The NSA has adopted a more flexible approach to the Estonian CIT, reducing the requirement for rigid formalities to 300 days of employment

The Supreme Administrative Court’s ruling of 15 May 2025 (ref. II FSK 163/25) provides clarity on one of the challenging and ambiguous issues concerning Estonian CIT. This refers to the condition of maintaining an appropriate level of employment for a minimum of 300 days in a tax year, as outlined in Article 28j(1)(3)(a) of the CIT Act.

The dispute over 300 days – how long and how many employees

The case concerned a limited liability company which initially employed two full-time employees in the first part of the year, subsequently increasing its workforce to four in June. The company claimed that it had met the condition of three full-time positions for 300 days by calculating the total number of days worked by all employees and converting them into the required full-time roles. This approach enabled the company to achieve a total of 1,160 days, which, when divided by three full-time positions, gave more than 386 days – well above the statutory minimum.

However, the Director of the National Tax Information Service (KIS) – followed by the Provincial Administrative Court in Bydgoszcz – considered this position to be incorrect. In their opinion, the provision should be understood to mean that for a period of 300 days in a given tax year, the company must have at least three full-time employees working simultaneously. In essence, it concerns the uninterrupted, concurrent utilisation of the minimum number of personnel for a specified duration – and not the aggregation of periods of employment by different employees.

The rationality of the interpretation made by the Supreme Administrative Court

The NSA found that the administrative authorities and the court of first instance had misinterpreted the substantive law. The discussion was based on three key arguments:

1. Linguistic interpretation as a starting point

The NSA highlighted that linguistic interpretation is a key component of the process, but not the sole interpretative tool to be considered. However, even when applied literally, it can.

It should be noted that the provision refers to ‘for a period of at least 300 days in a tax year’, but does not require that each of the three converted full-time positions exist for a full 300 days separately. The NSA has clarified that, in accordance with the established principles of interpretation, linguistic interpretation serves as the foundation for accurate subsumption. However, it is important to note that this interpretation cannot contradict the principles of systemic and purposive interpretation. As the Court noted: ‘The order of preference established on the basis of the principle of priority is not absolute. This means that it may be overridden by serious arguments of a systemic and functional nature. For example, this may occur when the linguistic interpretation leads to grossly unfair or irrational consequences’.

2. The purpose of the regulation is to encourage employment and to ensure that employers are not punished for circumstances beyond their control.

The Supreme Administrative Court has observed that an overly strict interpretation of the provisions may not align with economic realities. It is difficult to guarantee that employment will remain at a fixed level for exactly 300 days. Employee turnover, the need for dismissal due to misconduct, and seasonal fluctuations in certain sectors are some of the key factors influencing staffing requirements, irrespective of an employer’s initial intentions. It is unreasonable to expect taxpayers to predict and control these variables with day-to-day accuracy.

3. Rationality and proportionality

The Supreme Administrative Court emphasised that the application of Estonian CIT and its conditions should be based on reasonable criteria rather than formalistic rigour. The strict interpretation proposed by the Director of the National Tax Information Service and the Provincial Administrative Court could potentially result in a scenario where a taxpayer, despite having employed more personnel for the majority of the year, would forfeit the entitlement to a lump sum on the companies’ income.

What are the practical implications of this approach?

The ruling means that companies are protected from losing their right to Estonian CIT if their employment levels fluctuate during the year, provided that the total number of days worked exceeds 300. This is of particular relevance to companies in the seasonal, dynamic growth stage (e.g. start-ups) or undergoing restructuring.

While the Supreme Administrative Court’s ruling provides a clear direction for interpretation, which we expect the tax authorities to adopt, it is important to note that individual cases may present different interpretations.

MDDP comment

The Supreme Administrative Court’s ruling demonstrates a reasonable and functional approach to the interpretation of tax law. Instead of adhering to conventional formalism, the Court chose to interpret the regulations in a manner consistent with economic realities.

For taxpayers, this indicates that the criteria for applying Estonian CIT, while stringent, do not require interpretation in isolation from economic reality. The ruling enhances the legal certainty for taxpayers and facilitates more rational HR policy planning without the concern of losing practical tax benefits.