Using the investment account system, a private person has the possibility to defer the income tax liability arising from income from financial assets until such income is used for other purposes. A securities account is not an investment account.
On an income tax return you should indicate your gain/loss received from the transfer of:
- units of investment fund (incl. financial market fund)
- bonds or debt obligation
- derivatives or other securities not referred to here, and
- compensation for privatisation vouchers
Information on transactions in securities on pre-completed income tax returns
In case of transactions in securities conducted through the Estonian Central Register of Securities (ECRS) the tax authority pre-completes the table 6.1 of an income tax return.
Information on all transactions is not available to ECRS and so the taxpayer has to insert in the table the data on the transactions that were not concluded through ECRS. If an investment account is used for deferral of an income tax liability arising from financial assets, information on transactions in securities associated with an investment account must be deleted from the pre-completed data in Table 6.1.
A taxpayer is also required to insert additional information on the transactions communicated to the tax authority by ECRS. As ECRS is not able to submit information on the acquisition cost of securities, the taxpayers themselves must include this information on the tax return.
Difference between the acquisition cost and of the sales price of securities is deemed to be gain. Gain upon exchange of securities means difference between the acquisition cost and the market price of securities received as a consequence of the exchange.
Gains from transactions in securities must be declared in the year when the transfer of securities actually takes place.
All certified expenses in connection with the acquisition of securities are deemed to be the acquisition costs of securities.
Upon transfer of securities, in addition to the acquisition cost, the certified expenses directly related to the sale or exchange of securities (e.g. transaction fees, etc.) may also be deducted from the sales price.
In each specific case such expenses must be considered individually, for the concept of expenses directly related to the transfer of property is not legally specified. Directly related expenses may be the expenses made for concluding a particular transaction where such expenses are inevitable.
Maintenance fees of a security account and other overhead management costs in connection with the securities are not recorded as expenses. Taxpayers have to bear such expenses irrespective of the sales transaction of securities, and deduction of such expenses from income or including them in the loss is not possible.
If an option was used to acquire securities, the option premium can be included in the acquisition cost if the securities acquired are transferred. The option premium as of the date of exercise of the option may also be declared if the option does not materialise and the underlying assets are not purchased.
By declaration of securities, in addition to the gains received during a period of taxation, also the loss from the transfer of securities may be taken into account. Consequently, gains or loss from transfer of securities means:
- upon sale – difference between the acquisition cost and the sales cost of a security;
- upon exchange – difference between the acquisition cost of a security exchanged and the market cost of a security received as a result of exchange;
Taxation of new holdings acquired by exchange as a result of a merger, division or transformation of companies or non-profit associations shall take place upon transfer of the holdings, while the difference between the acquisition cost of an exchanged holding and the sales price of a received holding will be subject to taxation. Similar conditions apply to taxation of the gains derived from transfer of units that were acquired through the exchange of units of an investment fund of a State which is a Contracting Party to the EEA Agreement
By calculation the acquisition cost of a partial transfer of securities of the same class in different periods at different prices consistently one of the following methods should be followed:
- FIFO (First In, First Out) – transfer takes place in the order of purchasing;
- weighed average method – the acquisition cost of one transferred security is calculated by dividing the amount of the acquisition costs of securities of the same class existent at the moment of transfer by the number of securities of the same class.
Frequently asked questions
- Is income tax charged for the exchange of units of different investment funds managed by the same management company?
The exchange of units of various funds to be administered by the same management company and the replacement of the holding during the merger of the investment funds is not subject to income tax. Such exchange transactions need not be declared.
- What time is deemed to be the acquisition time of the units of an investment fund, if, by calculation of the acquisition cost the FIFO method is applied, and the units were exchanged exempt from tax?
The acquisition time of the units transferred in the course of an exchange exempt from tax is deemed to be the acquisition time of units.
How is the acquisition cost calculated in the case of a split, i.e. the nominal value of shares has changed but share capital remains the same?
