Starting from 2021, there was a new tax relief introduced in Polish tax law – so called the Estonian CIT. It allows the companies to run business tax-free until the dividends are paid or there is the – widely understood – profit distribution, which means that the profit is not taxed as long as it remains in the company and is subject to investment. The relief formally applies only to Polish companies, however there are no limitations for individuals who are shareholders of such companies. Thus, it should be considered as a perfect investment vehicle for foreigners investing in Poland.
The idea behind Estonian CIT in Poland
Estonia is known for its simple, taxpayer-friendly income tax system for companies. Its main assumption is that the tax is not payable on current income earned in the course of business but becomes due only when dividends are paid out to shareholders. The are no advance payments or tax returns if the income remains in the company. The adoption of such system in Estonia in the year 2000 has had astonishing economic effects, including an almost doubling of the rate of economic growth.
The Polish tax relief is based on regulations previously introduced in Estonia and that is why it is commonly called an “Estonian CIT”. The major difference between the Polish lump sum taxation (the official name for the Polish solution) is that it remains as an alternative to other applicable taxation methods, like traditional taxation models of companies, which involve paying monthly advance payments of corporate income tax.
The benefits of Estonian CIT in Poland
Choosing Estonian CIT means that the company has to pay income tax only when it decides to pay out the profit to shareholders. As long as the profits stay in the company, there is no taxation and the company has more funds for expansion of business or new investments. It should be noted however, that the profit distribution is understood widely – it is not only the formal payment of dividends, but also any other events that produce such an effect. For example, lending money from Company to shareholders under the Estonian CIT taxation model leads to similar taxation as on payment of dividends. The same refers to usage of company’s assets (such as cars) for shareholder’s private needs.
At some point however, the company will probably decide to pay out the income to shareholders. The additional profit resulting from applying the Estonian CIT is that even in the event of dividends, the effective taxation rate of income tax (which includes both CIT for companies and personal income tax for owners who are natural persons) may be low as 18.1% (in case of entities whose turnover does not exceed EUR 2 million) or 21.2% (for other entities) – most likely the lowest possible tax rate among many different forms of business taxation in Poland.
The legal form of the company is not a problem – limited liability company, joint stock company, limited partnership or so-called ‘simple joint stock, are all eligible. Also, the scale of the business since year 2022 does not matter any longer – small, medium as well as large entrepreneurs are allowed to choose this taxation model.
Where is the catch?
There are certain exemptions from the possibility to choose the Estonian CIT. These exemptions mostly relate to the type of company or type of business in which the company is involved in. One of the most important things is to fulfil the so-called ‘simple capital structure’ criteria. This means in practice that a company may be entitled to the Estonian CIT only if its direct shareholders are individuals (not companies or other entities) and at the same time the company does not have any subsidiaries. One of the other requirements is related to minimal required employment – the companies applying the Estonian CIT should employ a minimum of three employees, however new companies are exempt from this criteria in the first year from the company’s setup (this condition is also milder in case of ‘small taxpayers’ below EUR 2 million turnover).
To sum up, the main conditions that must be fulfilled in order to apply Estonian CIT are:
- the shareholders or partners of the company are natural persons (however, there is no requirement for shareholders to have Polish citizenship);
- the company has not subsidiaries;
- the company employs at least 3 persons (this conditions is milder in case of new companies and ‘small taxpayers’).
Great solution for foreign investors
All in all, the Estonian CIT regime in Poland can be considered as an investment vehicle for non-Polish tax resident individuals interested in investing or doing business in Poland.
If the Estonian CIT taxation interest you or you want help with establishing a company in Poland which benefits from the Estonian CIT – do not hesitate to contact us.
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