A closer look at Estonian CIT in Poland
Łukasz Kosonowski of MDDP discusses the Estonian CIT and explains who is likely to benefit the most from this new form of taxation for the corporate taxpayer.
The ‘Polish Deal’ is a complex, and probably the hugest, tax reform in Poland seen for years. It has brought significant changes to the so-called Polish ‘Estonian CIT’ – a new form of taxation introduced to Polish tax law in 2021.
In short, the Estonian CIT allows corporate taxpayers to defer payment of corporate income tax (CIT) at the point of profit distribution, up to a few years. However, due to restrictive and unprecise regulations, only a few hundred entities have chosen it so far. However, this may change from 2022 as the new law not only reduces the list of requirements that need to be fulfiled in order to qualify for the Estonian CIT, but it is also more attractive compared to other forms of taxation.
The effective taxation rate of income tax (both for companies and individuals – CIT and personal income tax (PIT)) may be as low as 18.1% (in case of entities whose turnover does not exceed €2 million) or 21.2% (for other entities) - most likely the lowest possible tax rate among many different forms of business taxation in Poland. This is in line with the option to defer payment of tax up to 4.5 years.
The Estonian CIT is in principle allowed for any businesses, with one exception being a financing and crediting activity. It is particularly interesting that real estate companies are also allowed to opt for it.
The legal form is also not a problem – limited liability company, joint stock company, limited partnership or so-called ‘simple joint stock company’ (new corporate form, dedicated to new ventures and start-ups), are all eligible.
Also, the scale of the business does not matter any longer (from 2022) – small, medium as well as large entrepreneurs will be allowed to choose this taxation model. In addition, the Polish Deal also brings another awaited change – starting from 2022, the requirement to incur investments expenditure will be removed.
So, where is the catch? In fact, there are not many – but one of the most important things is to fulfil the so-called ‘simple capital structure’ criteria. This means in practice that a company may be entitled to the Estonian CIT only if its direct shareholders are individuals (not companies or other entities) and at the same time the company does not have any subsidiaries.
This certainly limits the number of eligible entities, but apart from this all other requirements should be simple to fulfil. One of the requirements is related to minimal required employment – the companies applying the Estonian CIT should employ a minimum of three employees; but even this condition may be milder in case of new companies or so-called ‘small taxpayers’ (turnover below €2 million).
While the Estonian CIT is only formally allowed for Polish tax resident companies, there are no limitations for individuals who are shareholders of such companies. Thus, it should be also considered as an investment vehicle for non-Polish tax resident individuals interested in investing or doing business in Poland.