At the beginning of 2021, a new form of corporate income taxation, known as Estonian CIT, appeared in the Polish tax system. The introduction of this alternative method was intended to simplify the tax burden for entrepreneurs, especially those running smaller companies. Although initially this system was only available to companies meeting certain conditions, significant changes were introduced as part of the Polish Deal from 2022, which extended the taxation rules. The purpose of this article is to present the main principles, conditions and benefits of choosing Estonian CIT.
From 2023, changes have been introduced that have affected the application of Estonian CIT. The rules regarding employment that must be met by companies choosing this taxation system have been extended. Furthermore, changes have been introduced in the scope of tax settlements for mixed costs, such as depreciation, which gives greater control over what constitutes a tax expense.
Estonian CIT is an alternative method of taxing the income of capital companies, which allows the payment of income tax to be postponed until the income is paid to the owners in the form of dividends or profits. Instead of paying tax on the income earned, companies settle the tax only when these profits are consumed. This is a particularly beneficial solution for companies that prefer to reinvest the income earned in the business instead of paying it out as a dividend.
To benefit from taxation in the form of Estonian CIT, the company must meet a number of conditions. Firstly, this applies only to limited liability companies, joint-stock companies, simple joint-stock companies, limited partnerships and limited joint-stock partnerships. Importantly, choosing this form of taxation is only available if the owners of the company are individuals and do not have shares in other companies or investment funds. Another requirement is to maintain a minimum number of employees, which means employing at least three employees for 82% of the days of the year.
Choosing Estonian CIT offers a number of benefits. First of all, thanks to the deferral of income tax payment until the distribution of profits, entrepreneurs can reinvest a larger part of their income, which is conducive to the development of the company. In addition, the lack of the obligation to incur capital expenditures, which was required in the initial version of the regulations, makes the system more flexible and accessible to a wider range of taxpayers.
The decision to choose Estonian CIT is not easy and requires a thorough analysis of whether all requirements are met. It is worth remembering that although this system involves deferring tax payments, the tax rates for companies taxed in this way are higher than in the traditional CIT system (10% for small taxpayers and 20% for others).
Taxpayers must also remember that choosing Estonian CIT is a temporary solution, because after four years from its selection, a decision must be made on the further use of this form of taxation. In the case of resignation from lump sum taxation, entrepreneurs do not have to worry about retroactive taxation, but an appropriate declaration must be filed.
Estonian CIT is an innovative method of taxing corporate income, which can bring benefits to entrepreneurs who prefer to reinvest their profits. Thanks to flexible rules and deferral of the tax payment date, this system can be an attractive alternative to traditional taxation. However, it should be remembered that in order to use this form, the company must meet a number of requirements, which may vary depending on the characteristics of the business and the ownership structure.