The acquisition cost of the shares which have been split has to be divided according to the split ratio. For example if the split ratio is 2-for-1, i.e. in place of one earlier acquired share there are two shares after the split, the acquisition cost is divided by 2.
How is the acquisition cost calculated in the case of issuing new shares and increasing share capital?
Acquisition cost is the expenditure incurred when obtaining shares. If shares are received from an employer at a favourable price and the employer will be liable to pay fringe-benefit tax on these shares, the employee can, on the basis of a certificate issued by the employer, consider the amount taxed by the employer as the acquisition cost of the shares. If shares are received free of charge, there is no acquisition cost.
By transfer of securities not only the gains received as a result of a transaction but also the transactions suffering loss are taken into account. And it is not relevant if the loss by transfer of securities incurred during the period of taxation or it incurred earlier in previous years. In the last case the loss must have been declared already and it is carried forward from the previous periods of taxation.
If loss from transfer of securities is bigger than gains received from transfer of securities in the same year, the amount of loss exceeding the amount of gain may be deducted from the gains received from transfer of securities during the subsequent periods of taxation.
Besides the loss from the securities you can also declare loss incurred on charging the payments received from equity or liquidation proceeds of the legal person, as well as loss incurred on liquidation of common investment fund or when refunding units.
Loss incurred from transfer of securities may not be taken into account by reduction of gain received from transfer of securities, if:
- loss incurred by transfer of securities to a person associated with the taxpayer at a price below the market price, or
- loss incurred by transfer of securities from a person associated with the taxpayer at a price above the market price,
- losses incurred when the securities became invalid for the benefit of a person related to the taxpayer in the conditions different from the market conditions.
In the event of the transaction with the associated persons a symbol “X” should be entered in column 8 of the table 6.1 of an income tax return:
- if a security giving the right to receive dividends was acquired within 30 days before the date on which the persons with the right to receive dividends were specified and it was transferred on the date on which the persons with the right to receive dividends are specified, or
- if a security giving the right to receive dividends was acquired within 30 days before the date on which the persons with the right to receive dividends were specified and it was transferred within 30 days after the aforementioned date.
In case of the last two transactions suffering loss, a symbol “X” should be entered in column 9 of the table 6.1 of an income tax return.
Frequently asked questions
Is it possible to declare the option premium of shares with the right to receive dividends, if the shares were sold with loss within 30 days after the date on which the persons with the right to receive dividends were specified?
As in this situation the loss from the transfer of securities cannot be taken into account, also the option premium, which would increase the loss, cannot be taken into account.
In a situation where:
- the employee has received securities from the employer at a discount or for free from which the employer has paid income tax and social tax on the fringe benefit, or
- a natural person has received securities from a legal person as a qift and the legal person has paid the income tax on the gift,
the resident natural person has the right, when transferring these securities, to declare the paid tax on fringe benefit or the price of the gift (market price of the securities or the difference in price) as acquisition cost in the natural person income tax return.
In this case, the natural person has to ask a certificate (in free form) from the employer or the legal person, which indicates the name and registry code of the issuer of the securities and also the type, quantity and price of securities and the taxed sum by the employer or legal person. It is important to note on the certificate also the taxation period (month, year) form of the tax return TSD (Annex 4 or Annex 5) on which the taxed sum is declared.
Frequently asked questions
How to find the acquisition cost of securities that a person (employee) acquired with an option contract from an Estonian employer?
While transferring securities the person can declare as acquisition cost the expenses incurred by acquisition of underlying assets of an option and/or the taxed sum paid by the employer for the fringe benefit based on the certificate issued by the employer.
A participation option contract may stipulate that in entering into the agreement, an option premium is paid. While transferring securities the person can declare as acquisition cost also the option premium paid by the person.
The participation option contract may also stipulate that if it has passed less than 36 months from the conclusion of the option contract and the employee decides to realize the option, then the employee is obligated to pay to the employer the sum of tax liability arising from the fringe benefit.
In this case, the person can also declare the sum paid to the employer (the tax liability arising from the fringe benefit) as acquisition cost.
