Taxation of charity donations to EU public benefit organisations in Estonia

Gifts and donations made by a resident legal person or a permanent establishment of a non-resident legal person located in Estonia are subject to income tax at the rate of 20/80. In regards of tax deduction, it is possible to make tax-exempt donations only to non-profit organisations which have been verified and put on a list of non-profit organisations managed by the Estonian tax authorities. For a non-profit association, foundation or religious association to be entered in the list, it must fulfil the following requirements set in the Estonian Income Tax Act:

• the association operates in the public interest
• the association operates for charitable purposes and provides goods, services or benefits primarily free of charge or in a non-revenue seeking or publicly accessible manner
• the association does not distribute its assets or income to founders, members, management or controlling body members, donors within the last twelve months or associated persons
• upon dissolution, after satisfying creditor claims the remaining assets are transferred to another association on the list, a specified association or a legal person in public law
• the administrative expenses of the association align with its activity’s nature and objectives stated in its articles of association
• the remuneration for employees and members of the management or control body does not exceed the typical compensation for similar work in the business sector.

Donations (and gifts) made to legal entities are exempt from tax within certain limits. To know how much tax-exempt donations a company can make, two alternative calculations can be compared, with the company choosing to apply either:

• 3% of payments, subject to social tax, from the beginning of the calendar year (personalised payments such as salaries), or
• 10% of the previous financial year’s accounting profits.

If gifts and donations exceed these limits in the annual summary, the part exceeding the limit value is subject to income tax at the rate of 20/80. The same also applies to donations made in favour of an association established in another Contracting State, provided that it can provide sufficient evidence demonstrating its compliance with the requirements outlined above and none of the circumstances described in clauses 1, 3-5, 7 and 8 of subsection 4 of the Income Tax Act are applicable to the association in question. Therefore, tax exemption is possible; however, the eligibility for such exemption is contingent upon the recipient entity being listed, or being considered equivalent to being on the list, based on the prevailing circumstances.

In Estonia, a resident natural person has the right to deduct certified gifts and donations, made during a period of taxation to associations included in the list of non-profit organisations managed by the Estonian tax authorities, from the income for the period of taxation. The deductions are in total limited to EUR 1,200 per taxpayer during a period of taxation, and to no more than 50% of the taxpayer’s income taxable in Estonia for the same period of taxation, after the deductions relating to enterprise have been made.

The recipients of donation are required to submit to the Tax and Customs Board form INF 4 “Declaration of gifts and donations received” by 1 February and indicate on it the data of the persons who made the donation and the amount of the donations. On the basis of the INF 4 forms, information on deductions is pre-filled in income tax returns.

The same applies to donations made in favour of an association established in another Contracting State, again provided that it has sufficient evidence demonstrating its compliance with the requirements outlined above.

The treatment of an EU PBO being equal to an Estonian non-profit organisation depends highly on the circumstances of the EU PBO and if it is considered equivalent to being on the list of non-profit organisations benefiting from income tax incentives.

An EU PBO would not be obliged to pay gift tax in Estonia if it receives a donation from a donor who is resident in Estonia as the donor is the one obliged to withhold the tax.

In our opinion it would not make sense to channel donations from Estonia to a Ukrainian charitable foundation and/or a US public charity as tax exemptions and deductions will not apply to donations made to organisations outside the Contracting States, even when they might comply with the conditions required.