Contractual sanctions are not subject to Estonian IRC. Judgments are not final

I would like to caution against optimism, because it is worth bearing in mind the variability of the position of the KIS director and the fact that the first rulings of the Supreme Administrative Court on this issue will certainly appear soon. However, I hope that the lecture given on 9 August this year will hold up.

When creating the regulation on the flat corporate income tax, the legislator did not define which taxable expenses are related to expenses not related to business activity. An attempt to explain this concept was made by the Ministry of Finance in the Guide to the Global Corporate Income Tax of December 23, 2021 (which – most importantly – is not a source of law, although it is a general explanation of the tax legislation provisions referred to in Article 14.º-A, paragraph 1, point 2 of the Tax Ordinance). It is not clear why the guide focuses on the relationship between a certain expense and income, although the regulation clearly mentions the relationship with business activity. Anyone engaged in business knows that in a certain activity he has to incur certain expenses (even if he does not always want to), which have little to do with income. Example? Expenses for the PFRON that do not contribute to increasing income or ensuring or maintaining its source. The obligation to make such payments results from legal provisions and is a consequence of the taxpayer’s business activity. Interestingly, despite the content of the guide (in the context of the link between expenses and income), the KIS director does not recognize these expenses as income (taxed at Estonian CIT) due to non-business related expenses. I believe that the same rational approach should be applied to contractual penalties. The need to incur them may be part of the essence of doing business in some sectors. The tax office seemed to have noticed this before.