Is it possible to opt out of the Estonian CIT before the end of the 4-year period?

Czy wypłaty ze spółki po przekształceniu są opodatkowane?

Table of Contents:

  1. What are the conditions for opting out of Estonian CIT?
  2. What are the consequences of opting out of Estonian CIT?

A company that has chosen to be taxed with a flat-rate corporate income tax (i.e., Estonian CIT) can opt out at the end of any tax year. There is no possibility to terminate this form of income tax settlement during the tax year.

What are the conditions for opting out of Estonian CIT?

According to Article 28l, paragraph 1, point 1 of the CIT Act, opting out at the end of the tax year of the four-year period is a ground for losing the right to be taxed with a flat-rate corporate income tax. Article 28l, paragraph 1, point 1 of the CIT Act does not specify that this must be the last year of the four-year period, as the provision should state “at the end of the last tax year of the four-year period.” As the Director of the National Tax Information Office indicated in an individual interpretation on August 22, 2022, ref. 0111-KDIB1-1.4010.112.2022.1.BS: “in principle, Estonian CIT is chosen for four-year periods. The taxpayer may also opt out of this form of taxation at any time, based on Article 28l, paragraph 1, point 1 of the CIT Act. However, the condition is that the opt-out occurs at the end of the financial (tax) year. It is not permissible to opt out of the flat rate during the ongoing financial (tax) year.” Information about opting out of the Estonian CIT must be submitted to the relevant tax office head in the CIT-8E tax declaration for the tax year, which is to be the last year of flat-rate taxation. In another interpretation dated August 2, 2023, the Director of the National Tax Information Office (ref. 0111-KDIB2-1.4010.218.2023.3.BJ) resolved that: “opting out of the flat-rate taxation during the period of Estonian CIT is possible after submitting a notification to the office by the end of the third month of the following tax year by completing the appropriate position on the CIT-8E form. The taxpayer should mark item 33, point 1 in part B3 of the form, which means the taxpayer’s resignation from flat-rate taxation at the end of the tax year mentioned in items 4 and 5.”

Czy spółka z o.o. powstała z przekształcenia płaci 10% estoński CIT?

What are the consequences of opting out of Estonian CIT?

The consequences of opting out of Estonian CIT should not be overlooked, as their significance depends on the circumstances of the specific company.

According to Article 28l, paragraph 2 of the CIT Act, if the right to flat-rate taxation is lost, the taxpayer can submit a new notification for choosing flat-rate taxation (Estonian CIT) only after three tax years, but not earlier than 36 months following the calendar year in which the taxpayer lost the right to flat-rate taxation. According to Article 7aa, paragraph 5, point 1 of the CIT Act, the taxpayer must pay income tax by the end of the first month following the last year of Estonian CIT taxation if the flat-rate taxation was applied for less than four years. A taxpayer transitioning to Estonian CIT must submit a declaration for the initial correction on the CIT-KW form. It may turn out that the taxpayer determines the tax due on the income as the difference between revenues and costs in this declaration. However, the company is not automatically obligated to pay this tax – the obligation will not arise if the company settles under Estonian CIT for the legally provided four-year period. In this case, the tax obligation will expire. However, if the taxpayer opts out of Estonian CIT before the end of four tax years, then the obligation to pay the tax on the income shown in the initial correction arises. According to Article 7, paragraph 8 of the CIT Act, opting out of Estonian CIT before the end of the four tax years, if the taxpayer used the right to deduct a loss from previous years, results in the loss of the right to deduct the loss from the day it was used, which means that the taxpayer must recalculate the amount of the tax liability for those periods and therefore has an obligation to pay the tax along with interest for late payment.

In summary, opting out of Estonian CIT after the four-year period of using this form of taxation will not result in negative income tax consequences for the taxpayer.

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