The Supreme Court has ruled that disbursements made at the expense of undeclared equity contributions are not automatically subject to income tax.

The Supreme Court thus finds that a disbursement made from equity capital is not subject to income tax, if the disbursement does not exceed the contribution to the equity and the taxpayer can provide evidence of the equity contribution (regardless of whether or not the contribution has been declared).

Equity contributions must be declared

Pursuant to the Income Tax Act, all companies are obliged, from January 2015 onwards, to declare the contributions made to equity capital. Any equity contributions made before 2015 had to be declared by 10 February 2015.

As the tax returns could only be changed retrospectively for a period of three years, the last chance to declare equity contributions made before 2015 expired on 12 February 2018.

The explanatory memorandum to the draft legal act implementing the obligation to declare the contribution specified that taxpayers shall not have the right to make tax-free disbursements at the expense of equity undeclared by the established deadline.

The tax authority is of a firm opinion that, unless the equity contributions were declared by the established deadline, the taxpayer shall not have the right to make tax-free disbursements at the expense of the same. 

The Supreme Court did not concur with the legislator

The Supreme Court did not concur with the reasoning of the explanatory memorandum or the tax authority's approach. The Supreme Court finds that the obligation to declare equity contributions is, above all, a regulatory facilitating measure, and that the declared or undeclared contributions do not form the basis for imposing income tax. The tax authority has the right to impose income tax, if the disbursements of equity capital made by a company exceed contributions to the same, regardless of whether or not the contributions have been declared.

The Supreme Court emphasised that equity contributions are verified, and the tax is imposed based on declarations and other documents. Therefore, failure to declare the contribution does not trigger a tax obligation. Rather, it triggers the obligation to present the tax authority with additional documents in order to verify the equity contribution.

Documents verifying equity contributions may include a payment confirmation, an instrument of delivery and receipt of the non-monetary contribution, accounting documents and contracts concluded between parties.

Should you have any questions regarding the matter, please do not hesitate to contact Grant Thornton Baltic's tax specialists at the telephone number +372 626 0500 or the e-mail address

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