If no longer than 36 months has passed since the conclusion of the option contract and the option is realized, then the employer has the obligation to pay tax on fringe benefits on the securities (underlying asset of the option contract) given to the employee. The tax on fringe benefits in that case will be paid based on the market price or the price difference of the securities, from which the following will be deducted:
- option premium paid by the employee and/or
- the amount paid by the employee to the employer.
For example, in a situation where the price of a fringe benefit (the market price of the securities) is 1000 euros and the employee pays to the employer the tax liability arising from the fringe benefit, which is 662.50 euros, the taxable price of a fringe benefit for the employer is 1000 – 662.50 = 337.50 euros. The acquisition cost of securities for the employee will be 1000 euros (paid by the employee 662.50 + taxed as a fringe benefit 337.50 euros).
The abovementioned rules and principles of taxation are applicable to the transfer of securities through a foreign financial intermediary. The expenses made in foreign currency, sales/market prices of securities, taxes paid and withheld income tax must be recalculated into euros according to the exchange rate of the European Central Bank on the date on which the expenses were made or income was received, or on the date of payment or withholding income tax.
Acquisition cost of the assets acquired before 2011 must be recalculated into Estonian kroons according to the exchange rate of the Eesti Pank (Bank of Estonia) effective on that date, and after that into euros according to the exchange rate of 15.6466. Transaction figures concerning the same transaction (for example, acquisition cost and selling price) must be declared in the same currency. Transaction figures may be converted into euros, if necessary.
Securities transferred abroad are to be declared in the table 8.2 of the income tax return and the fields should be completed like the fields of the table 6.1.
The investment account enables to reinvest the gains or income exempt from income tax received on financial assets and to postpone the income tax liability.
The investment account is a cash account (standard bank account) opened with a resident credit institution of a member state of the Organisation for Economic Cooperation and Development (OECD) or in the permanent establishment of a credit institution located in the OECD country.
Only Estonian residents are allowed to use the investment account because gains from financial assets are taxed in the residency state. Thus, if residency of the investment account user changes, investment account should be marked as closed in the annual tax-return, arising income tax should be paid to Estonia and further transactions with financial assets be declared in the new residency state.
A person may have one or several investment accounts. In order to postpone the income tax liability, transactions with financial assets shall be concluded through the investment account.
The definition ’financial assets’ includes, for example, the publicly traded securities, shares and units of an investment fund, bank deposits and contributions made under unit-linked life assurance contracts (subsection 171 (2) of the Income Tax Act).
The definition ’financial assets’ does not include insurance contracts for a funded pension and units of pension funds, life assurance contracts, on the stock exchange non-marketable holdings in companies, the money granted on the basis of loan agreements, derivative instruments, which underlying are not financial assets and currency investments, as well as immovable property and precious metals.
Investment account and acquisition of financial assets
§ 17² (1) of the Income Tax Act imposes the general rule of acquisition of financial assets. According to the general rule in order to postpone income tax liability of resident natural person, financial assets shall be acquired for the money in the investment account and the money obtained from the sales of financial assets or the income received on financial assets shall immediately be transferred to the investment account. General rule must also be followed when the services of an investment firm (or brokerage firm) are used for the investment.
§ 17² (8) of the Income Tax Act imposes an exception to the general rule. In certain cases, it is possible to include financial assets that have not been acquired for the money in the investment account into the investment account system. The purpose of the exception is to prevent situations where a natural person is forced to use the so-called regular and investment account system at the same time, because of some of financial assets was impossible to acquire regarding the conditions of the general rule.
The acquisition of financial asset received as an inheritance, a gift, a liquidation proceeding or a share options can be regarded as an exception to the general rule, since there was no contract of sale and it was impossible to pay for the transaction without changing the substance of the transaction.
The exception stipulates that the acquisition cost of a financial asset, which was not acquired with money due to the substance of the transaction, should be declared in income tax return as a contribution to the investment account in order to postpone the income tax liability.
