In the Income Tax Act, a number of different sections regulate the taxation of gifts and donations, which is why it is important to define the person making gifts or donations – either a natural person or a legal person.
§ 49 of the Income Tax Act regulates the taxation of gifts or donations and costs of entertaining guests if these are made by a resident legal person or by a permanent establishment of a non-resident legal person located in Estonia.
Gifts and donations subject to tax under § 49 of the Income Tax Act are not included in the taxable income of a natural person (Income Tax Act § 12 (2)).
Taxation period of gifts, donations and costs of entertaining guests is a calendar month. Employer declares gifts, donations and costs of entertaining guests and income and social taxes calculated on these expenses in annex 5 of the declaration form TSD, which has to be submitted to the Tax and Customs Board by the 10th date following the calendar month of making gifts, donations and costs of entertaining guests. The tax amount is paid to the bank account of the Tax and Customs Board by the same date at the latest.
Taxation of gifts, donations and costs of entertaining guests
According to § 49 and § 53 (3) of the Income Tax Act, taxpayers are resident legal persons and permanent establishments.
All taxpayers are taxed equally, with the exception of persons included in the list of non-profit associations, foundations and religious associations benefiting from income tax incentives specified in § 11 (1) of the Income Tax Act. Therefore, depending on the taxpayers, annex 5 of the declaration form TSD is divided into two parts (part I and part II).
Gifts, donations and costs of entertaining guests of a taxation period provided for in § 49 of the Income Tax Act are declared in annex 5, regardless of whether or not the tax liability arises during the tax period.
Resident legal person
§ 24-47 of the General Part of the Civil Code Act concern legal persons. Pursuant to these sections, a legal person is a subject of law founded pursuant to law and meets the requirements imposed on a legal person governed by private law or public law:
- a legal person governed by private law is a general partnership, a limited partnership, a public limited company, a private limited company, a commercial association, a foundation and a non-profit association, which is created in private interest;
- a legal person governed by public law is established on the basis of law on legal entities and in public interest.
The provisions concerning a resident legal person apply to profit-making state agencies (State Forest Management Centre) pursuant to § 2 (3) of the Income Tax Act.
Permanent establishment of a non-resident legal person in Estonia
According to § 7 (1) of the Income Tax Act, a permanent establishment means a business entity through which the permanent economic activity of a non-resident is carried out in Estonia. § 7 (2) of the Income Tax Act specifies, that a permanent establishment is created as a result of economic activity which is geographically enclosed or has mobile nature, or as a result of economic activity conducted in Estonia through a representative authorised to enter into contracts on behalf of the non-resident.
The permanent establishment of a non-resident legal person located in Estonia is considered an independent taxpayer and the provisions governing taxation of a resident legal person apply to it, taking into account the provisions in § 53 of the Income Tax Act.
§ 2 (2) of the Income Tax Act separates resident legal persons and Estonian state and Estonian local government authorities as taxpayers.
Income Tax Act § 2 (3) treats only a resident legal person as a taxpayer, with the result that the state or local government authority is not a taxpayer for the objects of taxation referred to in § 49-52 of the Income Tax Act.
In that regard, legal persons which are similar in their activities and which may have been established as public or local government authorities, as legal persons governed by private law and as legal persons governed by public law must be attentive.
According to § 49 of the Income Tax Act
is a taxpayer
is not a taxpayer
|private museum||state or municipal museum|
|private archive||state or local government archive|
|public educational institution||state or local government educational institution|
|private educational institution|
For the implementation of § 49 of the Income Tax Act, it is not decisive whose administered sub-office it is or in which register the legal person is registered, but as which the legal person is established. When submitting an electronic declaration, persons who are not taxpayers under the Income Tax Act § 49 cannot submit the annex 5.
Receivers of gifts and donation and costs of entertaining guests
In case of gifts made to a natural person or entertainment expenses, catering expenses, etc., it is important to define, in particular, the person for whose benefit the expenditure is made. These expenses are taxed either according to § 48 or § 49 of the Income Tax Act, as a result of the recipient’s involvement with the taxpayer.
Gifts, expenses for catering or entertainment, etc. made by an employer to an employee, are taxed on the basis of § 48 of the Income Tax Act and are declared in annex 4 of the form TSD.
In this case it is a fringe benefit, in which the term “employee” is laid down in § 48 (3) and (6) of the Income Tax Act and the list of these persons is final. Therefore, gifts and costs of entertaining guests are not declared in annex 5 if the beneficiaries are:
- a person employed under an employment contract;
- an official (in the meaning of § 13 (1) of the Income Tax Act);
- a member of the management or controlling body (Income Tax Act § 9)
- a natural person who sells goods to an employer during a period longer than six months;
- a natural person who works or provides services on the basis of a contract for services, authorisation agreement or any other contract under the law of obligations;
- spouse, cohabitee or direct blood or collateral relative of the persons listed above.
