Adam Radomski
Business Development Executive
Estonian CIT, also referred to as the lump-sum tax on the income of capital companies, is an alternative form of company taxation. The Estonian model serves as an incentive for limited liability companies, limited partnerships, limited joint-stock partnerships, joint-stock companies and simple joint-stock companies, due to its attractive settlement model and the possibility of deferring the payment of tax until the moment of profit distribution. It is further characterised by the absence of separate tax accounting and minimal administrative obligations.
Estonian CIT – for whom?
Estonian CIT is aimed at micro, small and medium-sized companies whose revenues do not exceed PLN 100,000,000. The new taxation rules may be used by companies in which the shareholders, stockholders or partners are exclusively natural persons.
However, these are not the only conditions that must be met in order to use this form of taxation. Estonian CIT may be used by taxpayers who meet all the conditions set out in Article 28j(1) of the CIT Act.
Estonian CIT at KR Group
The advantage of the Estonian model is the reduction of the combined PIT and CIT taxation in the case of dividend distribution. In practice, this means that the taxpayer gains the ability to reduce the PIT paid by the shareholder, stockholder or partner by the CIT paid by the company. If you are considering implementing this new solution in your company, we invite you to contact our experts, who will comprehensively examine your situation. We will propose solutions tailored to the needs and capabilities of your business.
Estonian CIT – KR Group offer
- Analysis of the possibility of using Estonian CIT.
- Calculation of savings.
- Support in the area of company transformations and other reorganisation activities.
- Preparation of the required documents related to the commencement of the application of Estonian CIT.
- Ongoing advisory services in the area of applying the Estonian model.
FAQ
Who can use Estonian CIT?
Estonian CIT may be used by those entities that meet all the conditions set out in Article 28j(1) of the CIT Act, i.e.:
- micro, small and medium-sized companies whose combined operating revenues do not exceed PLN 100,000,000, with these revenues calculated inclusive of the amount of VAT due;
- the shareholders, stockholders or partners of the company are exclusively natural persons;
- the taxpayer does not hold shares (stocks) in the capital of another company;
- the taxpayer employs at least 3 persons, excluding shareholders (stockholders);
- passive revenues constitute less than 50% of operating revenues;
- the company does not prepare financial statements in accordance with IAS for the period of lump-sum taxation;
- the taxpayer submits a notice of the choice of lump-sum taxation, using the prescribed form, to the competent head of the tax office by the end of the first month of the first tax year in which it is to be taxed under the lump sum.
Can a taxpayer using Estonian CIT additionally benefit from innovation reliefs?
Estonian CIT precludes the simultaneous use of other tax reliefs. This means that the taxpayer will not be able to benefit from, among others: the research and development relief (R&D relief), IP BOX or the bad debt relief.
For what period of time may a taxpayer use Estonian CIT?
A taxpayer choosing Estonian CIT selects this form of taxation for a period of four years and has the possibility of extending it by a further four years, provided they continue to meet all the conditions for applying the Estonian system.
Is Estonian CIT a more advantageous form of taxation than taxation under the standard income tax?
There is no straightforward answer to this question. The advantage of Estonian CIT is the deferral of the taxation of the company’s income. This means that income is taxed only at the moment it is used for consumption purposes, rather than at the moment it is earned. This is an advantageous form of taxation for companies that wish to expand the scope of their business activities. However, it should be noted that in the event of withdrawal from this form of taxation, the taxpayer will be required to pay income tax for the period of using Estonian CIT not at a rate of 9 or 19 percent, but at 15 or 25 percent respectively.
Estonian CIT – for which companies?
Estonian CIT is a form of taxation intended for capital companies that carry out genuine business activity and meet the statutory conditions for choosing the lump-sum tax on company income. Estonian CIT may be used primarily by limited liability companies and joint-stock companies whose shareholders are natural persons, and whose revenues derive primarily from operating activities rather than passive income sources. This model is particularly advantageous for companies that reinvest profits, plan business development, new investments and the expansion of employment.
What is the rate of Estonian CIT?
What may be the sources of revenues qualifying for Estonian CIT as passive revenues? One of the conditions for a taxpayer to be able to use Estonian CIT is that revenues from activities achieved in the previous tax year which derive from the following sources must not exceed 50%: receivables, interest and proceeds from all types of loans, the interest portion of a leasing instalment, sureties and guarantees, copyrights or industrial property rights, including from the disposal of such rights, from the disposal and exercise of rights from financial instruments, and from transactions with related parties within the meaning of Article 11a(1)(4) – where no economic added value is generated in connection with those transactions, or the value generated is negligible.
