and market-based, they should be considered hidden profits because, in the authority’s opinion, they are undoubtedly benefits related to the right to participate in profits and may constitute the equivalent of a dividend.

Market conditions are not enough

In the opinion of the tax authorities, the fact that the remuneration was determined on the basis of market values is irrelevant for the recognition that the payment is not a hidden profit. What matters most is that the remuneration is paid to the partner and that his obligation arises from the articles of association. The authority pointed out that recurring non-monetary benefits are, in principle, a mechanism binding the partner to the company and may constitute a tool for indirect transfer of profits without formal payment of dividends.

The interpretation also indicated that the structure of Article 176 of the Commercial Companies Act leads to a link between a specific obligation and the status of a partner. This obligation is permanent

and is assigned to the share. As a result, the benefit is in fact a form of corporate encumbrance on the share, the economic effect of which is the payment of funds to the partner. From the perspective of Estonian CIT, it is therefore irrelevant that the payment is actually made – what is decisive is that it results from the articles of association and is linked to the shares.

Practical effects and conclusions for taxpayers

Repeated payments made by shareholders to the company – even if they are transparent and in line with market realities – create a risk of being considered hidden profits. The key criterion in the assessment of the authority remains the ownership relationship, not the content or form of the payment.

The interpretation in question is part of a broader trend of broadening the concept of hidden profits in Estonian CIT. It shows that even remunerated, economically justified and market-based cooperation between a shareholder and a company may lead to lump-sum taxation. In recent months, a change in the interpretation of the authorities with regard to benefits under Article 176 of the Commercial Companies Act has been observed – whereas in the past they assumed that, provided that market conditions were met, they should not be subject to taxation, they now consider any such benefits to be hidden profits.

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[1] Individual interpretation of 22 May 2025, ref. no. 0111-KDIB2-1.4010.76.2025.4.DKG.