For the successor, who received financial asset as an inheritance, the acquisition cost of a financial asset are only the expenses incurred by him(-) or herself (subsection 38 (1) of the Income Tax Act). The successor has the right to declare the expenses incurred in acquiring financial assets as a contribution to the investment account.
The acquisition cost of a financial asset received as a gift, liquidation division or share option may be the amount taxed with income tax on the basis of §§ 48, 49 and 50 of the Income Tax Act or the amount taxed with income tax in a foreign state on the basis of § 38 (8) of the Income Tax Act.
As an example, we bring out the acquisition of a financial asset with a share option. A resident natural person has the right to consider as an acquisition cost of a financial asset and declare in the income tax return as the investment account contribution:
- the amount, which was the subject to income tax paid by the company as a fringe benefit on the basis of § 48 of the Income Tax Act;
- the exercise price of an option paid by a natural person him/herself;
- the option premium paid upon concluding an option agreement, i.e. the amount paid for the option.
Investment account and currency conversions
§ 17² (5) of the Income Tax Act stipulates that currency conversion in the investment account is not considered to be investment account outpayment.
From the investment account it is permitted to invest only into instruments that belong to financial assets within the meaning of § 17¹ of the Income Tax Act. Acquisition of another financial instrument is considered as an investment account outpayment, which will give rise to income tax liability.
Due to the fact that currency is not included in the definition of a financial asset, it is not possible to invest in currencies using the investment account. However, part of the financial assets can only be acquired for a currency other than euro. Therefore, acquisition of a currency other than euro from the investment account is in some cases unavoidable and is not performed for currency investing purposes.
Under this provision, a person has the right to convert currencies on and off the investment account. This type of transactions shall be declared neither as contributions nor as outpayments, in case the sold currency originates from the investment account and the purchased currency is immediately transferred back to the investment account.
The data about the investment account and the income on financial assets shall be declared in a resident natural person’s income tax return (hereinafter income tax return) in table 6.5. In the income tax return shall be declared only contributions to the investment account and outpayments from the investment account. If the outpayment exceeds the payment to investment account, the tax liability shall arise.
In table 6.5 of the income tax return, in general, the following shall be declared only:
- the money transferred to the investment account (cash account) and
- the money outpayments from the investment account (cash account).
No purchase/sale of financial assets (for example, the securities which are traded publicly, units of investment funds, bank deposits) or the movements between the investment account, securities account and the deposit account shall be declared in table 6.5.
The following outpayment from the investment account shall be declared in table 6.5 as well:
- the income received on the financial assets which is not immediately transferred to the investment account.
Remittances between the investment accounts shall be declared neither as contributions nor as outpayments.
The following amounts of contributions to the investment account shall be declared in table 6.5 of the income tax return as well:
- upon opening an investment account, the amount of balance in the account,
from financial assets the dividends received from abroad and has taxed in a foreign state (these shall be declared in addition in table 8.8),
from financial assets the interests received from abroad and has taxed in a foreign state (these shall be declared in addition in table 8.1),
from financial assets the dividends received in Estonia and has taxed in Estonia (are in the pre-completed table 5.1 or 7.1),
from financial assets the interests received in Estonia and has taxed in Estonia (are in the first part of the pre-completed table 5.1).
The amount of contribution is not non-taxed dividend and interest, received from financial assets.
In table 6.5 the balance of the account shall be calculated after each contribution to the investment account and outpayment. The taxable amount shall arise, if the outpayment made from the investment account exceeds the balance of the contribution. If there are several investment accounts, then the taxable amount shall arise, if the outpayments made from all the investment accounts exceed the balance of the contributions.
If the balance of the investment account is 2000 euros, the taxable amount shall arise if the outpayment from the investment account exceeds 2000 euros.
If during a calendar year neither contributions to the investment account nor outpayments from the investment account have been made, then the corresponding notation shall be made in table 6.5 and the balance of the contribution shall be carried forward to the following calendar year.
Last updated: 07.09.2022