Hidden Profits Under Estonian CIT After the Provincial Administrative Court (WSA) Ruling in Gdańsk?

More and more companies are using the flat-rate tax on corporate income, known as Estonian CIT. This solution allows tax to be paid only when profits are distributed, rather than when they are earned. At the same time, it raises many questions: does signing a contract with a shareholder and paying them remuneration count as a hidden profit under Article 28m(3) of the CIT Act?

This question was partly answered by a December ruling of the Provincial Administrative Court (WSA) in Gdańsk of 10 December 2024 (case no. I SA/Gd 811/24). The court indicated that not every form of cooperation with a shareholder amounts to extracting money from the company and triggering additional taxation.

The case: shareholder remuneration and hidden profit

At the centre of the dispute was an advisory agreement concluded with a shareholder who also served as a member of the management board. The scope of services included preparing sales strategy, business analyses, and procurement optimisation. The agreement provided for hourly billing, time-tracking records, and verification of settlements by the company. Importantly, the multi-member management board was to regularly assess the quality of the services.

These details showed that the contract had genuine business rationale and delivered real benefits to the company. The remuneration was therefore not equivalent to a dividend, but payment for services actually performed.

Estonian CIT and Article 28m(3) – the court’s position

The WSA in Gdańsk clearly stressed that the CIT Act does not prohibit concluding service agreements with a shareholder who is also a board member. Tax authorities cannot automatically treat such cooperation as a hidden profit.

Article 28m(3) states that a hidden profit is a benefit whose value exceeds market level. This means a shareholder’s remuneration does not, by itself, constitute a hidden profit if:

• the services are real and genuinely needed by the company,
• the remuneration matches market rates,
• the cooperation has economic rationale and is properly documented.

Dividend versus remuneration – a key distinction

The ruling is a reminder of the difference between a dividend and payment for services. A dividend is owed to every shareholder solely on account of their stake in the company. Remuneration is owed for actual work, competence, and risk borne by the service provider.

That is why an advisory, consulting, or other service agreement provided by a shareholder does not have to be treated as a hidden profit, provided its terms match market standards.

When might the tax authorities treat remuneration as a hidden profit?

The risk arises when remuneration lacks economic justification. Tax authorities most often challenge situations where the services are sham, their results are hard to demonstrate, and the reports look „copy-pasted.” Rates higher than market level, a lack of accountability for results, or a situation where the shareholder assesses the quality of their own services are also problematic.

In such cases, the tax authorities may find that this is not a genuine service, but rather a hidden extraction of money from the company.

How to safely pay remuneration to a shareholder under Estonian CIT?

For safety, it is worth taking care of several key elements. The agreement should precisely describe the scope of services and the business objectives. Remuneration should be based on a market benchmark and documented through calculations. It is also necessary to keep time-tracking records and gather evidence of results — reports, analyses, recommendations. Corporate procedures also matter, such as periodic assessment of the services by the management board and the ability to terminate the agreement.

This approach significantly reduces the risk of the tax authorities treating the remuneration as a hidden profit.

Summary

The WSA ruling in Gdańsk from December 2024 is an important signal for entrepreneurs. It shows that Estonian CIT does not block cooperation between a company and its shareholder, and that remuneration for genuine services does not have to be treated as a hidden profit. The condition, however, is market-level rates and reliable documentation.

Want to know how to legally pay out money from your company under Estonian CIT?

At LAW CITY, we translate the regulations into plain language and help entrepreneurs operate safely. We will prepare your agreements, check that remuneration matches market rates, and help you avoid tax risk.

Get in touch with us and find out how to use Estonian CIT to pay out money from your company lawfully and without extra costs.