For whom will Estonian CIT be profitable?

According to the government’s declaration, capital companies will be able to switch to the so-called “Estonian CIT”, which is intended to encourage investment. As a rule, profits generated by enterprises will not be subject to taxation as long as their partners do not decide on distribution of profits – which means that the moment of CIT payment is shifted to the actual profits distribution. At the same time, the profits should be reinvested within the stipulated 2-year or 4-year periods. An additional incentive to switch to the new system will be the reduction of the total tax liability due to PIT and CIT.

Unfortunately, not all taxpayers will be able to use the new settlement method. Moreover, not all entrepreneurs will find it profitable in business terms. The basic conditions for using the “Estonian CIT” include:

  • the enterprise is run in the form of a limited liability company, joint-stock company or limited joint-stock partnership;
  • revenues in the previous tax year do not exceed PLN 50 million;
  • only natural persons may be shareholders of the company;
  • the company should employ at least 3 full-time employees who are not shareholders or stockholders;
  • the company cannot be a partner in other companies;
  • most of the company’s revenues come from operating activities and not from capital gains (e.g. copyrights, loans);
  • the company will incur direct investment outlays in the amount of not less than 15% (but not less than PLN 20 thousand) in the next two years or 33% (not less than PLN 50 thousand) in the next 4 years – the eligible outlays are expenses for the purchase of brand new fixed assets or the production of fixed assets, as well as expenses related to leasing fees in the part covering the repayment of capital.

In order to take advantage of the Estonian CIT, its use must be declared for a period of at least 4 years, with the possibility of automatic extension for another 4-year period.

The benefits of switching to an Estonian CIT are:

  • taxation of the company’s profit only in the part in which it was intended for distribution to shareholders (however the so-called hidden profits and expenses not related to the company’s operating activities are also taxed, including expenses paid directly or indirectly to shareholders or related entities by way of e.g. a donation or a loan);
  • reduction of the total taxation (PIT and CIT) of the profit intended for payment – although the CIT rates in the “Estonian” model are higher than the previous ones (25% or 15% respectively), the tax paid by the company can be deducted from the tax on dividends at the shareholder level, reducing the total tax liability to 30% or 25% for large taxpayers, or 25% or 20% for small taxpayers.

As can be seen from the above, the profitability of an Estonian CIT depends on the business structure and the investment plans held. Certainly, the biggest beneficiaries may turn out to be companies owned by private persons and which have not had time to implement their investment plans or are planning to incur large expenses. Entrepreneurs should also ask themselves whether they plan to consume the generated profits in the coming years.

The government project on the Estonian CIT shows that limited liability companies created by the way of transformation of civil partnerships, general partnerships or the transformation of sole proprietorship will also be able to use the new system. The company thus established will be able to benefit from the Estonian tax in the second tax year after the transformation. In connection with the above, it is worth analyzing the change in the legal form of the current business activity in order to combine the preferences related to the Estonian CIT and the benefits resulting from the exclusion of liability of the partners of the limited liability company for her obligations.

An entrepreneur running a sole proprietorship bears full responsibility for liabilities with all his property, including private property. The partners are liable for the obligations of a civil law partnership or general partnership on the same terms. Considering that the costs of transforming a partnership into a joint-stock company are currently lower (the obligation to audit the transformation plan by a statutory auditor has been abolished), it may be an ideal moment to organize the ownership matters.