ESTONIAN CIT – HOW DOES IT WORK?

Estonian CIT – who is it for?

Have you heard of the Estonian CIT yet? Any simplifications and the opportunity to pay lower taxes are a boon for entrepreneurs. Over the years, numerous measures have been introduced to make the regulations more favourable for setting up both small and large businesses. Complicated tax systems and obscure financial legislation are among

most frequently cited barriers to setting up a business. Poland isn’t exactly renowned for having the simplest tax system, but much has been changing in this regard over the years. One response to the needs of Polish entrepreneurs is Estonian CIT, which, despite offering numerous benefits, is still not widely utilised. It is worth knowing what the Estonian CIT scheme involves and who can make use of it.

What is the Estonian CIT?

The Estonian CIT is a form of taxation that should be of interest to most companies. Its main aim is to simplify procedures when dealing with the Tax Office, as well as to reduce the accounting burden. Estonian CIT, also known as the flat-rate tax on the income of limited companies, has been in operation in Poland since January 2021. It is available to companies that apply for it themselves and, furthermore, meet all the criteria. The expertise of accountants and business owners themselves is therefore essential to be able to take advantage of this beneficial scheme. The Estonian CIT is particularly recommended for those who wish to invest as much as possible in their business. CIT is a corporation tax, though it is calculated slightly differently from traditional CIT.

Advantages of the Estonian CIT for businesses

The main advantage and distinctive feature of Estonian CIT is the deferral of the tax settlement date. Under the traditional CIT system, tax is settled on a month-by-month basis, with a year-end summary. With Estonian CIT, the situation is quite different. This tax is not calculated until the profits generated are channelled into investments within the business. This is a very good solution, particularly for start-ups which still require additional start-up funding. Therefore, as long as all profits are reinvested in the company, the company is exempt from paying Estonian CIT. The tax liability arises, however, when the entrepreneur pays out profits to themselves or to shareholders in the form of dividends. It is then that they will have to pay the tax. The CIT rates are slightly higher than those under the standard CIT regime; however, part of it can be deducted in the annual PIT return. Overall, this should prove far more advantageous for all shareholders.

Who can benefit from the Estonian CIT scheme?

The Estonian CIT scheme exists in Poland under the Act of 28 November 2020 amending the Corporate Income Tax Act and certain other acts. The introduction of this scheme was driven by very lofty objectives. The legislators were keen to level the playing field between businesses. Between those with stable sources of funding and those facing a shortage of funds, which would effectively increase their potential and competitiveness as a result. This is an opportunity for start-ups seeking investors and which are only just at the stage of implementing numerous investments. To be eligible for the Estonian CIT, the following conditions must be met:

1. the company’s passive income must not exceed its operating income,
              
2. the company must employ at least three people under employment contracts who are not shareholders,
              
3. the company owner must not hold shares or equity interests in any other companies,
              
4. a company benefiting from the Estonian CIT must spend at least 15 per cent of its initial value on investments over the next two tax years,
              
5. if the company is unable to invest, it must demonstrate an increase in staff salaries of at least 20 per cent compared with the year before it began to benefit from the preferential CIT scheme,
              
6. a company benefiting from the Estonian CIT regime must keep accounts and prepare financial statements in accordance with the currently applicable legislation.  
   

An entrepreneur wishing to benefit from the advantages of the Estonian CIT regime must meet a number of conditions. On the one hand, this presents an opportunity for investment growth; on the other, it requires constant financial monitoring in order to qualify for this tax regime. A good approach for start-ups is, of course, to keep track of the changes proposed by the government. Attention should also be paid to support for grassroots initiatives, such as business incubators. These are organisations whose role is to support businesses that are still in their infancy. One form of assistance offered by the ‘Firma Dla Każdego’ Foundation is support during the company formation process. Another important factor is the subsequent significant reduction in start-up fees, as well as the ability to utilise the Foundation’s legal personality, which reduces the risk when signing contracts with business partners.

See also: The Polish Deal – pros and cons