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You can use an investment account if you want to postpone the taxation of the income that you have earned on your investments. This means that you can re-invest the whole of your earned income
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How does it work?
Questions and answers
An investment account is a normal current account that is dedicated for making financial investments.
You can use an investment account if you want to postpone the taxation of the income that you have earned on your financial assets.
The investment account system was created by the amended
Income Tax Act
, which came into force in January 2011 and says that if you as a private investor invest through an investment account, you can postpone the taxation of the income that you have earned on your investments.
You can use an investment account if you want to
postpone the taxation of the income
that you have earned on your financial assets. In order to benefit from this provision, you will need to transfer some money to your investment account and buy some securities for it.
If you sell these securities and transfer the amount you have earned back to your investment account, you do not have to pay tax on your earnings immediately but can re-invest all of the money in new securities.
You will have to pay income tax when you take out more money from your investment account than you have paid into it.
For the purposes of the Income Tax Act, you can use any current account that you open in Estonia or in a member state of the European Economic Area (EEA) or the OECD as an investment account.
You need to declare all the accounts that you use as investment accounts in your income tax return, and show all the payments to and from these accounts in a consolidated form.
Frequently asked questions about investment accounts:
- What are financial assets for the purposes of an investment account?
Financial assets for the purposes of an investment account are equities, bonds, investment funds, index-linked or structured bonds, and life insurance contracts with investment risk.
- Do I need to open a separate current account for my investments?
Yes, your investment account has to be a separate current account that you do not use for your daily transactions like salary transfers, card payments and loan payments. An investment account can be opened as a new current account or you can convert your existing current account into an investment account. If you convert your existing current account into an investment account, you will need to ensure that you don’t use it for any other banking services such as loan repayments, card payments, or direct debits, as this would make it complicated and time-consuming to keep track of your payments to and from the investment account.
- If I want to invest in securities, do I have to open an investment account?
No, you do not. There are two taxation systems for investment income: the standard system, where you must pay income tax as soon as you sell a security, and the new investment account system.
- How is my investment income taxed if I have an investment account?
If you use an investment account, you will have to pay tax on the difference between the payments from your investment account and the payments to your investment account. You need to declare all payments to and from your investment account in your income tax return and calculate the balance of the payments that you have made to the account. As long as the balance of your payments to the investment account is positive, meaning you have paid out less from your account than you have paid into your account, you do not have to pay any tax.
- When would it be reasonable to use the investment account system?
If you plan to use the amount invested together with the income earned immediately, it is not practical to open an investment account. However, if you plan to re-invest the earned income and the principal in financial assets again, you may want to consider opening an investment account.
- What is considered as a payment to an investment account?
A payment to an investment account is any amount of money that you transfer to your investment account. The money that was already on a bank account that you have started using as an investment account is also considered a payment to your investment account. You will have to declare this balance of account as the first entry for your investment account.
Payments to an investment account do not include:
Income earned on financial assets that has not been taxed, such as income from the sale of assets, or interest;
Money that has been transferred to your investment account from your other investment account.
Income earned on financial assets is considered a payment to your investment account if you have paid income tax on it.
- Can I have more than one investment account?
There are no restrictions on the number of investment accounts you can have. You can open separate investment accounts in different currencies and in different banks. You can also open multiple investment accounts in the same currency.
You can make payments between your investment accounts without having to pay income tax
- How is income earned on index-linked or structured bonds taxed under the new Income Tax Act?
Interest earned on index-linked or structured bonds is subject to income tax from 1 January 2011. As a general rule, the withholding agent must withhold income tax from the interest paid to a private investor. If you want to postpone the taxation of your income earned through the investment account system, you as a tax-payer and owner of securities will need to inform the withholding agent for income tax, in this case the bank, that you have earned the interest on the financial assets that you bought using the money on your investment account.
- What should I do if I want to sell securities that I bought before 1 January 2011?
If you want to sell securities that you bought before 1 January 2011 using the investment account system, you will first need to decide which of your accounts you want to use as an investment account. Then you will need to show the investment account on your transaction order as the account where you want to transfer the money from the sale of your securities. This way you can postpone the taxation of your income. If you make a loss from the sale of the securities, you can reduce the amount of income tax you must pay.
- Can I use the money on my investment account as collateral?
You cannot use money on your investment account as collateral unless your obligations are related to the purchase of financial assets.
- How are financial assets that I have inherited or been given as a gift taxed in the investment account system?
If you want to postpone the taxation of income earned on financial assets that you have inherited or been given as a gift, you will have to declare the purchase price of the financial assets as a payment to your investment account. The purchase price here means the price that was paid by the inheritor or the receiver of the gift.
If you as the inheritor or the receiver of the gift did not incur any costs when you accepted the inheritance or the gift, the purchase price is considered zero. Normally you would have to pay income tax on the whole gain earned from the sale of such assets. However, if you declare the purchase price (zero) as a payment to your investment account, you can later re-invest the income earned from the sale of these assets and you do not have to pay income tax in the year following the sale of these assets.
- Can I close my investment account and if so, how?
You can close your investment account at any time, but you should remember that you may have to pay income tax if you do so. If you close an investment account but still have another investment account that is not closed, and if you want to postpone paying your income tax, you will need to transfer the balance of the account that you want to close to your other investment account. If you do not transfer the balance to your other account or if you do not have another investment account, you must declare the balance of the account that you want to close as a payment from your investment account.
'Declaratory closing' of an investment account means that you will keep on using your bank account but you will no longer use it as an investment account. In this case you will have to declare the whole balance of your account as a payment from your investment account. If you actually close your bank account, then this, too, will be considered as the closing of an investment account.
Investment account guide
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