As at the beginning of 2011, amendments to the Income Tax Act entered into force, which enable natural persons to plan the creation of their income tax liability in a better manner and postpone it to a future time, if they so wish. Although the existence of an investment account and tax liability can be declared for the first time in 2012, it is possible to use an investment account and make transactions already this year.
Below, we have briefly presented initial information on the investment account, to enable the interested parties to make their first choice – whether it is or is not reasonable.
What is an investment account?
An investment account is an ordinary bank account registered with a credit institution of a state which is a contracting party to the EEA Agreement or a member country of OECD, the assets in which are subject to a specific taxation regime that enables one to achieve the objective set for investment accounts – to postpone taxation of certain income of natural persons. Any existing bank account may be used or a new one opened for an investment account. An ordinary account will become an investment account so that the taxpayer simply declares that account as his or her investment account in the tax return.
The opening of a separate bank account is certainly preferred, as it is easier to keep accounts and fill out returns if changes in the account are only related to purchase and sales transactions of financial assets. Otherwise, everyday outflows from an investment account must be separately accounted for as withdrawn amounts that are subject to taxation.
What is a financial asset?
The answer to that question is necessary in order to understand what benefit and income would flow from postponing tax liability by using an investment account. Pursuant to law, financial assets are understood as publicly offered securities, securities traded in a securities market, shares and units of investment funds, deposits with investment risk and life insurance contracts as well as special types of securities – derivative instruments and short-term debt securities. Funded pension insurance contracts and pension fund units are expressly excluded from financial assets; neither do they generally include unlisted shares, shares of private limited companies, etc. According to the general rule, securities included in financial assets must be accepted for trade or offered through a public offer in a contracting party to the EEA Agreement or a member country of OECD. The same principle also applies to investment funds and deposits as well as life insurance contracts – a respective fund, credit institution and insurer must be registered in those countries.
Who should use an investment account?
The taxation system based on an investment account is not compulsory to anyone, neither is a general principal change in taxation of securities. All taxpayers who are currently satisfied with the amount of their tax liability and the periodical creation of tax liability may continue with taxation of income on their financial assets in the present manner. Today, the principles applicable to the taxation of income of legal persons in Estonia are already so well-known and wide-spread that many more active investors have arranged for postponement of their tax liability by using companies registered in Estonia.
One of the objectives of adopting an investment account is to enable natural persons to more flexibly manage their investments in securities and harmonise taxation of specific types of income with the principles for taxation of investments of companies. By using an investment account, a natural person may also earn income on securities which is not taxed in the period when the income is received, but only after the earned income is withdrawn from the investment account (to be consumed). Thus, those who foresee profitable transactions in securities where, pursuant to the regular procedure, they would be required to pay income tax on the earned income, could consider using an investment account in order to postpone that tax liability to the more distant future.
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Investment account postpones income tax liability to a future time
As at the beginning of 2011, amendments to the Income Tax Act entered into force, which enable natural persons to plan the creation of their income tax liability in a better manner and postpone it to a future time, if they so wish. Although the existence of an investment account and tax liability can be declared for the first time in 2012, it is possible to use an investment account and make transactions already this year.
Below, we have briefly presented initial information on the investment account, to enable the interested parties to make their first choice – whether it is or is not reasonable.
What is an investment account?
An investment account is an ordinary bank account registered with a credit institution of a state which is a contracting party to the EEA Agreement or a member country of OECD, the assets in which are subject to a specific taxation regime that enables one to achieve the objective set for investment accounts – to postpone taxation of certain income of natural persons. Any existing bank account may be used or a new one opened for an investment account. An ordinary account will become an investment account so that the taxpayer simply declares that account as his or her investment account in the tax return.
The opening of a separate bank account is certainly preferred, as it is easier to keep accounts and fill out returns if changes in the account are only related to purchase and sales transactions of financial assets. Otherwise, everyday outflows from an investment account must be separately accounted for as withdrawn amounts that are subject to taxation.
What is a financial asset?
The answer to that question is necessary in order to understand what benefit and income would flow from postponing tax liability by using an investment account. Pursuant to law, financial assets are understood as publicly offered securities, securities traded in a securities market, shares and units of investment funds, deposits with investment risk and life insurance contracts as well as special types of securities – derivative instruments and short-term debt securities. Funded pension insurance contracts and pension fund units are expressly excluded from financial assets; neither do they generally include unlisted shares, shares of private limited companies, etc. According to the general rule, securities included in financial assets must be accepted for trade or offered through a public offer in a contracting party to the EEA Agreement or a member country of OECD. The same principle also applies to investment funds and deposits as well as life insurance contracts – a respective fund, credit institution and insurer must be registered in those countries.
Who should use an investment account?
The taxation system based on an investment account is not compulsory to anyone, neither is a general principal change in taxation of securities. All taxpayers who are currently satisfied with the amount of their tax liability and the periodical creation of tax liability may continue with taxation of income on their financial assets in the present manner. Today, the principles applicable to the taxation of income of legal persons in Estonia are already so well-known and wide-spread that many more active investors have arranged for postponement of their tax liability by using companies registered in Estonia.
One of the objectives of adopting an investment account is to enable natural persons to more flexibly manage their investments in securities and harmonise taxation of specific types of income with the principles for taxation of investments of companies. By using an investment account, a natural person may also earn income on securities which is not taxed in the period when the income is received, but only after the earned income is withdrawn from the investment account (to be consumed). Thus, those who foresee profitable transactions in securities where, pursuant to the regular procedure, they would be required to pay income tax on the earned income, could consider using an investment account in order to postpone that tax liability to the more distant future.