Estonian CIT – Imagine you can run your business in Poland tax free…

Yes, you read that right. It is possible to run your business in Europe and not pay income tax. We’re talking about Poland and the possibility of choosing the taxation of a Polish company with the so-called “Estonian CIT” in Poland.

Table of Contents

• Estonian CIT in Poland – how does it work? You do not have to pay CIT in Poland!
• Who can apply the Estonian CIT in Poland?
• Conditions of applying Estonian CIT by Polish Company
• Restrictions
• Formalities
• Estonian CIT tax rates
• Summary

Estonian CIT in Poland – how does it work? You do not have to pay CIT in Poland!

“Estonian CIT” – or officially corporate income tax lump sum – is a type of corporate income taxation that allows the company to run business tax-free as long as their owners do not consume profits on private purposes nor transfer them to their personal accounts. This solution is based on regulations previously introduced in Estonia. That’s why it is commonly called an “Estonian corporate income tax” or simply “Estonian CIT”. The replacement of classical CIT with such a tax was adopted in Estonia in the year 2000, and has had astonishing economic effects there, including an almost doubling of the rate of economic growth and private investments.

The traditional taxation model of a company involves paying monthly advance payments of corporate income tax and at the end of the year the taxpayer is required to file an annual return. In case of a Estonian CIT, there are no advance payments or tax returns as long as the profit remains in the company. The Estonian CIT allows therefore the company not only to not pay any income tax but also the company responsibilities related to accounting records are severely limited!

Choosing Estonian CIT therefore means that the company will not have to pay income tax regularly (monthly/quarterly/yearly), but only when it decides to pay out the profit to shareholders. This provides the company with more funds for day-to-day operations, expansion of business activities or new investments! Can you imagine a better tax solution for an investor?

Who can apply the Estonian CIT in Poland?

The Estonian CIT may be (obviously) applied only by legal entities.

There are several type of Polish companies that may apply this form of taxation:

• Limited liability company (pol. Spółka z ograniczoną odpowiedzialnością)
• Joint Stock Company (pol. Spółka Akcyjna)
• Simple Joint Stock Company (pol. Prosta Spółka Akcyjna)
• Limited partnership (pol. Spółka komandytowa)
• Limited joint-stock partnership (pol. Spółka komandytowo-akcyjna)

Conditions of applying Estonian CIT by Polish Company

There are, however, some conditions that must be fulfilled in order to apply Estonian CIT:

• the company employs at least 3 persons;
• the shareholders or partners of the company are exclusively natural persons (however, there is no requirement for shareholders to have Polish citizenship);
• the company does not prepare financial statements in accordance with International Accounting Standards.

Restrictions

Apart from fulfilling the above conditions, there are also certain exemptions from the possibility to apply the Estonian CIT. These exemptions mostly relate to the type of company or type of business in which the company is involved in. If such a circumstance did not exist when opting for Estonian CIT, but appears later – the company loses the right to apply this form of taxation.

The Estonian CIT may not be applied by:

• companies whose 50% or more of revenues comes from so-called passive sources (e.g. receivables, interest),
• companies that own shares in another companies (or titles of participation in an investment funds);
• companies being the financial institutions (e.g. banks, lending companies);
• companies operating in a special economic zones;
• companies keeping accounting records in accordance with standards other than Polish;
• companies formed as a result of a merger or division;
• companies that are put into liquidation or bankruptcy.

Formalities

Estonian CIT is not the default form of company taxation. Switching to it is voluntary and depends on the will of the taxpayer. In order to do so, the company must submit a formal notice on the choice of this form of taxation to the relevant tax authority – either by the end of the 1^st month of the tax year in which the company intends to use Estonian CIT or during the tax year (in the latter case, however, classic CIT must be settled, the company accounting books must be closed and the financial statements must be prepared. This allows for the correct determination of the tax base for the period of application of Estonian CIT).

Estonian CIT tax rates

At some point, the company shareholders will probably decide to pay out the income – at this moment the Estonian CIT needs to be paid. So, the Estonian CIT is paid when profits are distributed and at a different rate than standard Corporate Income Tax. For small taxpayers and for taxpayers starting a business under these rules, Estonian CIT rate is 10% and for other taxpayers it’s 20%.

But wait, isn’t CIT rates in Poland are 9% (for small taxpayers) and 19% for other companies? So how is Estonian CIT profitable?

Well, we have to look at the big picture. It should be remembered that the shareholder of the company (company that is tax payer of Corporate income tax) pays separately personal income tax (PIT) from dividends in 19% rate. The effective tax rate (CIT + PIT) under the general rules is therefore higher than the Estonian CIT rate.

Moreover, a shareholder of a company that has opted for Estonian CIT has the right to reduce the PIT (resulting from the receipt of dividends) by the relevant part of the CIT paid by the company. The effective taxation will therefore be lower than in the case of CIT and PIT under the general rules. As a result, the shareholder may save on this solution, not only if dividends are not paid, but also when the profit is actually paid out to shareholders!

Let’s see how this looks on the example (with ‘small taxpayer’ i.e. a company that has not exceeded the threshold of 2 million EUR revenue annually):

It should be noted, however, that profit distribution is understood widely – it is not only the formal payment of dividends on the basis of a shareholders’ resolution, but also any other events that produce such an effect. This refers to situations when the profit is intentionally paid out in a manner other than in the form of a dividend, e.g. when the company grants a non-refundable loan to the shareholder.

Summary

So you can easily see that Estonian CIT in Poland is a great solution for investors. It is worth noting that many favourable changes in Estonian CIT have taken place since the beginning of year 2022 (previously there was, for example, a requirement for a company to incur sufficient capital expenditures in order to qualify for Estonian CIT, which was abolished at the beginning of this year). Tax advisors therefore estimate that the number of companies benefiting from Estonian CIT will increase significantly this year.

Did the topic of Estonian CIT interest you? Do you already have a company in Poland and you are wondering what you have to do in order to apply this form of taxation? Or maybe you need help with your investment in Poland? If yes – contact us! If this article was interesting for you and you want to know more on the topic it concerned we encourage you to contact us. Specialists from our law firm in Poland, Warsaw, will  be happy to help.