Gifts and donations and costs of entertaining guests made to all natural persons not mentioned above are taxed pursuant to § 49 of the Income Tax Act and are declared in annex 5.
- Resident legal persons (including persons in public law, political parties, non-profit associations, foundations, etc.) and non-residents with a permanent establishment pay income tax on gifts and donations (Income Tax Act § 2, § 49 and § 53).
- Local government and state authorities do not pay income tax on gifts and donations.
- Persons included in the list of non-profit associations, foundations and religious associations benefiting from income tax incentives (hereinafter referred to as the list of associations benefiting from income tax incentives) do not pay income tax on donations if they make donations to persons included in the list of associations benefiting from income tax incentives, or to an association established in another EEA Contracting State which is treated as an association benefiting from income tax incentives.
- The content of gift and making a donation is not specifically regulated in the Income Tax Act, which is why the tax authority uses their usual meaning or the content laid down in other legislation (e.g. the Law of Obligations Act) to define these concepts.
Examples of taxation of donations
A legal person or a permanent establishment donates money/assets to a person included in the list of associations benefiting from income tax incentives or to an association established in another EEA Contracting State, which is treated as a company benefiting from income tax incentives.
Donations (and gifts) made to such persons are exempt from tax within certain limits.
The taxpayer chooses the limit value to be applied, but only one limit value can be used in the annual summary. Donations and gifts are exempt from tax in the extent of up to 3% of the amount of the payments subject to social tax made by a taxpayer in the same calendar year (i.e. essentially 3% of the salary fund) or 10% of the profits of the taxpayer of the last financial year ending on 1 January of the calendar year.
If gifts and donations made exceed these limits in the annual summary, the part exceeding the limit value is subject to income tax at the rate of 20/80.
A legal person or a permanent establishment donates money/assets to a person who is not included in list of associations benefiting from income tax incentives or to another legal person.
These donations are subject to tax in the usual manner with the tax rate of 20/80.
A legal person or a permanent establishment donates money/assets to another legal person who, although not included in list of associations benefiting from income tax incentives, transfers the donation to a person included in list of associations benefiting from income tax incentives, acting essentially as an intermediary for money/assets.
If the initial recipient of the donation acts only as an intermediary and the actual recipient of the donation is a person included in list of associations benefiting from income tax incentives, the tax incentive can be used, in certain cases, in the same way, as if the donator had provided the money/asset directly to the person included in list of associations benefiting from income tax incentives.
The donator will not have a tax liability if the collection/receipt of donations by the intermediary is for its intended purpose and documented, the subsequent transfer to a person included in the list of associations benefiting from income tax incentives is certified and it can be seen that the total amount donated will be transferred.
If part of the donations are retained by the intermediary or not transferred to the person included in list of associations benefiting from income tax incentives, donators are not entitled to the exemption from income tax of the amount donated. A number of end-of-year donation campaigns have been organised this way, e.g. the annual Christmas TV show Jõulutunnel.
An advertisement in a newspaper, the revenue of which the newspaper directs to a charity project, etc. For example, an advertisement in the newspaper Postimees, the proceeds of which Postimees plans to donate to certain orphanages.
Newspaper advertisement cannot be regarded as a donation; for a legal person it is an advertising expense. If the other legal person (a newspaper) decides to donate part of its advertising income, it is taxed as a donation of this legal person depending on the recipient of the donation.
A legal person or a permanent establishment donates part of its sales revenue. For example, for each chocolate X purchased, 0.2 euros of the price of the goods will be allocated to a donation of specific purpose.
In this case, the person making the donation is a legal person or a permanent establishment that decides to donate part of its sales revenue (0.2 euros in the example) for certain purposes. Donations made this way are taxed as usual, depending on the recipient of the donation.
The person setting up the collection box cannot be regarded as the person making a donation, but as an intermediary for donations. The money in the collection boxes must be counted over in a manner that it can be certified and it must be ascertainable that it is transferred to the recipient of the donation. Organising the collection and transfer of donations to the recipient in this manner will not give rise to any tax liability on the intermediary.
Cash placed in collection boxes does not grant the person donating a tax advantage because donations are not documented.
Donations are collected in donation boxes for various purposes, this is done, for example, in shopping centres.
Calling or sending messages for donation purposes to special telephone numbers of a legal person (not a person with income tax incentives), the income of which goes to various charity projects (e.g. Dancing with the Stars).
If the owner of the telephone number acts as an intermediary for the donation — the collection/receipt of donations by the intermediary is intended and documented and the subsequent transfer to the person benefiting from income tax incentives is proven and it can be seen that the total amount donated is transferred, the callers/message senders can treat the cost of the call/message as a donation exempt from tax.
