During 2023, doubts arose regarding companies that transition to Estonian Corporate Income Tax (CIT) during the year rather than at the beginning of the next. Some tax interpretations and court judgments (from August 29, 2023, under file numbers III SA/Wa 1335/23 and III SA/Wa 1336/23) suggested that a company would need to prepare financial statements and submit a notification of choosing the Estonian CIT before the end of the first month of the tax year in which the transition occurred. However, the latest tax interpretation from the Director of the National Tax Information confirmed that such a stance is not justified, and the company has a significantly longer period to prepare financial statements (individual interpretation from November 28, 2023, under file number 0111-KDIB1-2.4010.561.2023.1.MK).
How to transition to Estonian CIT during the year?
According to Article 28j(5) of the CIT Act: “A taxpayer may choose the lump-sum taxation before the end of its adopted tax year if, on the last day of the month preceding the first month of lump-sum taxation, it closes its accounting books and prepares financial statements in accordance with accounting regulations.” Interpreting this provision, the Director of the National Tax Information initially believed that financial statements must be prepared first, followed by submitting a notification (ZAW-RD) about choosing Estonian CIT. This would make the time available for submitting the notification exceptionally short, practically making it impossible to choose Estonian CIT during the year.
What did the Director of the National Tax Information determine?
Another company, formed in November 2022, with its first tax year running from November 4, 2022, to December 31, 2023, requested another tax interpretation. It clarified that it started applying Estonian CIT from January 1, 2023, during its first tax year. On the last day of January 2023, it submitted a notification (ZAW-RD) to the tax office and only closed its accounting books and prepared financial statements in March. The Director of the National Tax Information confirmed that the company effectively chose lump-sum taxation during the year if it submitted the notification to the head of the tax office first, followed by preparing financial statements.
In summary, there is no longer any doubt about the effective transition to Estonian CIT during the year.