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24 September 2020

Estonian CIT in 2021? Details about the law project

A revolution in the regulations on corporate income tax will soon become a reality. After the pre-consultation stage, which lasted until August 23rd, the Ministry of Finance has published the full draft of the new law introducing the so-called Estonian solutions in CIT.

Ongoing work on the new CIT law amendment will probably last until the end of this year, with the planned date of entry into force in early 2021. We present the crucial assumptions of the project.

Estonian CIT – a pro-investment tax system?

The fundamental rules of the new version of CIT can be summarized in two points:

  • The tax obligation arises when corporate income is paid out to business owners, rather than in regular advance cycles, as is the case today. In other words, the new law provides for a lump-sum tax on the income of companies.
  • Estonian CIT can be implemented for four consecutive years, with the possibility of a one-time extension for another four years.

Moreover, company profits will not be taxed in the period in which they are earned, but only when they are paid out. It will allow companies to turn over and invest the amount of tax for further investment actions.

The government believes that the capital kept by the companies can be invested in modern technologies and enterprise development, which suggests that the Estonian CIT may turn out to be another form of system support after R&D reliefs and IP Box.

Mandatory criteria

Not all companies and entities will be able to use the new form of CIT scheme. The draft law published by the Ministry of Finance shows that the number of conditions and the revenue thresholds can significantly reduce the number of entities eligible.

Among the mandatory criteria:

  • Annual income of legal persons in the company cannot exceed 50 million PLN.
  • More than 50% of revenue must come from real business activities – therefore, dividends, interest, and other passive income cannot account for more than half of the annual revenue.
  • Investment condition: the company’s expenditure on depreciable fixed assets should increase by at least 15% in two years or by 33% in four years.
  • Shareholders (only natural persons eligible) should not own shares in another company.

Currently, there is no similar work being carried out regarding PIT regulations. Therefore, the benefits that will come with the Estonian solutions regarding CIT will be unavailable for natural persons, partners (in partnerships), as well as companies whose shareholder is another domestic or foreign company.

New Estonian CIT rates

In the current tax ordinance, the base CIT rate is 19% and 9% for the so-called small taxpayers and 19% rate on dividends paid for business partners. When we include the dividend tax amount, the real CIT rates are 34.39% and 26.29% for small taxpayers.

The Ministry of Finance argues that, overall, the level of taxation under the Estonian solution will be lower because the tax paid by the company will be deductible from the tax on dividends.

For this reason, in practice the Estonian CIT project introduces lower CIT rates:

  • basic 25% and reduced 20% (maximum 6 pp of difference);
  • basic 15% and reduced 10% for small taxpayers (maximum 9 pp difference).

Questionnaire

The Ministry of Finance has provided a questionnaire for representatives of companies’ representatives, which determines whether a given entity can apply for the transition to the Estonian CIT system.

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