If the intermediary does not transfer the entire amount to the person benefiting from the income tax incentive (such as the Dancing with the Stars project), the cost of the call/message of the person donating cannot be regarded as a donation exempt from tax.
Calling or sending messages for donation purposes to the special telephone numbers of a person included in the list of associations benefiting from income tax incentives.
If the telephone number belongs to a person entered in the list of associations benefiting from income tax incentives, the donation is deemed to have been made to the person benefiting from income tax relief and the donator is entitled to use the exemption in accordance with the general procedure.
If the telephone number through which the donation was made belongs to a legal person, the following should also be noted. If the telephone number of the legal person has been given for use to another person (who is indicated as a user at the telephone operator), the user of the telephone number is considered to be the donator. If the employee has been indicated as the user of the phone (e.g. the employee has a mobile phone number belonging to the employer) and the employer reimburses the cost of the donation to the employee, this is considered a fringe benefit.
Before making a donation, you can use the inquiry of gifts and donations usage to see how the non-profit associations and foundations have been using the donations.
Promotional gifts (goods or services supplied for advertising purposes) with a value of less than or equal to 10 euros, excluding VAT, are not subject to taxation.
For a promotional gift, a company buys mugs for its customers and has the logo of the company printed on the mugs. The price of one mug excluding VAT is 9.46 euros and the advertising cost (logo) is 0.80 euros. Despite the fact that the total cost for the company on a mug is 10.26 euros, the promotional gift is not subject to taxation. A mug cost less than 10 euros excluding VAT and 0.80 euros was advertising expenditure. These costs are not summed up. Printing the logo on the mug does not increase the monetary value of the mug for the recipient of the gift.
The cost of transporting, posting and packaging a promotional gift are business-related expenses (the input VAT on these invoices is deductible) which are not taxed as a gift, as these costs do not increase the monetary value of the gift for the recipient of the gift.
NEW! Subsection 66 has been added to § 61 of the Income Tax Act and it provides that a resident legal person shall not pay income tax on donations and gifts made in order to preserve the territorial integrity and sovereignty of Ukraine and to provide and organise targeted humanitarian aid, provided that the donations and gifts are made between 24 February and 31 December 2022 to the following legal persons:
- Estonian Refugee Council (MTÜ Eesti Pagulasabi);
- NGO Mondo (MTÜ Mondo);
- Ukrainian Cultural Centre (Ukraina Kultuurikeskus);
- National Defence Promotion Foundation (Riigikaitse Edendamise Sihtasutus);
- Estonian Red Cross (Eesti Punane Rist);
- Rescue Association (Päästeliit);
- Rotary Club Tallinn Vanalinn (Rotary Klubi Tallinn Vanalinn).
Donations to Ukrainian people can be made through the following ways:
- the campaign "For Ukraine!" – coordinates and organises help to people living in the settlements close to the front line in Ukraine and other vulnerable people through three Estonian non-governmental organizations (NGO) – the Estonian Refugee Council, Mondo and the Ukrainian Cultural Centre. More information on the activities of these NGOs can be found on the campaign page.
The Estonian Refugee Council is mapping offers of accommodation, jobs, various supplies and services.
- the Estonian Red Cross is gathering both things and monetary donations and will deliver the donations to those in need through the Ukrainian Red Cross. The Red Cross collects only new items: unused hygiene products (detergents, soap, toothpaste, toothbrushes, diapers, sanitary towels, etc.), bed linen, blankets, pillows, sleeping bags, towels.
More information on the donation collection points and donation accounts can be found on the webpage of the Estonian Red Cross.
the National Defence Promotion Foundation, which was founded by the Estonian Chamber of Commerce and Industry and the Ministry of Defence, launched a charitable donation campaign with the Estonian Reserve Officers’ Association to support the medical treatment of victims of the Ukrainian war in Estonia or other allied countries.
More information and details of the account for donations can be found on the webpage of the Estonian Chamber of Commerce and Industry.
- the Rescue Association is raising donations to help rescuers in Ukraine.
Specific rescue equipment such as firefighters’ boots, heat-resistant clothing, firefighters’ hoods, drones with thermal cameras etc. are welcome.
The taxation of donated money and goods depends on the identity of both the person making the donation and the recipient of the donation.
Estonian companies (legal persons) can donate money and transfer goods free of charge exempt from tax to the following legal persons (subsection 61 (66) of the Income Tax Act): the Estonian Refugee Council, NGO Mondo, Ukrainian Cultural Centre, National Defence Promotion Foundation, Estonian Red Cross, Rescue Association and Rotary Club Tallinn Vanalinn. This means that companies can provide services (e.g. accommodation for Ukrainian war refugees, transport, etc.) and donate goods (e.g. humanitarian aid) to the above-listed legal persons exempt from tax as well.
