Corporate loans between companies and individuals are common in Estonia — often used for intra-group funding, investments, or short-term liquidity. These transactions, however, require proper legal documentation, arm’s-length interest rates, and thorough record-keeping to avoid later tax and legal disputes.
In this article, we unpack key lending scenarios, how to set market-based interest, special points for investment loans, typical tax risks, and practical steps to stay compliant and transparent.
🧠 Before You lend (or borrow): define the purpose, counterparty, and terms
Before signing any loan agreement, a company should deliberately assess and document why and to whom it lends — or why and from whom it borrows. This isn’t box-ticking: tax authorities and auditors scrutinise the economic substance.
Questions to answer upfront:
📌 Why is the loan granted or taken — what business need does it serve?
📌 To/From whom — related or unrelated party, domestic or foreign?
📌 On what terms — interest rate, maturity, security, repayment schedule?
📌 Borrower’s capacity — how was creditworthiness assessed?
📌 Strategic fit — does it align with core business and strategy?
👉 Tip: Prepare a short board decision/memo summarising purpose and terms. It’s powerful evidence later that the loan has real business substance, not a disguised profit distribution or sham arrangement.
💡 Market-based interest: how to set and substantiate It
Tax authorities closely check whether interest rates are at arm’s length, especially for related-party loans where rates can be used to shift profit.
Suggested process:
Characterise the loan: tenor, collateral, risk level, amount.
Survey the market: compare bank/credit offers for similar loans.
Credit profile: stronger borrowers justify lower rates; riskier need higher.
Add a risk premium for investment/foreign loans where appropriate.
Document comparables: save screenshots/quotes/links that support the rate.
👉 Example: If Estonian banks offer c. 6% for 5-year corporate loans, a 0% related-party loan is high-risk for re-characterisation. A 6–7% range is typically defendable when supported by evidence.
🌍 Loans to foreign companies for investment purposes
If an Estonian company lends to a foreign company to finance an investment (e.g., setting up/expanding a subsidiary abroad), documentation must be extra robust.
📋 Document the investment purpose
Include in a board resolution/minutes:
investment objective (e.g., market expansion, new production unit),
loan amount and intended use of funds,
why debt vs. equity was chosen for this project.
📝 Agreement & special clauses
Use an arm’s-length loan contract with all key terms. Add a clause limiting use of proceeds, e.g.:
“The loan is granted to finance the establishment of a production unit in Poland under project XYZ.”
🧾 Evidence of use of funds
Keep invoices, bank statements, capex proofs — show the money actually funded the investment. Idle balances on the borrower’s account invite challenges.
💼 Accounting & tax angle (EE company perspective)
Long-term loans are fine if repayment capacity exists.
Interest must be regularly accrued/paid at arm’s-length.
Be prepared to demonstrate the loan isn’t a profit outflow to a lower-tax jurisdiction.
💰 Lending scenarios (company as lender)
1) Company → unrelated company
Example: OÜ A lends OÜ B €50,000 at 6%.
Use a proper contract, arm’s-length rate, repayment schedule.
Interest income is accounted for in profit; Estonian CIT applies on distribution, not on accrual.
2) Company → unrelated individual
Example: OÜ A lends €20,000 to an unrelated individual at 5%.
Require solid security and clear terms.
Interest-free or under-market loans risk re-characterisation (gift/benefit).
3) Company → related company
Example: Parent lends €200,000 at 4% to a subsidiary.
Transfer pricing rules apply (see next section).
Keep market-rate evidence and repayment capacity analysis.
4) Company → related individual (e.g., shareholder, director)
Example: OÜ lends €50,000 to a shareholder at 0%.
High tax risk: can be treated as hidden profit distribution or fringe benefit.
Prefer market-rate interest, a tight contract, and security — or avoid if no clear business purpose.
⚖️ Transfer pricing rules in lending
Loans to/from related parties (parent–subsidiary, common-ownership companies, shareholders, directors) trigger transfer pricing.
This means terms — especially interest — must reflect what independent parties would agree in the market. The rate must be defensible and evidenced.
👉 Example: If banks price a 5-year loan at ~6%, a 0% intra-group loan is risky. The tax authority may treat it as a hidden distribution and adjust tax by imputing arm’s-length interest.
📝 Documentation matters
For related-party loans, keep:
market rate evidence (bank quotes, central bank stats),
a brief TP memo explaining your benchmark,
references to the legal framework, if needed.
🧾 Interest computation
Simple interest — e.g., 5% per annum on principal.
Reducing-balance interest — interest on the outstanding principal.
Accrual period: monthly, quarterly, annually.
Authorities will check:
whether interest is accrued per contract,
whether the rate is arm’s-length,
whether accounting/tax treatment is correct.
💰 Paying interest to an individual lender (Tax)
If a company pays interest to a resident natural person, it’s that person’s capital income and withholding applies. From 1 January 2025, 22% income tax is withheld at source by the payer (company), declared on Form TSD Annex 7. emta.ee+1
MTA guidance for interest income: “Interest received from a loan, bond, security, deposit or other debt obligation is taxable.”emta.ee
📌 1) Company is the withholding agent
Withhold 22% at payment, report on TSD Annex 7; for the resident individual the tax is final. emta.ee+1
👥 2) If the individual is a shareholder/director
Same rules, but rate must be arm’s-length; over/under-pricing risks re-characterisation (e.g., hidden distribution/benefit). (General MTA guidance on profit distributions/adjustments.) emta.ee
🌍 3) Non-resident individuals
Check treaty rules and domestic law; Estonia commonly does not withhold on interest to non-residents (exceptions may apply). Verify per deal with treaty/residency evidence. taxsummaries.pwc.com
Missing contract → risk of hidden profit distribution.
Wrong rate for non-residents → double taxation or penalties.
🌐 Estonia vs. cross-border
When funds cross borders:
Apply double tax treaties and local rules on source taxation/withholding.
Collect residency certificates and keep robust documentation.
Related-party cross-border loans face heightened scrutiny.
⏳ Tenor & materiality
Very long maturities with no repayments (e.g., 7+ years) invite questions whether it’s really debt.
If loans exceed ~25–30% of total assets, expect auditors to probe credit risk and impairment.
❌ If interest isn’t paid or the loan isn’t repaid
Unpaid interest may be re-characterised (e.g., hidden distribution).
Non-repaid principal → potential write-off/impairment; for related parties, may be treated as a distribution.
Options: rescheduling, capitalisation (debt-to-equity), or write-off — all require careful documentation.
🤝 How we can help
Lending, interest setting, taxation and documentation look simple — yet they’re among the first areas auditors and the tax authority review. Small slips in contracts or pricing can create material risk.
👉 We can make sure everything is correct, transparent and tax-safe:
draft/review loan agreements,
set and substantiate arm’s-length interest rates,
advise on tax & accounting treatment,
prepare you for audits/tax reviews (incl. concise TP memos).
📩 Get in touch at info@e-raamatupidamine24.ee — we’ll keep your lending processes legally and tax-wise compliant so you can avoid unpleasant surprises later.
