The taxation of loans granted by companies subject to the Estonian CIT regime to their related parties continues to raise significant doubts. On the one hand, following the judgment of the Supreme Administrative Court (NSA) of 9 October 2024 (case no. II FSK 797/24) and a number of taxpayer-unfavorable individual tax rulings, such loans should be classified as hidden profits, with the entire loan amount subject to taxation.
On the other hand, the jurisprudence of the Voivodship Administrative Courts (WSA) remains divided. Some courts support the interpretation adopted by the tax authorities and the NSA, while others consider that not every loan should automatically be regarded as a hidden profit. The latter approach was recently expressed by the WSA in Wrocław in its judgment of 27 March 2025 (case no. I SA/Wr 817/24).
The case involved a Polish furniture manufacturing company benefiting from taxation under the lump-sum regime on corporate income (Estonian CIT). The company was considering granting a loan to a related legal entity. The loans were to be granted for business purposes and on arm’s-length terms. Importantly, the loans were not intended to finance dividend distributions, share redemptions, acquisitions of shares, or other profit-distribution-related activities in favor of the company’s shareholders or related entities. Nor were they to be used for the purchase of goods or services from related parties. The company argued that, in such circumstances, the loan was not linked to the right to participate in the company’s profit, and that the transaction had sound business justification. Consequently, the company questioned whether the loan would qualify as a hidden profit under Article 28m(3)(1) of the CIT Act.
According to the taxpayer, such a loan should not be treated as a hidden profit, as its primary purpose was strictly business-oriented. Each loan was to be allocated to the company’s operational needs, rather than dividend payments or other profit-related benefits, a condition additionally guaranteed under the loan agreement. Therefore, in the company’s view, the loan should not be classified as a profit-related benefit and, as such, should not be subject to lump-sum taxation as hidden profit.
The tax authority disagreed. It argued that the provisions of Articles 28m(1)(2), 28m(3)(1), and 28m(4)(3) of the CIT Act aim to ensure that the subject of taxation under the Estonian CIT is the effective distribution of profit from the company to its shareholders/partners. This scope, in the authority’s view, should not be limited solely to dividends, but also extend to other forms of profit distribution. Referring to the Ministry of Finance’s official guidance on the Estonian CIT, the authority concluded that loans must be recognized as hidden profits and subject to taxation. The authority further noted that neither the intended use of the loan nor the fact that it was granted on market terms affected the classification of the loan as hidden profit.
The WSA in Wrocław, however, rejected this reasoning. The court emphasized that the tax authority selectively quoted the Ministry’s guidance, ignoring passages favorable to taxpayers and citing individual sentences out of context. The court further clarified that only those benefits linked to the right to participate in profit qualify as hidden profits. In the context of loans, this means they must be provided in connection with such a right and to the benefit of shareholders, partners, or related entities. In the case at hand, the loan was demonstrably independent of profit entitlement, meaning the statutory definition of hidden profit under Article 28m(3)(1) of the CIT Act was not met and the loan should not be subject to taxation.
This judgment is one of several that have adopted a taxpayer-friendly interpretation of the Estonian CIT rules. The decisive factor, however, remains the stance of the NSA, which so far—in its only judgment on the matter—ruled against the taxpayer. That ruling, however, arose from an appeal of an unfavorable WSA judgment. Accordingly, there is still reason to hope that, when faced with appeals from taxpayer-friendly judgments, the NSA may ultimately adopt a more favorable position for taxpayers.