Gifts, entertainment and non-business costs

Some company costs carry corporate income tax even though nobody is paid a dividend. Entertaining clients over a monthly limit, gifts and donations (Income Tax Act § 49), fines, interest paid to EMTA and costs that have nothing to do with the business (§ 51) are taxed at 22/78. They are declared on the month's TSD: § 49 costs on Annex 5, § 51 costs on Annex 6. EMTA wants Annex 5 for every month in which you entertain or give, even when no tax is due.

Arvello can't tell a client dinner from a team lunch by the account it is booked to, so you mark each cost yourself with its income tax class.

Marking a cost

On an expense line, under the amount, pick the class in Income tax (TSD). On meals and entertainment and on tax penalties and interest the picker is shown straight away; on any other account click Gift, entertainment or non-business cost? to open it. An expense that is already finalised can still be marked: open it and change the class in its line table. Only the TSD uses the class, so nothing in the posted expense or the VAT return changes. VAT on entertainment and on your own staff's meals can't be deducted, though (VAT Act § 30): when a line you class as entertainment or a staff meal deducts its VAT, Arvello says so. On a draft, switch the line to VAT not deductible (§ 30). The same goes for a cost not connected with the business or paid without a valid invoice (VAT Act § 29 and § 31): its VAT can't be deducted either. A finalised expense is corrected the usual way, with a credit note for the line and the line recorded again with that code. Until it is, Arvello won't send that month's VAT return over X-tee; a credit note dated in the same month nets the deduction to nil, so the return can then be sent. VAT you self-assess on a purchase from abroad (reverse charge) is barred the same way, except for a missing invoice, which self-assessment doesn't need. Arvello has no tax code that self-assesses without deducting, so it says to lower line 5 of the VAT return in e-MTA by that line's VAT before you submit it, or to correct that return in e-MTA if it's already filed. For the same reason Arvello won't send that month's VAT return over X-tee: submit it in e-MTA, then mark it submitted in Arvello. A supplier credit note of the purchase dated in the same month cancels its VAT on line 5, so only what the credit leaves needs lowering, and a full credit needs none. The same goes for a later month holding a supplier credit note of such a purchase, except that there you raise line 5 by the VAT the credit takes back on the classed lines, since the return takes it off as if it had been deducted. The same goes for a supplier's VAT on a purchase paid in advance: when an earlier month's return was filed without its barred VAT, a later credit note or a refund of the advance takes that VAT off line 5 again, so raise line 5 by it in e-MTA, less any of it that month's own share of the purchase still deducts. A credit note doesn't say which line it credits, so when the purchase has a classed line and an ordinary one on the same account and tax code, Arvello can't tell which the credit reverses and won't send the return over X-tee: decide in e-MTA. For a purchase from an earlier month, raise line 5 only if it reversed the classed line; for one this month also deducts, compare the classed line's VAT this return deducts with what the credit takes back from that line here (nothing if it reversed the ordinary line), and lower line 5 by the difference, or raise it if the credit takes back more. Booking classed costs on their own account avoids this. For a bank payment you book straight to an account with Bank Fee / Simple Charge, the same picker is in the reconciliation sheet. A refund of such a payment, arriving as an incoming bank payment, isn't linked to it: once the cost's month is filed, declare the refund yourself in e-MTA (code 6140 for Annex 6, a correction of the original month for Annex 5) and book the tax change with an adjusting entry in Reports → Transaction History (debit 2240, credit 6210). A rule created there, and a recurring expense made from a classified expense, give the same class to every later cost.

Arvello prepares codes 6010, 6020, 6070 and 6080 of Annex 6. Fines, EMTA interest and payments without a source document count in the month they are paid: Arvello declares such an expense line in each month money is paid towards it, for that month's share, and nothing while it is unpaid: a €100 fine paid €40 in January and €60 in February is €40 on January's Annex 6 and €60 on February's. A bank payment you class directly counts on its own date. Membership fees of a non-profit unrelated to the business (6060), an increased environmental charge (6040), confiscated property (6030) and bribes (6050) have codes of their own: enter those in e-MTA yourself rather than classing them here, and record the 6160 and 6170 you filed when you mark the return submitted (see Booking the tax below), so the tax is booked. In a month with no return in Arvello (no payroll, dividend or classified cost), book the tax with an adjusting entry in Reports → Transaction History instead: debit 6210, credit 2240.

