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Investment account

Investment account

A separate current account for investments

  • You can postpone taxation of investment income
  • You can exchange investments more favourably
  • You keep apart the investment money from everyday settlements

Starting from 2011, a private individual can postpone taxation of investment income by using an investment account. For that purpose, the transactions with financial assets must be made through an investment account only.

As long as you do not withdraw the earned income from the investment account, tax liability is not created.

Open account

Investment account is a monetary account, which you can use for such transactions with financial assets, the taxation of income earned on which (interest, sales proceeds, insurance benefit, etc), you would like to postpone.

Accordingly, it is reasonable to have at least two accounts: One is for managing your everyday banking operations (receipt of salary, card payments, loan obligations, bills, credit card, etc), the other is for carrying out transactions with financial assets (upon need, you can transfer money for that purpose from the account used for daily transactions).

A person can hold investment accounts in several banks.  

Which investments allow postponing of income tax liability when using the investment account?

By using the investment account, you can postpone the income tax liability of only certain financial assets, like to the public offered and traded on regulated market securities, investment funds investment deposits and unit-linked life insurance contracts, opened after 1 January 2010.

Through investment account it is wise to invest into the following financial assets

  • To the public offered security
  • Security traded at a regulated or alternative market
  • Share or unit of an investment fund
  • Deposit with investment risk (investment deposit)
  • Unit-linked life insurance contract, concluded after 1 August 2010
  • Derivative
  • Short-term bond
     

Through investment account it is not wise to invest into

  • Pension fund or funded pension agreements (taxation is based on another scheme)
  • Unlisted shares and units of companies (income tax liability cannot be postponed)
     

At the time of acquisition, the financial assets must conform to the following conditions

  • Trading with the financial asset must take place in an EEA or OECD member state.
  • The shares or units of foreign investment funds and securities of foreign countries must be acquired through a credit institution, investment firm or fund manager, located in an EEA or OECD member state.
  • Financial supervision is exercised over the fund manager or market.
     

Financial assets may be acquired also as a gift or estate.

You can postpone income tax liability, if

  • You acquire the financial assets with the money in your investment account
  • You transfer income earned on the financial assets (e.g. dividends or interests of investment deposit) and the gains from transfer of the financial assets to the investment account as soon as possible
     

Tax liability is created, if payments from the investment account exceed contributions into the account.

Accounting must be common for all investment accounts; in case of a positive difference, income tax is to be paid based on the next year’s Income Tax Return.

For the purpose of Income Tax Act, a contribution to investment account is

  • Initial balance of the account
  • Cash deposited in the account
  • Financial income subject to taxation (e.g. interests and dividends on which income tax has been withheld)
  • Acquisition and disposal expenses of financial assets, if the funds of investment account were not used
  • Loss on securities for the previous years (can be shown only in Income Tax Return of 2011)
  • Acquisition cost of existing financial assets (incl. unit-linked life insurance contract) or the deposited amount (can be shown only in Income Tax Return of 2011).
     

A contribution is not

  • Untaxed income on financial assets (e.g. interest, gains from transfer of financial assets)
  • Transfer from another investment account
     

For the purpose of Income Tax Act, a payment from investment account is

  • Any transfer made from the investment account
  • Income earned on financial assets, which is not transferred promptly to the investment account
  • Account balance of a closed investment account, which is not transferred to another investment account
     

A payment is not

  • Acquisition of financial assets
  • Transfer to another investment account
     

Declaration of investment account

  • The investment account numbers must be shown
  • Movements in investment account are declared jointly
  • Each contribution and payment is shown on a separate row
  • Last fields show the difference of payments and contributions; positive result is subject to taxation
  • The deadline of paying the income tax is 1 July.

What kind of private investors benefit from the new system?
With the new taxation system, also the so-called old system will remain in effect. You can choose the system that suits you the best.

Investment account suits you, if

  • You do not want to use immediately the income, earned on financial assets;
  • You would like to exchange the financial assets without paying income tax on the earned profit and with a wider range of reinvestment options;
  • You are ready to fill in the Income Tax Return and keep accounts of the movement of your funds by yourself
  • You would like to buy an investment deposit after 1 January 2011

 

f you intend to start daily consumption of the entire earned income, it would be reasonable to continue with the tax system effective so far.

 

When making the choice you need to know all the details related to the investment account. This is why we recommend consulting first our private client executive, who will help you in making the right decision.

  1. What is an investment account for the purpose of Income Tax Act?
  2. Why is it wise to open a separate account for investments?
  3. What should I do with my existing current account, which I have used so far for making investments?
  4. What will happen to those investment deposits, which I opened before 1 January 2011?
  5. What will happen to my Growth Portfolio agreement, which I concluded before 1 January 2011?
  6. What will happen to my investments that I own as at 1 January 2011?
  7. Why should I open an investment deposit from the investment account?
  8. What should I do, if after 1 January 2011 I buy financial assets with the money in my account for daily settlements, however would still like to postpone the income tax liability?
  9. What should I do, if after 1 January 2011 I transfer the gains from the transfer of financial assets to the account for daily settlements, however I would still like to postpone the income tax liability?
  10. When do I have to submit the income tax return?
  11. What are the conditions for postponing tax liability?
  12. When is tax liability created?
  13. What should I state as contribution of an investment account in the income tax return?
  14. What should I state as payment (disbursement) from an investment account in the income tax return?
  15. What does it mean that income must be transferred to the investment account as soon as possible?
  16. How is income tax charged on interests starting from 1 January 2011?
  17. How is income tax withheld on interests? Can I postpone the tax liability of interest income as well?
  18. How should I fill in the part income tax return, concerning the investment account?
  19. What kinds of obligations are established in law to the user of investment account system towards the Tax Board?
  20. Can I place my money of the investment account also to an operating and term deposit?
  21. What to consider when signing contracts related to the investment account?
  22. Who are the EEA member states?
  23. Who are the OECD member states?
  24. Where can I find additional information?