NB! There is no obligation for a company (the donor) to declare the donations made to the above-listed legal persons. If a company has already declared the donations made to the above-listed legal persons from 24 February to 31 March 2022, the company has the right to submit a correction to Annex 5 of form TSD and delete the amounts of donations made in February and March.
The recipients of the donations are obliged to submit form INF 4 “Declaration of gifts and donations received” and to use the money to support Ukraine and also submit form INF 9 “Declaration on the use of gifts, donations and other income”.
It is also possible for a company to donate money and transfer goods free of charge to non-profit associations and foundations entered in the list of non-profit associations, foundations and religious associations benefiting from income tax incentives (hereinafter the list), but within the tax exempt limit (subsection 49 (2) of the Income Tax Act).
When donating to a listed non-profit association and foundation, companies (donators) can choose between two tax exempt limit values, either:
- 3% of the wages paid or
- 10% of the profit for the previous financial year.
The tax exempt limit is calculated on an annual basis. A company (the donor) is obliged to declare donations made to the listed non-profit associations and foundations in Annex 5 to form TSD. The recipient of donations is obliged to submit forms INF 4 and INF 9.
In turn, charity organisations included in the list can provide material assistance to natural persons for subsistence purposes exempt from tax (subsection 49 (6) of the Income Tax Act). The delivery of free food and essential goods or catering (e.g. food packages etc.) for subsistence purposes is also exempt from tax.
When donating directly to the Ukrainian state, to the armed forces of Ukraine or to the accounts of the Central Bank of Ukraine, as well as to Ukrainian companies, you cannot use tax exemptions within limits.
For natural persons
Estonian people can also deduct from their income donations to a listed non-profit association and foundation up to a maximum amount of 1200 euros (with interest on housing loans and training costs). This also applies to NGO Estonian Refugee Council, NGO Mondo, the Ukrainian Cultural Centre, the National Defence Promotion Foundation, the Estonian Red Cross, the Rescue Association and the Rotary Club Tallinn Vanalinn.
The recipients of the donation are obliged to submit form INF 4 “Declaration of gifts and donations received” and indicate on it the data of the persons who made the donation and the amount of the donations. On the basis of form INF 4, deductions will be pre-filled in a person’s income tax return.
Furthermore, on submitting your income tax return, you can donate your income tax refund to a listed association — the Estonian Red Cross, the Estonian Refugee Council and NGO Mondo.
When donating directly to the Ukrainian state, to the armed forces of Ukraine or to the accounts of the Central Bank of Ukraine, as well as to Ukrainian companies, you cannot use tax incentives.
VAT treatment of goods transferred as donations
Export of goods
WHEN THE EXPORTER IS SUBJECT TO VAT
According to subsection 5 (1) of the VAT Act, “export” means the transfer of Union goods by the transferor of the goods or foreign acquirer of the goods with transport of the goods to a destination outside the customs territory of the Union. The VAT rate on exportation of goods is 0 % (clause 15 (3) 1) of the VAT Act). If the exporter is liable to VAT, he will be able to deduct the input value added tax on the acquisition of the exported goods and will not be required to refund it to the State after exportation.
WHEN THE EXPORTER IS NOT SUBJECT TO VAT AND EXPORTS GOODS AS HUMANITARIAN AID
In accordance with subsection 35 (6) of the VAT Act, the VAT paid in Estonia upon acquisition of goods or importation of goods from a country outside the EU is refunded to a persons who exports such goods as humanitarian aid. In accordance with the same provision, humanitarian aid is irrecoverable aid granted for alleviation of need to international organisations, foreign governments, foreign local governments or foreign non-governmental organisations. Therefore, the goods currently being sent to Ukraine also constitute humanitarian aid within the meaning of this provision, as they are intended to alleviate a need.
VAT paid upon purchase of goods exported as humanitarian aid in Estonia or upon importation from a country outside the EU is refunded in accordance with the procedure established by Regulation No 66 of the Minister of Finance of 18 December 2009.
An application for VAT refund in free format and digitally signed must be submitted to the e-mail address of the Estonian Tax and Customs Board firstname.lastname@example.org.
The application must contain information on the goods exported, including the documents drawn up in connection with the export of the goods and the circumstances in which the goods are delivered to their destination, and to whose name and to which bank account VAT should be refunded.
A legible invoice from the seller of the exported goods bought in Estonia complying with the requirements provided for in § 37 of the VAT Act must be added to the application or, in the case of import of the exported goods, documents certifying payment of VAT to customs authorities.
Delivery of goods as a donation in Estonia or elsewhere in the EU
For the purposes of the VAT Act it means the transfer of goods without charge, which is subject to VAT. The transfer of goods without charge is not subject to tax if the goods are not connected with the supplier’s business and input value added tax of the goods has not been deducted. The EU VAT Directive does not lay down any differences in this regard either.
Last updated: 07.09.2022