Estonian CIT, draft bill, taxes, Crowe

Estonian CIT: which companies will benefit from the new tax form?

Agata Nieżychowska
Estonian CIT, draft bill, taxes, Crowe
In 2021, an amendment introducing a pro-investment tax system, the so-called Estonian CIT, into corporate income tax regulations is to come into force. The new regulations are intended to be of great benefit to companies, but they also contain many restrictions. So, what exactly does the planned revolution in CIT regulations mean and who will benefit the most from this?
 The Ministry of Finance has drafted and published the amendment to the Corporate Income Tax Act. The new tax solution, known as the Estonian CIT, is to be introduced at the beginning of 2021, and its aim is to stimulate companies to increase employment and fixed assets and to encourage companies to make new investments.

The draft bill contains two alternative options of taxation and is directed mainly to entrepreneurs from the micro, small and medium-sized enterprise sector. It is intended to eliminate the existing barrier related to financing smaller entities and thus equalise their chances for further development.

Estonian CIT - the key information

The Estonian CIT, a tax solution designed to promote investments and reduce tax settlement requirements, is to cover four types of income (from the profits distributed, hidden profits and non-business-related expenses, changes in the value of assets in the situation of restructuring operations and net profits) and is directed to:

  • small and medium-sized capital companies (limited liability and joint stock companies) with revenues not exceeding PLN 50 million,
  • companies whose shareholders are exclusively natural persons.

In order to take advantage of this new tax solution, the companies concerned will have to meet simultaneously the following criteria:

  • no shares in other entities,
  • employment: at least 3 employees other than shareholders,
  • passive income must not exceed operating income,
  • the investment expenditure must be reported.

Moreover, the draft that has been submitted for public consultation and review provides the taxpayer with two options to choose from for a period of 4 years:

  • the first option: a system modelled on the Estonian system, allowing the payment of tax by the company at the moment of the payment of profits rather than periodically, i.e. linking taxable income to the categories of balance sheet law,
  • the second option: a special investment fund which will ensure faster settlement of depreciation of fixed assets in tax costs (without interfering with current tax settlements).

The 4-year period of application of the chosen option may be extended by further 4-year periods, but only if in the fourth year the entrepreneur still meets the required criteria. What is important is that the exceeding of the threshold of PLN 50 million during the 4-year period will not exclude the company from the possibility of applying Estonian CIT, but will involve the necessity to pay additional 5% tax.

Estonian CIT not for all companies

The Ministry of Finance estimates that around 200 000 Polish entrepreneurs will benefit from the new solution, but the numerous conditions to be met may make the actual application of Estonian CIT not as widespread as the government expects.

Crowe experts indicate that the recipients of this new tax preference will be mainly companies from the manufacturing industry, although the project itself does not restrict the entrepreneurs entitled to any particular industry. The new mechanism, however, excludes investment in intangible assets, providing for the application of a lump sum only in the case of reporting investment expenditure in fixed assets. Thus, enterprises which invest in new technologies, including those benefiting from  R&D relief, will not be able to benefit from Estonian CIT.

The circle of recipients of the new solution is also limited by the provision on the exclusion of companies whose shareholders are legal persons (most companies with foreign capital) and the provision on the exclusion of the smallest companies whose employment does not exceed three employees (only 34.4 thousand of all entities registered in Poland).

Nonetheless, it should be noted that the draft amendment to the CIT Act, which the Ministry of Finance has published on its website, has yet to be publicly consulted and agreed between the ministries, and in the course of parliamentary work the draft regulation may still undergo significant changes.

Contact our expert

Agata Nieżychowska
Agata Nieżychowska
Tax Director

Tax Advisory