An investment account allows the reinvestment of the profit or income derived from a financial asset without the payment of income tax and the deferral of the tax liability for the payment of income tax on income derived from financial property.
An investment account is a regular cash account maintained with a credit institution resident in a State member of the Organization for Economic Cooperation and Development (OECD) or in a fixed place of business of a credit institution located in an OECD State.
The investment account for deferment of tax obligations can only be used by a resident of Estonia. The income from the financial assets of a non-resident is taxed in the country of residence. Thus, if the user of an investment account becomes a non-resident of Estonia, it is necessary to mark the closure of the investment account in the income declaration, pay the income tax obligation arising in Estonia, and further transactions in financial assets must be declared in the new State of residence.
A natural person may have one or more investment accounts. In order to defer the income tax obligation, transactions in financial assets should be conducted through an investment account.
Financial assets include, for example, publicly offered securities, shares and shares of an investment fund, bank deposits/deposits and contributions made under an investment risk life insurance policy.
Financial assets do not include contributory pension funds and pension fund shares, life insurance contracts, participation in non-listed business entities, money issued under loan agreements, derivatives, non-financial asset-based investments, investments in foreign currency, as well as real estate and precious metals.
Investment account and acquisition of financial assets
Local authorities establish the general rule that in order to defer a tax obligation, financial assets must be acquired from the money in the investment account, and the money received from the sale of the financial assets or the income derived from the financial assets should be transferred immediately to the investment account. This is also the case when an investment company (brokerage firm) is used for investment.
It provides an exception to the general rule that, in certain cases, financial assets that have not been purchased with money in the investment account may be included in the investment account system. The purpose of the exclusion is to prevent a person from being forced to use a system of ordinary and investment accounts at the same time, because of the content of the transaction to acquire financial assets, he or she cannot comply with the general rule.
An example is the acquisition of a financial asset by inheritance, gift, liquidation or option of participation, which is not a contract of sale, and a person is unable to pay for the transaction without changing the content of the transaction. The exception provides that, in order to defer the income tax obligation arising from income derived from financial assets that could not be purchased for money due to the content of the transaction, The value of the acquisition of the financial asset should be included in the income declaration as a contribution to the investment account.
Investment account and currency conversion
Currency is not included in the definition of a financial asset and cannot be invested from an investment account. However, a portion of the financial assets can only be purchased in a currency other than the euro. Hence, the acquisition of a currency other than the euro from the investment account is sometimes unavoidable and is not made for the purpose of investing in currency According to this provision, a person has the right to convert currency provided that the currency sold is in an investment account and the currency purchased is immediately transferred to an investment account.
Investment account declaration
Investment account data and income from financial assets are declared in schedule 6.5 of the resident individual’s income statement (hereinafter, the income statement). Only contributions made to the investment account (cash account) and payments made from that investment account are declared in the income declaration. If the payments exceed the contributions, then the income tax obligation arises.
In general, only:
- Money deposited in an investment account (money account)
- Withdrawals from the investment account (cash account).
As a contribution to the investment account, table 6.5 should also declare:
- Cash balance in the account when opening an investment account;
- Dividends on financial assets received from abroad and taxed by income;
- Interest on financial assets received from abroad and subject to income tax;
- Dividends on financial assets received in Estonia and taxed in Estonia;
- Dividends on financial assets received in Estonia and taxed in Estonia.