What is Estonian CIT?
This is a modern method of taxation that promotes investments and minimizes tax settlement formalities. It is modeled after the system functioning in Estonia, which is famous for its quite simple and therefore friendly method of taxation based on the structure that assumes that taxation takes place only when dividends are paid to partners, while they do not pay tax on current income during the company’s operations. Such a system undoubtedly significantly facilitates taxation, and therefore running a business itself, by eliminating tax obligations. It can also be used as an incentive for further development, financed by the generated profit. The assumption of this method of taxation is to simplify and facilitate the incurring of tax burdens.
These regulations are addressed to entities with the simplest share structure possible, i.e. limited liability companies and joint-stock companies, and from 1 January 2022, also limited partnerships, limited joint-stock partnerships and simple joint-stock companies whose shareholders are only natural persons and who do not hold shares in the capital of another company, participation titles in an investment fund or in a collective investment institution, all rights and obligations in a company that is not a legal person and other property rights related to the right to receive benefits as the founder beneficiary of a foundation, trust or other entity or a legal relationship of a fiduciary nature. However, a shareholder of such a company cannot have property rights related to the right to receive benefits as the founder or beneficiary of a foundation, trust or other entity or legal relationship of a fiduciary nature, but may have shares, shares or all rights and obligations in a company that is not a legal person.
Who Will Not Benefit From the Estonian CIT?
Estonian CIT cannot be used by:
- Financial companies (e.g. banks)
- Lending institutions
- Taxpayers conducting business in special economic zones
- Taxpayers declared bankrupt or liquidated
- Taxpayers created as a result of a merger or division or divided by separation.
Is Estonian CIT Available For New Companies?
Yes.
In the case of a taxpayer starting a business, the condition regarding the structure of income is deemed to be met in the first tax year of lump-sum taxation.
The employment condition does not apply to the year of commencement of this activity and the 2 consecutive tax years.
However, starting from the second tax year, the taxpayer must increase employment annually by at least 1 full-time position until the employment level specified in this provision is reached.
How To Switch to Estonian CIT?
Switching to taxation in the form of Estonian CIT is not obligatory, and the decision on this matter rests with the taxpayer. To take this step, it is necessary to submit an appropriate notification to the tax office.
If you decide to take such a step before the start of the tax year, you have until the end of January to inform the head of the relevant tax office about your choice.
However, if your change of mind occurs during the tax year, the process becomes a bit more complicated. First, you will have to settle CIT according to standard rules. The next step is to close the books and prepare financial statements. Thanks to this, you will be able to correctly determine the tax base.
What Is the Subject To CIT Taxation?
The Estonian CIT tax applies not only to the company’s net profit and dividends (as shown in the examples above), but also to the so-called hidden profits, i.e.: monetary and non-monetary benefits, paid, gratuitous and partially paid benefits, or benefits provided to shareholders or partners (e.g. loans).
Expenditures not related to business activity are also taxed, as is the excess of the market value of the assets taken over or contributed in kind over the value of the assets in the event of a merger, division, transformation of entities or contribution.
It is worth mentioning here that expenses, depreciation write-offs and write-offs for permanent loss of value that are related to the use of vehicles and other assets solely for business purposes are not included in this group – they are therefore treated as business-related expenses and not subject to taxation. If the same expenses and deductions concern assets used in mixed activities, 50% of them are subject to Estonian CIT.
Estonian CIT Rate
The Estonian CIT rate is higher than when taxed under general rules and is 10% for a small taxpayer and a taxpayer starting a business and 20% for other taxpayers. When taxed under general principles, the corporate income tax rate is 9% and 19%, respectively. The partners are obliged to pay personal income tax on the dividend paid. However, in Estonian CIT it is subject to a reduction of 90% of the tax paid by the company – in the case of companies with the status of “small taxpayer” and companies starting their business, and 70% of the tax paid by the company in the case of other companies. When taxing income under general rules, partners cannot benefit from such a reduction.
Advantages of Estonian CIT
Estonian CIT is a real revolution in thinking about taxes. Thanks to the lack of tax on reinvested profits, companies can better plan their investments and implement them without fear of immediate tax burdens.
Moreover, the availability of Estonian CIT for various types of companies makes it an attractive option for both small and larger enterprises operating in various industries.
Disadvantages of the Estonian CIT
Although Estonian CIT may offer some benefits, there are disadvantages that effectively discourage some entrepreneurs from using this solution. The disadvantages of Estonian CIT in Poland include, among others:
- The threat of having to suddenly pay tax retroactively with interest, which may constitute an unexpected financial burden for the company. (in the event of falling out of this form of taxation, e.g. through loss of employment or acquisition of shares in another company)
- Tax on hidden profits, which may affect companies that do not settle transparently or have complex financial structures
- Taxation of expenses that are not directly related to generating income may limit the investment opportunities of enterprises
- Cost analysis in terms of hidden profits, such as the use of a company car by the owner, provision of services by the owner on a B2B basis but at rates much higher than market rates, without the possibility of justifying their validity, etc.
Are you interested in switching to Estonian CIT and have more questions or need assistance? Or maybe you are interested in other tax issues? Adwisen offers you comprehensive service in this area. Our experienced team will help you find the perfect solution for you!
