A company subject to Estonian CIT can pay a reduced 10% tax rate if the resolution regarding profit distribution is made in the year when it meets the criteria for a small taxpayer. The timing of profit generation is irrelevant, as determined by the Regional Administrative Court in Krakow (WSA) and previously confirmed by the tax authorities.
Estonian CIT rates
The Estonian CIT rates vary depending on the taxpayer’s status. For small taxpayers and those starting a business, the rate is 10%. In other cases, the tax rate is 20%. According to the statutory definition, a small taxpayer is one whose revenue from sales (including VAT) did not exceed the equivalent of 2,000,000 euros in the previous tax year.
The resolution on profit distribution is crucial
Intuitively, one might assume that the tax rate should be determined by the timing of profit generation. Such an approach aligns with the logic and functional interpretation of the Estonian CIT taxation mechanism. However, the Director of the National Tax Information presents a different view. For the determination of the tax rate, the date (month) of adopting the resolution on profit distribution is considered significant, rather than the date of actual payment or the year for which it is paid. For example, if a company, classified as a small taxpayer in 2023, generated a profit but the resolution on profit distribution was made in 2024, causing the company to lose its small taxpayer status that year, the tax rate would increase to 20%. The position of the tax authorities has now been supported by the Regional Administrative Court in Krakow. To pay the 10% Estonian CIT rate instead of the 20% rate, the company must be a small taxpayer at the time of profit distribution.
Consequences for the taxpayer
The above position can have favorable or unfavorable consequences for the taxpayer, depending on the specific circumstances of the case. Theoretically, partners can accumulate profits and distribute them after reducing the company’s activities (reducing revenues) to benefit from more favorable taxation. Therefore, there is a possibility of choosing the ideal moment for profit distribution. However, this can also have negative effects. If revenues continue to grow rather than decrease, it may be advantageous for partners of smaller companies to accelerate profit distribution or even make advances before the company no longer qualifies as a “small taxpayer.” This is because with sufficiently rapid growth, the income generated at the beginning of the company’s operations will eventually fall into the higher 20% threshold of Estonian CIT.