The amount counted is what the cost is in your books: the net, plus any VAT that can't be deducted. VAT on entertainment is never deductible, so for a client dinner that is the whole bill. A supplier's credit note lowers the lines on the ledger account and tax code it credits, in proportion to their net, because a credit note doesn't record which line of the invoice it was for. To keep a classified line apart from the rest of an invoice, book it on its own account.

• Entertainment is food, drinks, transport, lodging or entertainment for guests and business partners. Meals, events and gifts for your own staff and board members are a fringe benefit instead: Arvello puts them on Annex 4, code 4130, with social tax as well (see Annex 4: fringe benefits).
• Gifts: items given for advertising worth up to €21 excluding VAT each aren't gifts, so leave them as a business cost. Above €21 the whole item counts, not just the part over €21, and a set of items given together counts as one: a hamper of three €10 items is a €30 gift. A gift to your own staff or a board member is a fringe benefit (Annex 4), not an Annex 5 gift. EMTA doesn't treat cut flowers for clients as gifts either. A gift goes on Annex 5 at its price including VAT, even when you deducted the VAT: a €25 item with €6 of VAT is a €31 gift. Goods you donate are valued the same way. A gift bought from abroad counts with the VAT you self-assess on it. VAT has a rule of its own: giving away goods whose input VAT you deducted is a taxable self-supply whatever their value (VAT Act § 2(6)), valued at what they cost (§ 12(3)), unless they are samples or items given for advertising worth up to €10 excluding VAT (§ 4(2)(6)). The €21 limit above is for income tax only. Arvello doesn't add self-supplies to the VAT return: for a line classed as a gift or a donation that deducts VAT, the VAT return checklist warns. Either credit the expense and record it again with a non-deductible VAT code (no VAT deducted, so no self-supply; reverse-charged and import VAT codes have no non-deductible version, so for those add the self-supply in e-MTA), or add the self-supply in e-MTA, in the return for the month the goods are given away, on the line for their VAT rate (line 1 at the standard rate). The same goes for a promotional item worth between €10 and €21, though it isn't classed as a gift, so the checklist can't see it.
• Donations get the tax-free limit only when the recipient is on EMTA's list of organisations with an income tax incentive on the donation date (or is an equivalent body in another EEA country). A donation to any other organisation is a gift and is taxed in full. Donations made by 31 December 2027 for Ukraine's territorial integrity or humanitarian aid to the bodies TuMS § 61 lg 66 lists (MTÜ Eesti Pagulasabi, MTÜ Mondo, Ukraina Kultuurikeskus, Riigikaitse Edendamise Sihtasutus, Eesti Punane Rist, Päästeliit, Rotary Klubi Tallinn Vanalinn, MTÜ Freedom Convoy) are tax-free outside these limits: leave them unclassified.
• EMTA interest booked by Arvello's bank matching is marked as interest paid to EMTA. Interest EMTA took from your prepayment account, with no bank payment of its own, is recorded on the Tax overview instead, with the date and amount from e-MTA: Arvello books it on that date (debit 6200, credit 2200) and declares it on that month's Annex 6, code 6020. Interest on a tax debt EMTA scheduled in instalments isn't taxed, unless the tax was assessed by a tax decision. e-MTA shows which kind each charge is under Arvestus, as Tulumaksuvaba intress. Change the class of such a payment on its month's TSD return page; prepare the return first if the month has none.

How the limits work

Entertainment is tax-free up to €50 a month plus 2% of the month's salaries and board fees. The limit is counted from 1 January: a month without entertainment still adds its €50 and 2%, so a later month can use it, and tax paid earlier in the year can come back. Donations to listed non-profits are tax-free up to one of two limits, and the company uses only one of them for the year (its choice on December's TSD is final): 3% of the year's payments taxed with personalised social tax (salaries, board fees and the like), or 10% of the profit of its last financial year that ended by 1 January (Income Tax Act § 49 lg 2–3). Arvello works out the 3% limit only, on code 5030. To use the 10% limit, fill codes 5040 and 5050 in e-MTA instead, and record the figures you filed when you mark the return submitted (see Booking the tax below).

