Estonian CIT
The Estonian CIT is the colloquial name for a taxation system whose true (formal) name is the flat-rate taxation of income. The legal regulations concerning this method of taxation are contained in the CIT Act. It is an alternative income tax (CIT) system that introduces significant changes compared to the traditional system. Its main feature is that profits are taxed only when they are distributed to shareholders, not when they are generated. In Poland, the Estonian CIT taxation model was introduced on 1st January 2021. It is an alternative to the standard CIT system aimed at stimulating investment in small and medium-sized enterprises (SMEs).
The name “Estonian CIT” is derived from a similar tax system successfully implemented in Estonia in 2020.
The main advantages of Estonian CIT:
- Improved liquidity: As there is no requirement to make advance tax payments, the company can manage its liquidity more effectively
- Simpler tax settlements: The system is less complicated than traditional CIT, which can translate into lower costs associated with accounting and tax settlements. Incentive to reinvest profits: Estonian CIT encourages companies to reinvest profits in the company’s development because the tax is only paid when the profit is distributed.
- Favourable tax rate: The total tax rate (CIT and PIT) is generally lower than the tax rate under the traditional system.
Disadvantages of the Estonian CIT:
Limitations on certain expenses: Some expenses may be treated less favourably under the Estonian CIT than under the traditional system.
Estonian CIT in Poland is only available to companies that meet certain requirements:
– The company must be a capital company (limited liability company or joint-stock company).
– It must not hold shares in other entities.
– It must employ at least three people, regardless of the number of shareholders.
– Passive income (e.g. from rental, licences) must not exceed operating activities.
What is the amount of taxation under the Estonian CIT rules?
a) CIT:
– small taxpayers and new taxpayers – flat rate of 10%
– other taxpayers – flat rate of 20%
b) PIT:
– Shareholders of companies taxed at a flat rate of 10% CIT – tax calculated at a rate of 19% (capital gains tax) minus 90% of the amount equal to the product of the shareholder’s percentage share in the company’s profit (calculated at the time the shareholder acquires the right to payment of the distributed profit) and the lump sum due (CIT),
– Shareholders in companies taxed at the flat rate of 20% CIT – tax calculated at a rate of 19% (capital gains tax) minus 70% of the amount corresponding to the product of the shareholder’s percentage share in the company’s profit (calculated as at the date on which the shareholder acquires the right to payment of the distributed profit) and the lump sum due (CIT).
Total effective taxation (CIT+PIT):
– Small taxpayers – 18.1% on average (26.29% in the classical CIT+PIT model)
– Other taxpayers – 21.2% on average (34.39% in the classical CIT+PIT model)
Do companies taxed with Estonian CIT pay tax during the year?
In general, companies taxed with Estonian CIT do not pay tax during the year, although in certain situations there may be an obligation to do so. This applies to two categories of income:
Income from hidden profits
Income from hidden profits is a benefit of the company, other than dividends, paid to shareholders or entities directly or indirectly related to the taxpayer or shareholders. Hidden profits are defined as benefits, whether in money or in kind, gratuitous or partly gratuitous, linked to the right to participate in profits, other than distributed profits, the beneficiary of which is, directly or indirectly, a shareholder or an entity directly or indirectly related to the taxpayer or to that shareholder. This income, if any, is taxed on a monthly basis.
Income from non-business expenses of the taxpayer
Non-business expenses of the company and public law expenses of a sanctioning nature, such as penalties, fines or interest on overdue tax debts, are taxable. This income, if any, is taxed on a monthly basis.
What should be done to opt for taxation under the Estonian CIT rules?
Analyse whether it is possible to choose Estonian CIT, taking into account:
- the company’s legal form,
- the structure of the company’s shareholders,
- the rights held,
- the rules for preparing financial statements,
- the share of passive income and transactions with related parties in income,
- the size and structure of employment,
- whether the company is a financial enterprise,
- whether the company is a lending institution,
- whether the company generates income from business activities carried out in a special economic zone,
- whether the company benefits from the so-called investment tax credit,
- whether the company has not been declared bankrupt or liquidated,
- how the company was established (merger, division, contribution in kind, etc.
Analyse whether it is profitable to choose Estonian CIT, taking into account:
- the emergence of income and tax from the initial adjustment of income and expenses,
- the emergence of income and tax from transformation,
- the obligation to pay tax during the tax year (on a monthly basis) due to the existence of:
– income from hidden profits,
– income from non-business expenses, - risk of loss of tax losses,
- loss of eligibility for tax benefits,
- effective tax rate after the discretion of Estonian CIT compared to current taxation.
Analyse and complete the formal requirements for the discretion of Estonian CIT, taking into account:
- filing of the notice of discretion on lump-sum taxation on corporate income (ZAW-RD),
- analysis of temporary differences shown in the company’s financial statements for previous years,
- filing by the shareholder, a declaration about the entities in which it holds, directly or indirectly, shares,
- separation in the company’s equity:
– the amount of undistributed profits and the amount of conflicted profits attributable to capital, earned in the years preceding the first year of taxation on companies‘ income on a flat basis, and
– the amount of uncovered losses incurred in the years preceding the first year of taxation on companies’ income on a flat basis.
Estonian CIT and a family trust
Can a family trust be taxed under Estonian CIT rules?
A family trust cannot be taxed under Estonian CIT rules. A family trust is taxed according to rules similar to Estonian CIT.
Can a family trust hold shares in a company taxed under Estonian CIT rules?
A family trust cannot hold shares in a company taxed under Estonian CIT rules. The acquisition of shares in a company taxed under Estonian CIT rules by a family trust would mean that such a company would lose its right to be taxed under Estonian CIT rules.
Can the founder of a family trust also be a shareholder in a company taxed under Estonian CIT rules?
Yes, there is no obstacle for the founder of a family trust to be at the same time a shareholder of a company taxed under Estonian CIT rules.
Robert Wienskowski
Tax advisor
e-mail: robert.wienskowski@gws.net.pl
phone: +48 605 216 150
Galia Ginelli
Legal adviser
e-mail: galia.ginelli@gws.net.pl
phone: +48 502 330 105
Piotr Sobczak
Tax advisor