Investment account system: how to legally defer income tax and grow your portfolio faster?

Have you ever wondered what an investor's biggest expense item is? Most people mistakenly think it's fees, management fees or failed trades. While these are also important, the biggest deterrent for the long-term investor is often the following taxes.

Living in Estonia, we are used to the idea that taxes are simple and automatic. But in the world of investment, we have a rare advantage that many other European countries don't have. Investment account system. This is the Estonian investor's secret weapon, which allows the income tax liability to be legally postponed into the future, allowing compound interest to work undisturbed.

This article is a comprehensive guide to using an investment account system in 2026. We're not talking about complicated legal terms, but about the practical benefits for your wallet. We'll take you step-by-step through how the system works, what assets you can buy into it and how to avoid common pitfalls that can cause problems with the tax authorities.

What is an investment account and why is it brilliant?

Many beginners mistakenly think that an “investment account” is a special bank product that can only be opened under a special contract. In reality, an investment account is just a normal current account (IBAN) that you, as the account holder, have designated as an investment account on your income tax return.

The basic idea behind the system is simple: only money taken for consumption is taxed, not profits earned on investment activities.

In the case of a normal investment (as a private individual without an investment account), you would have to pay income tax of 22% (or the applicable rate) on each profitable sale or dividend received in the following year. This means that about one fifth of your profits will immediately disappear from circulation and no new income can be generated.

Investment account system (IK), the taxation is different. You can buy shares, sell them at a profit, receive dividends and reinvest the money - and the state doesn't ask for a cent of income tax in the meantime. The tax liability only arises when you take more money out of the account than you put in.

Compound interest leverage: a mathematical example

To understand why tax deferral (not avoidance, but deferral!) is useful, let's look at a simplified example.

Let's say we have two investors, Mari and Jüri.

Both start with €10 000.
Both earn an annual return of 10%.
Both reinvest all profits over 20 years.

Jüri (normal system): Jüri does not use an investment account. At the end of each year, if he has earned a profit of 10%, he has to declare the profit and pay income tax of 22%. His real net return after tax is therefore 8%.

In 20 years' time, Jüri's portfolio will be: EUR 46 609.

Mari (IJ System): Mari uses an investment account. She earns 10% and reinvests the whole amount, as she does not have to pay anything to the tax authorities yet. Her money grows by 10% a year.

After 20 years, Mari's portfolio is: EUR 67 275.

If Mari decides now, at the end of the 20th year, to withdraw all the money, she will have to pay income tax on the profit earned (67 275 - 10 000 = 57 275 profit). The tax is 22% or €11 455. Mari will receive: EUR 55 820.

Result: Mari earned thanks to an investment account EUR 9 211 more than Jüri, even though they made exactly the same investments. The extra money came from Mari keeping the tax share for herself, which gave her extra income for 20 years. The longer the period and the higher the rate of return, the bigger the investment account gain.

How to get started with an investment account?

It's easier than ever to get started, as most banks in Estonia have made their systems very user-friendly.

Step 1: Open a separate account

The first golden rule: don't use your investment account for day-to-day settlements. Don't pay utility bills or buy food there. It makes accounting (declaration) a hell of a lot more complicated.

Open a new, empty current account at your home bank (LHV, Swedbank, SEB, Coop, etc.). Name it “Investment account”, for example. That's it - you don't need to sign any separate “investment account agreement” with the bank. In legal terms, this account becomes an investment account the moment you declare it in your income tax return.

Step 2: Transfer money to your account (deposit)

Transfer money from your usual account to a new investment account. This move is called a “deposit”. Memorise or write down how much you have deposited. This is your tax-free base.

Step 3: Linking a securities account

To buy shares or funds, you need a securities account. Open a securities account and link it to your new money account (investment account). This means that when you buy shares, the money goes out of the investment account, and when you sell, the money goes back into the same account.

What can you keep on your IK? (concept of financial assets)

This is where it gets a bit more technical, but it's critical. The Income Tax Act only allows an exemption for “financial assets” when purchasing. If you buy something through an investment account that does not qualify as a financial asset, the money is immediately considered withdrawn and you could end up in tax debt.

What IS a financial asset:

Publicly traded securities: Shares (Apple, Tallink, Tesla etc.) that trade on regulated exchanges.
Investment fund units: ETF-(index funds), bank pension funds (except Pillar III, which has its own system).
Bonds: Both sovereign and corporate bonds, which are publicly traded.
Derivative instruments: Options and futures, if traded on a regulated market.
Deposits: Money held in an investment account is also considered part of a financial asset (if held in a bank).

