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Estonian CIT from the beginning of 2021

2020-12-14

On November 30, 2020, the Journal of Laws published an amendment to the Corporate Income Tax ("CIT") Act, which means that at the beginning of the new year the regulations governing the lump sum on the income of companies, the so-called Estonian CIT, will come into force.

What will be the new institution in Polish tax law like? The Estonian CIT primarily means, above all, a lack of tax as long as the profit is retained in the company and a minimalization of settlement formalities. The tax deferral results from the fact that income is taxed not at the moment when it is earned, but only when it is used for consumption purposes.

In order to benefit from these advantages, the taxpayer will have to meet a number of conditions, among which one should mention:

  • Total turnover not exceeding PLN 100 million. There is an additional requirement of the operating revenue exceeding passive revenue. In comparison with the  proposed bill, which envisaged a maximum revenue level of PLN 50 million, the final wording of the act is more advantageous in this respect and, according to the Ministry of Finance, thanks to this, the income criterion is met by 98% of entities,
  • Employing at least 3 people on employment contracts, calculated full-time equivalent basis, who are not shareholders or stakeholders of that taxpayer, for at least 300 days in a tax year,
  • Conducting business in the form of a limited liability company or a joint-stock company whose shareholders are exclusively natural persons,
  • No shares held in the capital of another company,
  • Incurring direct expenditure for investment purposes. Its amount must be 15% in 2 consecutive tax years or 33% in 4 consecutive tax years. In the first variant, however, the outlays may not be lower than PLN 20,000, and in the second variant - PLN 50,000.

The Polish version of Estonian CIT provides for a flat rate of 15 % for the small taxpayer and 25% for others taxpayers. However, the levels of rate, which might seem unfavourable, are justified by a different tax base and the time when the tax obligation arises in contrast to the standard rules under the CIT Act. Moreover, the legislator has provided for a reduction in the tax rate to 10% for the small taxpayer and to 20% for other taxpayers, if the capital expenditure reaches 50% in the two-year period or 110% in the four-year period.

It is also worth mentioning that the new tax rules imply that the standard tax preferences functioning in the classic CIT are excluded, such as the additional deductions from the tax base of donations or qualified costs incurred in connection with research and development activity, among other things.

The lump-sum tax on the income companies is certainly a voluntary solution. If a taxpayer decides to benefit from it, he will have to submit a notification to the relevant head of the tax office by the end of the first month of the first tax year in which he is to be taxed with the lump-sum tax.

The Estonian CIT, which has both its opponents and proponents, is certainly a kind of investment relief, which, although adopted in a distinct shape compared to other European countries, may provide substantial support for many Polish businesses.

Should you be interested in further information, please contact us to discuss the details of the proposed changes in the tax regulations, which enter into force on January 1, 2021.

 

Jakub Janicki, Tax Consultant, ATA Tax Sp. z o.o.

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