Inaccuracies in the preparation of financial statements and the risk of forfeiting the right to taxation with Estonian CIT
Recently, the Head of the National Tax Chamber issued several tax interpretations that may affect taxpayers who have opted, or plan to opt, for lump-sum taxation of income during the year (also known as Estonian CIT), by filing a ZAW-RD notice before the end of the tax year adopted by the company.
In addition to accounting for income from the previous period (the period during which the general rules apply), preparing the CIT-8 return and calculating the preliminary adjustment, such taxpayers must close their accounting books and prepare financial statements in accordance with accounting regulations as at the last day of the month before the first month of lump-sum taxation (Article 28j(5) of the Corporate Income Tax Law — hereafter referred to as the ‘CIT Law’).
Recently, the Head of NTC has drawn attention to certain shortcomings that could result in the financial statements being deemed non-compliant with the requirements of the Accounting Law. This could lead to the conclusion that the company has not effectively opted for lump-sum taxation on corporate income.
Effective signing of the financial statements
The Head of the National Tax Chamber ruled that, in order to opt for lump-sum taxation of corporate income, financial statements must not only be prepared, but also signed by both the person responsible for keeping the books and the head of the entity (management) within three months of closing the books (as evidenced by the rulings No. 0111-KDIB1-1.4010.79.2025.1.AND and No. 0111-KDIB1-1.4010.78.2025.1.AW, dated 7 May 2025, and No. 0114-KDIP2-2.4010.63.2025.1.IN, dated 27 February 2025).
In the opinion of the Head of the NTC, the foregoing follows directly from the wording of Article 28j(5) of the CIT Law, which requires financial statements to be prepared in accordance with accounting regulations. Signing the financial statements is an integral part of this process; preparing the financial statements without signing them does not constitute compliance with the provisions of the Accounting Act.
According to the authority, signing the financial statements within three months of the balance sheet date by the person assigned to keep the books, and then by the head of the entity after the aforementioned deadline has expired, also results in recognizing that the financial statements have not been effectively prepared. Consequently, financial statements prepared in this way do not entitle the entity to opt for taxation with Estonian CIT.
The requirement to make and sign the financial statements electronically
Similar conclusions apply to the preparation of financial statements in any form other than electronic. Therefore, the timely preparation and signing of financial statements in paper form is not sufficient for the effective election of lump-sum taxation of corporate income, since, according to the provisions of the Accounting Law, financial statements must be prepared electronically. Consequently, financial statements prepared in paper form also do not constitute an effective election of lump-sum taxation of corporate income (individual ruling of the Head of the NTC dated 25 March 2025, ref. 0111-KDIB1-2.4010.68.2025.1.MK).
Important consequences of the stance taken by the authority
The recent rulings by the Head of the NTC have drastic consequences for companies that have chosen to be taxed with Estonian corporate income tax (CIT) during the year, i.e. a loss of this right. These consequences seem to be disproportionate to the severity of the shortcomings in question.
This may serve as a warning to entities subject to lump-sum taxation on corporate income. The fact that the topic is still ongoing, with continuing enquiries from taxpayers, indicates that the number of companies that have prepared financial statements in breach of the regulations may be significant. Given the emerging line of interpretation, further negative rulings for taxpayers in situations involving questionable areas can be expected. It is therefore necessary to carefully analyze the potential tax consequences and plan further steps to address the risk of the lump-sum taxation election being deemed ineffective.
If you have any questions or concerns regarding the foregoing, please do not hesitate to contact us.
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