What is NOT a financial asset (or be careful):

Crowdfunding: Loans on portals such as Mintos, Estateguru or Omaraha. These are legally loan agreements, not securities. If you transfer money from your investment account to Estateguru, the tax authorities will consider it as a “withdrawal” and you will lose the tax advantage. Note: Some portals now offer “Notes” type instruments, which are securities, but always check before investing.
Cryptocurrencies: Bitcoin, Ethereum, etc. Crypto is not a security within the meaning of the Income Tax Act. Using an investment account to trade in crypto is complicated and generally not recommended, as every entry into a crypto platform is considered a withdrawal.
Real estate: Buying an apartment is not a financial asset.
Precious metals: Gold and silver (in physical form).

A practical recommendation for: Use an investment account especially for stocks, ETFs and bonds. For crowdfunding and crypto, use a regular account and declare income in the “old way” or use a legal entity (LLC).

Declaring: easier than you think

Many people are afraid of an investment account precisely because of the declaration. In fact, it's easy once you've followed the rules (i.e. you've only used the account for investing).

The declaration takes place once a year (February-March), together with the usual with an income tax return. You need to fill in a table (usually Table 6.5).

You only need to enter two numbers:

Contributions: How many euros did you transfer from your salary account to an investment account during the year?
Disbursements: How many euros did you take out of your investment account for consumption?

NB! Transactions (purchase and sale of shares) do not need to be declared! This is the beauty of the system. The tax authorities don't care how many times you bought or sold a Tesla, as long as the money stays in a closed ring in your investment account.

The currency trap

One place where investors often stumble is in currency exchange. If you have an investment account in euros but you buy US shares, the bank will do an automatic conversion.

Years ago it was a “grey area”, but now the rules are clearer. However, the cleanest and safest way is to have a multi-currency investment account (multicurrency account). For example, with LHV or Interactive Brokers (if set up correctly), you can hold dollars in an account. When you exchange money in your investment account from euros to dollars, this is an in-account transaction and no tax is incurred. However, if the conversion is done “on the fly” and there is a foreign exchange gain, you may need to monitor it. Recommendation: Keep it simple. If you are investing in the US, use a broker that allows you to hold a dollar account and declare that account as an investment account as well.

Foreign dividends and double taxation

This is the biggest drawback of the investment account system, and it needs to be talked about frankly.

If you receive dividends from an Estonian company (e.g. Tallinna Kaubamaja), the income tax has already been withheld by the company and you receive the net amount. This amount will be credited to your investment account and you will not have any additional tax liability (but you will not get a refund of the overpaid income).

The problem arises with foreign stocks (e.g. US - Microsoft, Coca-Cola). The US generally withholds 15% income tax (if you have a completed W-8BEN form). Your account will receive 85% of the dividend. If you ever withdraw money from your investment account in the future, you will have to pay income tax in Estonia (22%). full on the profits to be extracted.

This means double taxation. You paid 15% to the US and will pay 22% to Estonia later. The investment account system does not allow you to offset income tax paid abroad under current law. Under the normal system (without an investment account), you would be able to deduct the 15% paid in the US in Estonia and would only pay 5% more.

Does this mean that it is not worth holding foreign dividend shares in an investment account? Not necessarily. If your goal is long-term growth (growth stocks like Amazon or Google that pay little or no dividends), an investment account is ideal. If your strategy is purely US stocks with high dividend yields, it's ineffective. In that case, it is worth considering either a normal declaration or a Pillar III (where different rules apply).

Investment account vs. LLC (limited liability company)

Sophisticated investors often ask: “Does it make more sense for me to invest as an individual through an investment account or to set up a company?”.”

Here's a quick comparison to 2026:

Investment account (Private individual)

Pros: Free of charge (no set-up costs and no accounting fees), easy to declare, the money is yours (you can “pull the lever” at any time).
Cons: Restricted asset classes (financial assets only), double taxation of foreign dividends.

Private limited company (Legal person)

Pros: You can invest in everything (real estate, crypto, loans, gold), you can include your computer, financial journal subscriptions, etc. in your expenses. Possibility to avoid double taxation under certain conditions.
Cons: LEI code fee (around €50 per year), accounting is compulsory (either you do it yourself or pay for the service), getting the money is more complicated (you have to pay yourself a salary or dividends, which leads to taxes).

The Russian rule: If your portfolio is less than €50 000 - €100 000 and you invest mainly in the stock market, an investment account is easier and cheaper. If you have a larger portfolio or want to deal in real estate/craft, consider a LLC.

Summary: how to act in 2026?

The year 2026 offers new opportunities for investors amid falling interest rates and economic recovery. An investment account is a tool that should be in every Estonian investor's arsenal.

Here's your action plan:

Check with your bank: Do you have a separate account for investments?
Think strategy: Do you plan to Buy & Hold? If yes, an investment account is your best friend.
Be precise: Keep money in the account for investment purposes only, and don't use it for everyday expenses.
Watch what you buy: Make sure it is a financial asset (shares, funds, bonds).

An investment account is like a snowball effect - the tax benefit seems small at the beginning, but over the years, as the interest earns interest income without paying a fee to the taxman in the meantime, it becomes an avalanche. Don't give away your future returns - take advantage of the system the state has set up for you.