The Ministry of Finance has updated the National Accounting Standard (KSR) No. 2 “Income Tax” introducing important clarifications and updates regarding the recognition, valuation, and presentation of income tax assets and liabilities. These changes are particularly significant for entities subject to Estonian CIT, those claiming tax loss deductions, or those generating income from capital gains.
The key changes in the updated KSR no. 2 “Income Tax” are:
1. Clarification regarding Estonian CIT
The update provides detailed guidelines on the Estonian CIT, a system where companies do not pay income tax on retained earnings. According to the new rules outlined in KSR no. 2, entities do not create deferred tax assets or liabilities for retained earnings. Tax liabilities and related expenses are recognized only when a decision is made to distribute dividends or other forms of profit distribution.
2. Backward deduction of tax losses
The updated standard addresses situations where an entity incurs a tax loss and deducts it from income earned in previous periods. Such a deduction can only be recognized once the entity can reliably determine that it will benefit from this deduction.
3. Separate taxation of capital gains and income from other sources
Another important change concerns the separate taxation of capital gains and income from other sources. This affects the recognition of deferred tax assets and liabilities and the calculation of tax allowances and losses, which can only be offset within the specific income source.
4. Deferred tax in case of a change in tax status
In the event of a change in the tax status of an entity (e.g., transitioning to Estonian CIT), the standard outlines the rules for recognizing deferred tax assets and liabilities. Such changes must be reflected in the profit and loss statement in the period when the change in tax status becomes irrevocable.
5. Expanded disclosure requirements
The updated KSR no. 2 introduces additional disclosure requirements in financial statements. Entities must now disclose whether they have opted out of recognizing deferred tax assets and liabilities and specify how they handle income tax in their financial reports.
6. Presentation of deferred tax assets and liabilities
The new version of the standard provides guidance on how deferred tax assets and liabilities should be presented in financial statements, particularly for micro and small entities in accordance with the Accounting Act. This is a significant step towards improving the transparency of information in financial reports.
Summary
The introduced changes are positively received, especially the clarifications regarding tax presentation for Estonian CIT taxpayers. The updated KSR No. 2 will be effective from January 1, 2025, with the option for early adoption.
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