1. What is an investment account for the purpose of Income Tax Act?
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).

2. Why is it wise to open a separate account for investments?
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).

3. What should I do with my existing current account, which I have used so far for making investments?
It is not possible in our bank to change the existing current account into an investment account. We advise you to open a new investment account and use it for making transactions with those financial assets, the taxation of income on which you would like to postpone.

4. Mis saab neist investeerimishoiustest, mille olen avanud enne 1. jaanuarit 2011?
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.

5. What will happen to those investment deposits, which I opened before 1 January 2011?
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.

6. What will happen to my investments that I own as at 1 January 2011?
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.

7. Why should I open an investment deposit from the investment account?
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.

8. What should I do, if after 1 January 2011 I buy financial assets with the money in my account for daily settlements, however would still like to postpone the income tax liability?
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.

9. What should I do, if after 1 January 2011 I transfer the gains from the transfer of financial assets to the account for daily settlements, however I would still like to postpone the income tax liability?
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.

10. When do I have to submit the income tax return?
Income tax return must be submitted by 31 March of the year, following the taxation period.

11. What are the conditions for postponing tax liability?
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.

12. When is tax liability created?
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.

13. What should I state as contribution of an investment account in the income tax return?
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.

14. What should I state as payment (disbursement) from an investment account in the income tax return?
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.

15. What does it mean that income must be transferred to the investment account as soon as possible?
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.

16. How is income tax charged on interests starting from 1 January 2011?
Starting from 1 January 2011, also interest taxation will change. Interests paid to current account and operating and term deposit will remain exempt from income tax.

Deposit interest is subject to income tax, if it depends on the value of the underlying asset or the changes hereof, e.g. in case of an investment deposit. At the same time, tax exemption will still be applicable to investment deposits, which were opened before 1 January 2011, if the interest is paid out before 31 December 2013.

In addition, interest earned on the investment account will be subject to income tax.

17. How is income tax withheld on interests? Can I postpone the tax liability of interest income as well?
Outside the investment account, we withhold income tax on the interests of investment deposit upon disbursement of hereof.
To postpone the tax liability, you have to open the investment deposit from the investment account. In addition, upon termination of the investment 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.

18. How should I fill in the part income tax return, concerning the investment account?
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.

19. What kinds of obligations are established in law to the user of investment account system towards the Tax Board?
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.

20. Can I place my money of the investment account also to an operating and term deposit?
If you would like to place the funds in the investment account temporarily to an operating or term deposit, you have two options.
a) If you deposit a smaller amount than the balance of contributions in the investment account, it is wise to declare the deposited amount as a payment (disbursement). In this case, the placed funds will move out of the investment account system and the interest earned on the deposit is exempt from income tax.
b) If you deposit a larger amount than the balance of contributions in the investment account, it is wise to show the deposit in the income tax return as an investment account. In this case, the funds will remain in the investment account system and the earned interest is not exempt from income tax, however tax liability is not created for you on the amount of deposit, which exceeds the balance of contributions.

21. What to consider when signing contracts related to the investment account?
Direct debit order contracts
You should sign only such direct debit order contracts, which are related to the Growth Portfolio agreement, tied to the investment account.

Standing payment order contracts
You should sign the contracts only for the purchase of financial assets or for making a transfer to your other investment account.

Debit card
It is wise to prohibit card payments and make as few cash transactions as possible. It is reasonable to initiate only such payment orders, which are aimed at purchasing financial assets or making a transfer to your other investment account.

Mobile Bank
Mobile payments should be made only between your own investment accounts.

Securities account contract
When tying the account, it must be considered that maintenance fee entries of securities safekeeping account must be declared as payment (disbursement). Is worth tying to the investment account, if the securities safekeeping account contains funds placed in custody of ECRS (their sales proceeds are always received in the account tied to securities safekeeping account). Also if untaxed income may be received from the financial assets in the securities safekeeping account to the related account (e.g. dividends, on which income tax has not been withheld).

Fund saving contract
It is not reasonable to sign contracts for saving into III pillar pension fund, since this is not considered purchase of financial assets (these entries must be declared as a payment (disbursement)).

22. Who are the EEA member states?
eeas.europa.eu/eea

23. Who are the OECD member states?
www.oecd.org/countrieslist/0,3351,en_33873108_33844430_1_1_1_1_1,00.html

24. Where can I find additional information?
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.

Terms and conditions of investment account agreement Terms and conditions of current account agreement

Legal acts governing the taxation system may be amended in the future and the taxation of different investment products depends on the individual circumstances related to each client, including the client’s residency, the short and long-term objectives of the investments and other similar circumstances.

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