Taxation of entertaining and guests related costs in Estonia

The Income Tax Act defines "costs of entertaining guests" as expenses incurred for providing catering, accommodation, transportation, or entertainment to guests and cooperation partners. These costs may also be referred to as "representation expenses."

Within certain limits, a company may cover expenses related to entertaining business partners without incurring tax obligations.

A reception is considered a recreational event, such as a Christmas party, a business lunch, or a visit to the theater.

The tax-exempt limit for representation expenses is 32 EUR per month plus 2% of the salary paid. In this context, "salary" refers to remuneration subject to social tax.

Generally, a company's employees and members of management or control bodies are not considered guests. Therefore, any expenses related to providing them with catering or entertainment are subject to taxation as fringe benefits.

If a reception is intended for business partners and is attended by the company's own employees performing their work duties, these costs are considered normal business-related expenses.

If an expense is subject to taxation as a fringe benefit, it is subject to both income tax and social tax. Additionally, no VAT can be recovered from such expenses. Therefore, it is advisable for a company to consult with an accountant before incurring such expenses to ensure proper arrangements. When reporting such costs, clear explanations should be provided to justify why they should be subject to taxation as costs of entertaining guests under § 49 of the Income Tax Act.