One must clearly distinguish between the definition of investment account for the purpose of Income Tax Act and the solution offered to the client by the bank.
For the purpose of Income Tax Act, an investment account may be any monetary account and a person can have several such accounts in the banks of Estonia as well as of foreign countries (the EEA and OECD member states).
In the Income Tax Return, all such accounts, which are used as an investment account, must be specified, and contributions to and payments from the accounts must be indicated in an aggregated lump sum.
All accounts can be defined as an investment account, however for practical reasons it is wise to open a separate account for investments. Using a current account of daily settlements also for investment purpose, places a large burden on an investor when keeping the accounts in the Income Tax Return (all transactions, which are not made with financial assets, must be shown in the Tax Return).
By owning two accounts, you can use the first one for executing your daily transactions (receipt of salary, card payments, loan obligations, bills, credit card, etc) and the other for carrying out transactions with financial assets (upon need, you can transfer money for that purpose from the account used for daily transactions).
Thanks to a separate account
- You spend less, since you keep separated your everyday settlements and investments
- You will have a better overview of your property
- You save time when filling in the income tax return
Through an investment account, you can also postpone taxation of income earned on financial assets (interest, sales gains, insurance benefit and other income).
You can change an existing current account into an investment account at a bank branch. If you use a current account for day-to-day transactions (for example, card payments, utilities, and telephone bills), it is not reasonable to change it into an investment account. In this case, it is worthwhile to open a new investment account.
If your investment deposit is opened before 1 January 2011, the taxation of the deposit will not change until 1 January 2014. The interest, paid out until then, will be still income tax free. These investment deposits are not considered financial assets of an investment account. If the deposit amount or interest of such an investment deposit is received in your investment account, you must show it in the income tax return as a contribution to the investment account.
If you save pension assets under the agreement of Growth Portfolio for Pension, the taxation principles will remain the same for you.
If you signed the Growth Portfolio or Growth Portfolio Junior contract before 1 August 2010, the taxation will not change for you until 1 January 2024. Until then, the previous tax incentives of unit-linked life insurance contracts will remain in effect. These contracts are not considered financial assets of an investment account.
If you signed the Growth Portfolio or Growth Portfolio Junior contract after 1 August 2010, then the tax incentives do not apply to your contract. Income earned on these contracts is subject to income tax. At the same time, this contract can be tied to the investment account, allowing thereby postponement of tax liability. In order to tie the contract to the investment account, then starting from 1 January 2011, you must transfer money to the contract from the investment account.
We do not recommend tying with investment account the Growth Portfolio Junior contract, since if income from such a contract is not received in your investment account, but for example in the account of a child, then double taxation is imposed.
For investments owned as at 1 January 2011, you must decide whether you would like to use the old taxation or the investment account taxation system. However, you must consider that you may use the investment account system only, if the investment is classified as a financial asset for the purpose of Income Tax Act.
You must make the decision based on the following.
- If in 2011, you sell the existing financial assets and would like to postpone the tax liability, transfer the sales gains to the investment account. If you prefer the old taxation system, transfer the sales gains to your account for daily settlements.
- For those financial assets, which you do not sell in 2011, you will make a decision when filling in the 2011 income tax return (at the beginning of 2012). To transfer these financial assets to the taxation system of the investment account, you must indicate the acquisition cost of the respective financial assets as a contribution to the investment account. Otherwise, the financial assets will still be subject to income tax under the old taxation system.
The interest earned on investment deposits, opened after 1 January 2011, is subject to income tax. Taxation of an investment deposit in the investment account will be more favourable to you for the following reasons:
- Income tax is not deducted immediately from the interest
- You can postpone the income tax liability
- You can clear profit-loss of the investment deposits
- You can calculate the risk fee and the exit fee as an expenditure and reduce the tax liability from the account of it.
If you have by mistake acquired financial assets in our bank through your account for daily settlements, you should do the following:
- If you have not opened an investment account besides your current account, then do it as soon as possible.
- In your income tax return, you must show your account for daily settlements as an investment account at least from the day of buying the financial asset until the day of opening the investment account.
If you have by mistake transferred financial assets to the account for daily settlements, you should transfer the sales amount to the investment account as soon as possible.
Income tax return must be submitted by 31 March of the year, following the taxation period.
To postpone tax liability, you have to purchase financial assets only for the funds available in the investment account and transfer income earned on the financial asset immediately (as soon as possible) to the investment account. Income does not have to be received directly in the investment account. You may transfer the income also from another account. Still, if possible, transfer the income directly to the investment account.
If the consolidated payments of investment accounts exceed the consolidated contributions in the account, the amount, exceeding the contributions, shall be subject to income tax. Tax liability is created based on income tax return. Even, if the accounts are in different banks, the movements in these accounts must be regarded together.
A contribution is any money paid or transferred to the investment account. A contribution is also income earned on such financial assets, on which income tax has been withheld (e.g. dividends, on which income tax has been withheld in abroad or the income tax on which is paid by an Estonian company).
A contribution is not income (sales gains, interests) earned on financial assets, on which income tax has not been withheld, nor an amount received from your other investment account.
Payments are not entries, which are made for the acquisition of financial assets or for transfers to your other investment account, but all other transfers from the investment account.
According to Income Tax Act, income earned on the financial assets must be transferred immediately to the investment account. This means that the taxpayer must transfer this money at the earliest possibility, dependent on him. We recommend transferring income directly to the investment account. If this is not possible, then transfer the money to the investment account as soon as possible and keep in mind that you have to provide documentary evidence to the reason for the delay.
Starting from 1 January 2018 interest taxation will change. Income tax will be charged on any interest payable to a resident private person and the payer of interest will be required to withhold a 20% income tax upon payment.
If the deposit of a private person who is a resident for tax purposes is tied to a current account, the bank shall withhold income tax on the payment of interest earned on the investment deposit. This applies even if the deposit was opened from an investment account, however by the time of making the interest payment the deposit is tied to a current account.
To postpone the tax liability, you have to open the deposit from the investment account. In addition, upon termination of the deposit, you have to transfer the deposited amount and interest to the investment account.
According to Income Tax Act, in order to postpone the tax liability, the client has to notify the bank that the respective interest was received for the financial assets acquired for the funds in the investment account. You can give such notification at our bank upon opening an investment account for all those financial assets, the income on which you will transfer to the investment account in the future.
All contributions and disbursements of investment account have to be shown separately in the income tax return, according to their date of occurrence. Tax liability is created if payments exceed contributions, which must be shown in the income tax return, submitted for the year. If tax liability is created based on the investment account system, income tax must be paid pursuant to general principles, i.e. by 1 July of the year, following the taxation period.
According to law, a user of the investment account system has the obligation to keep the accounts of his investment accounts and transfer the data and movements of these accounts to the income tax return. In addition, the bank must be notified, if you have acquired financial assets for the funds of the investment account, and would like the bank not to withhold income tax on the gained interests.
The bank is obliged to present to the Tax Board information about these interests, subject to income tax, on which income tax has not been withheld.
You can view the new form of income tax return of a natural person at saad tutvuda siin. Information, concerning the investment account can be found under item 6.5 of Annex 1.
