Accounts for investing

Since 2011, Estonia has had two parallel systems for taxing private individuals’ investment income: the ordinary system, under which all sales of securities have to be declared, and the investment account system, under which only cash payments into and out of the account have to be declared.

You can also declare income from securities under both systems.

If you use the ordinary system (i.e., you only use a securities account for investment), all sales of securities during the year will be declared. Income tax liability arises when you have made a profit on all your sales. Income tax must be paid with the tax return of the following year. However, if you make a loss for the year, you can carry it over to the next year. Under the ordinary system, you can deduct service fees from the realised income, but not administration fees.

When you use the investment account system (i.e., you use an investment current account in addition to the securities account), you declare the payments into and out of the bank account designated as the investment account, not the securities transactions. You can also use several investment accounts with several banks at the same time. A tax liability only arises if the total of the payouts made from all investment accounts exceeds the total of the contributions made to all investment accounts.

Generally, profit or loss can arise in two ways.

• When selling securities:
  Profit or loss = sales price – cost of sales – acquisition cost
• When exchanging securities:
  Profit or loss = acquisition cost of the security to be exchanged – market price of the security received upon exchange

The acquisition cost is considered to be all documented costs incurred by the investor to acquire the asset.

The FIFO method or the weighted average method is used to calculate the acquisition cost of securities of the same name acquired at different prices and at different times. Profit from a securities transaction can be deducted against losses on securities in the same or previous years. Losses can be carried forward indefinitely, but cannot be inherited, given as a gift, sold, etc.

As it is not possible to distinguish whether you are using the ordinary system or the investment account system when submitting the data, this information reaches the Tax and Customs Board automatically.

When completing the declaration, verify that no transactions are automatically included in sections 6.1 and 8.2 – these fields must be left blank when using an investment account. However, if there are any records of your transfer of Estonian or non-Estonian securities, they must be deleted.

In addition, review section 6.5 of the Tax and Customs Board’s declaration, where you must confirm that you have an investment account, and verify that your report is included in the declaration.

An investment account is a current account used exclusively for investments and transactions in financial assets.

However, if you happen to make a single transfer from your investment account, for example, when paying online, there is nothing to worry about. When you fill in an investment account report in the future, you simply need to mark the transaction as a payout. In the same way, for example, if someone inadvertently transfers funds into your investment account, it should be recorded as a contribution. The report must normally be sent to the Tax and Customs Board during the income declaration period. Next year try to be more careful.

An investor can have several securities accounts with the same bank or with different banks.

If you use an investment account with a securities account, fill in the investment account report in each bank separately and submit it to the Tax and Customs Board.

If you only use a securities account, these transactions will be recorded in the Tax and Customs Board’s declaration under sections 6.1 and 8.2. In this case, verify that the transactions made with all banks are recorded correctly.

Documentary evidence of an expense directly attributable to the acquisition and disposal of a financial asset will be treated as a contribution to an investment account if the expense is not incurred on account of the contribution. When considering expenses, the rule is that expenses incurred on account of a contribution cannot be declared as a new contribution.

Example 1

Investor A has 0 currency units in their investment account and a contribution balance of 0 currency units. They transfer 228 currency units to their investment account. Their investment account now has 228 currency units and their contribution balance is 228 currency units.

They buy shares in AS ABC for 225 currency units and pay a transaction fee of 3 currency units from their investment account.

In such a case, it is not allowed to declare the transaction fee as a contribution, as the same amount cannot be treated as a contribution twice.

Example 2

Investor B has 228 currency units in their investment account and a contribution balance of 200 currency units. They withdraw 200 currency units from their investment account. Their investment account now has 28 currency units and their contribution balance is 0 currency units.

The investor transfers an additional 200 currency units to the investment account.

The investor buys shares in AS ABC for 225 currency units and pays a transaction fee of 3 currency units from their investment account.

In such a case, it is allowed to declare the transaction fee as a contribution, as the amount of the transaction fee has not been previously included as part of the contribution.

Declaring income on behalf of a child depends on the child’s age; whether they have Internet Bank; and whether you only use a securities account or also an investment account to invest on their behalf.

If you use an investment account and a securities account to invest on behalf of your child:

a) Children up to 5 years of age (incl.) and children who do not have Internet Bank. In this case, declare all transactions manually in the report to the Tax and Customs Board using your child’s securities account statement;

b) Children from the age of 6 with Internet Bank. In this case, create an investment account report in the Internet Bank and submit it to the Tax and Customs Board for declaration. Then confirm this with the Tax and Customs Board and submit the declaration there on behalf of the child.

If you only use a securities account to invest on behalf of your child:

a) Children up to 5 years of age (incl.) and children who do not have Internet Bank. In this case, declare all transactions manually in the report to the Tax and Customs Board using your child’s securities account statement;

b) Children from the age of 6 with Internet Bank. In this case, the transaction data will be generated in the child’s Internet Bank on the ‘My data’ page. You can use this data to declare transactions in the Tax and Customs Board online environment.

Foreign dividends are either tax exempt in Estonia (if the profit or dividend is paid abroad) or taxed. In any case, foreign dividends must always be declared.

If you use an investment account in addition to a securities account, dividends received will be reflected in your investment account report. In the explanation line, you can see the ISIN code of the security, the name, the dividends, and the amount of income tax withheld. If income tax has not been withheld, the amount of income tax at the end of the explanation is 0 and the line should be reported as a transaction in a financial asset.

If income tax has been withheld, i.e., there is a non-zero figure at the end of the explanation, the line should be entered as a contribution.

An amendment to the Income Tax Act entered into force on 1 January 2018. On this basis, a company that regularly pays dividends can benefit from a lower tax rate.

At the corporate level, the income tax rate is 14% for regular dividends (14/86 of the net amount) and 20% for other dividends (20/80 of the net amount).

Dividend payments taxed at 20% are exempt from tax for private individuals. Income tax is withheld at the rate of 7% on dividends paid to private individuals under the 14/86 rule.

For a private individual, both dividend payments are contributions to an investment account. In addition, in the case of a dividend payment taxed at a rate of 14%, an entry for the amount of income tax withheld at the level of the private individual (7% of the gross amount) will be made in the investment account statement.