Important Changes to the Investment Account Rules Will Soon Take Effect
On November 13, the Riigikogu passed amendments to the Income Tax Act and the Funded Pensions Act, making the investment account rules more flexible and better suited to the needs of small investors. For instance, it will soon be possible to invest in crowdfunding and cryptocurrency via an investment account, and accounts can be opened not only in credit institutions but also in payment institutions, e-money institutions, and investment firms.
Investing in Crowdfunding and Cryptocurrency via an Investment Account
Soon, investments in crowdfunding will be permitted through an investment account. Specifically, the list of allowed financial assets will be expanded to include loans given and securities or participations acquired through a licensed crowdfunding service provider under a European Parliament and Council regulation.
This change allows the deferral of taxes on income earned from crowdfunding investments, such as interest from loans or profits from the transfer of claims, when using an investment account. Losses from such investments can also be accounted for.
Currently, under the Income Tax Act, income from crowdfunding investments is taxed individually for each transaction, without considering the overall gains or losses from crowdfunding for the year.
Starting January 1, 2025, the list of allowed financial assets will also include cryptocurrency acquired through a licensed crypto service provider or issuer authorized under the MiCA regulation.
This amendment allows tax deferral on gains from the sale or exchange of regulated cryptocurrency using an investment account. Losses from transactions can also be accounted for.
At present, profits from crypto investments are taxed on a per-transaction basis, regardless of annual overall gains or losses.
The list of allowed financial assets for investment accounts will also include covered bonds. This covers both Estonian covered bonds and equivalent covered bonds issued in other EU member states that meet the conditions set out in the EU Covered Bonds Directive.
Additionally, the list will be expanded to include non-publicly traded financial instruments issued by credit institutions, such as bonds.
However, starting January 1, 2025, investment accounts will no longer be allowed to hold units or shares of small funds without an operating license.
Simplifying Investment Through Accounts Opened with Investment Firms
The amendments to the Income Tax Act will also allow income from one investment made through an account with an investment firm, crowdfunding platform, or cryptocurrency trading platform to be reinvested in another investment without needing to transfer the funds to an investment account in between.
Expanded Options for Opening Investment Accounts
One significant change is the ability to open investment accounts in more types of financial institutions. Under current law, accounts can only be opened with credit institutions. Going forward, investment accounts can also be opened with payment institutions, e-money institutions, and investment firms based in a contracting state or operating through a permanent establishment in a contracting state.
Investment firms will also be able to open investment accounts, provided they maintain an account for the taxpayer that meets the necessary conditions for conducting transactions or hold the taxpayer’s funds in a way that distinguishes them from the investment firm’s own and other clients’ funds.
The specified financial institutions do not need to be based in Estonia but must be residents of a contracting state.
The Income Tax Act will also include a provision allowing accounts opened with an investment firm before January 1, 2024, to be declared as investment accounts. To defer tax liability on income or gains from financial assets acquired through such an account before this date, the cost of acquiring the assets must be declared as an investment account contribution for 2024.
Deducting Fees from Investment Income
A positive change is that management fees for securities accounts, as well as fees for using crowdfunding or cryptocurrency trading platforms, will not be considered investment account withdrawals. These costs can be deducted from investment income.
Additionally, leveraged loans will not be considered investment account contributions, and the repayment of the loan principal will not be considered a withdrawal. Leveraged loans are those provided by a credit institution or investment firm in connection with the purchase, sale, holding, or trading of securities. Only interest paid on leveraged loans will need to be declared as a withdrawal from the investment account.
Changes Take Effect Retroactively
Most favorable changes for taxpayers will take effect under the general procedure and will be applied retroactively from January 1, 2024.
The exclusion of small fund units without an operating license from the list of financial assets for investment accounts will take effect on January 1, 2025. The cryptocurrency-related amendments will also come into effect on the same date.