On the TSD return

Approving payroll or a dividend prepares that month's TSD for you, and its Annex 5 and 6 come with it. A month that has only classified costs gets no return by itself: the TSD list marks it Annex 5 or 6 to declare, and Prepare creates its return. A staff meal, event or gift goes on the month's Annex 4 instead: a month with one and no return is marked Annex 4 to declare, and a return whose Annex 4 no longer matches is marked Annex 4 changed. The list also marks a month whose Annex 5 recalculation gives tax back (entertainment tax paid earlier in the year, with the limit still growing by €50 a month), and a month with a supplier credit of a cost declared earlier. A return whose Annex 5 or 6 figures your books no longer give, whatever changed them, is marked Annex 5/6 changed. File each such month: Annex 5's monthly codes (5000, 5010, 5100) and Annex 6 belong to the month of the cost, and EMTA doesn't let a later return net them. A gift or donation counts in the month it is handed over or made; Arvello dates it by the expense, so for a gift bought in one month and handed over in another, leave the line unclassified and declare the gift in e-MTA for the month it was given. Record what you filed when you mark that month's return submitted or, if Arvello has no return for that month, book the tax with an adjusting entry in Reports → Transaction History (debit 6210, credit 2240).

The return's page shows a Gifts, entertainment and non-business costs card with:

• the Annex 5 and Annex 6 figures, code by code, to type into e-MTA (there is no file import for these annexes);
• the month's classified costs, with links to the expenses;
• supplier credit notes issued this month for a payment without a valid source document, or a non-business cost, declared on Annex 6 in an earlier month. The earlier return stays as it was filed, and Arvello puts the credit on code 6140 of this month's Annex 6, taking it off 6150. In e-MTA, enter each credit with its original month and year (6141, 6142), as the return lists them. The tax comes back at the rate of the year the cost was declared in, so a 2024 cost gives back 20/80 of the credit, not 22/78;
• on a filed return, supplier credit notes issued since for its other costs: gifts, donations, entertainment, fines and interest. 6140 doesn't take those back (TuMS § 54 lg 6), so the return asks you to correct its own month in e-MTA, and the later months whose Annex 5 it changes; the TSD list marks that month Annex 5/6 changed. No return is created in the credit note's month for these. A credit note in the cost's own month, before its return is filed, simply lowers the cost;
• a warning when a later month of the year is already filed with Annex 5. Each Annex 5 is compared with the previous one filed, so once you file this one, correct that later month in e-MTA;
• a warning when your books changed after the return was prepared. Use Regenerate before filing. Once it is filed, a changed gift, donation or entertainment cost needs a correction of that month's Annex 5 in e-MTA, and of the later months of the year whose Annex 5 it changes (EMTA takes no negative amounts on the monthly codes); a payment that has since got its source document, or a cost that turned out to be for the business, is given back on code 6140 of the Annex 6 for the month that happens in, with the original month and year (TuMS § 54 lg 6). Arvello fills 6140 only for a supplier credit note, so enter this one in e-MTA; a changed fine or interest, or a cost newly classed as non-business or as paid without a source document, needs a correction of that month's Annex 6 in e-MTA. Until that month declares such a cost, a later supplier credit of it can't take its tax back on 6140. Either way, book the change in income tax with an adjusting entry in Reports → Transaction History, because the filed figures stay as they were in Arvello.

The tax on the two annexes is added to the return's grand total. e-MTA fills code 6021 (interest paid to EMTA) itself; it is part of 6020, not an extra amount.

Booking the tax

When you mark the return as submitted, Arvello books the tax on the last day of the month: debit 6210 Income tax on gifts and non-business expenses, credit 2240 Corporate income tax payable, or the other way round when the month gives tax back. The annual report files this tax with other operating expenses, not as income tax: that line is for income tax on dividends only. If the booking fails, for example because the year is locked, the return's page offers Book tax to try again. It only books what isn't in the books yet, so pressing it twice books nothing twice.

If you filed figures in e-MTA that differ from Arvello's (the 10%-of-profit donation limit, months before Arvello's books, or Annex 6 codes Arvello doesn't fill, such as 6060, or 6140 for a reclassified cost), tick I entered my own Annex 5 or Annex 6 figures in e-MTA when you mark the return submitted. The fields start with Arvello's figures: change 5070, 5130, 5160, 5170, 6160 or 6170 to what you filed. An annex whose fields you leave as they are is recorded as Arvello prepared it. Arvello books the tax from 5160 − 5170 and 6160 − 6170, as EMTA calculated it, and the next return compares with your 5070 and 5130.