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Estonian CIT has existed in Poland for more than four years. How does it work, and is it still an attractive alternative to traditional income taxation for CIT taxpayers? Here are the essential facts for 2025!
What is Estonian CIT and how does it work?
The lump-sum tax on corporate income, commonly called Estonian CIT, is a method of taxing CIT taxpayers' income introduced in 2021, based on Estonia's model, widely regarded as simple, transparent and supportive of investment.
The main idea is no need to pay CIT on an ongoing basis. Under the corporate income lump-sum regime, CIT becomes payable only when company profit is distributed to shareholders, as a dividend or an advance dividend, or used to cover a loss incurred before the lump-sum tax period. Tax is also payable on so-called hidden profits.
Thus, as long as the company reinvests its profits or simply retains them without distribution, no tax needs to be paid.
This offers considerable simplification and growth with fewer formalities and charges. It extends to accounting too: Estonian CIT means no need for complex tax accounting, calculating tax costs or depreciation and the possibility of preferential taxation. The lump-sum rates are 10% for small taxpayers and 20% for others, with effective tax rates of 20% and 25%, respectively, instead of over 26% and 34% under general rules. These preferences result from a further relief allowing CIT paid by the company to be deducted from the tax due on distributed profits.
Under Article 30a(19) of the PIT Act, the flat-rate tax on a shareholder's receipts from distributed company profits earned during the lump-sum taxation period, provided the distribution comes from that period's profits separately identified in company equity, is reduced by:
- 90% of the amount equal to the shareholder's percentage share of company profit, measured when the right to the distribution arises, multiplied by the lump-sum tax due on the distributed profit giving rise to the receipt, if it is paid from profits of a small taxpayer or a taxpayer starting operations; or
- 70% of that amount, likewise calculated as the percentage share of profit when the right to payment arises times the lump-sum tax due on the distributed profit, where the company is neither a small taxpayer nor a taxpayer starting operations.
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Estonian CIT conditions: who may use it?
Estonian CIT is voluntary and available to limited liability companies, joint-stock companies, simple joint-stock companies, limited partnerships and limited joint-stock partnerships. Moving to the regime requires meeting Article 28j of the CIT Act, namely:
- Passive income must be less than 50% of revenue, including revenue from:
- receivables,
- interest and benefits from all kinds of loans,
- the interest component of lease instalments,
- sureties and guarantees,
- copyright or industrial property rights,
- sale and exercise of rights in financial instruments,
- transactions with related parties where the economic added value arising from the transactions is negligible or is generated;
- Employing at least three full-time equivalents, excluding shareholders and partners, under employment contracts for at least 300 days in a tax year, or at least 82% of days if the year is not twelve consecutive calendar months. Alternatively, incurring monthly remuneration expenditure of at least three times the average monthly wage in the enterprise sector for at least three individuals, excluding shareholders and partners, engaged under other contracts, where the taxpayer withholds their personal income tax or social or health contributions;
- Operating as one of the specified companies whose shareholders or partners are exclusively individuals without property rights to benefits as founders or beneficiaries of foundations, trusts or similar fiduciary entities or relationships, except founders and beneficiaries of family foundations;
- Holding no shares in other companies, participation units in investment funds or collective investment institutions, general rights and obligations in a partnership without legal personality, or other property rights to benefits as a founder or beneficiary of a foundation, trust or similar fiduciary relationship;
- Not preparing financial statements under International Accounting Standards during the lump-sum period;
- Filing the prescribed notice electing lump-sum taxation with the competent head of the tax office by the applicable deadline.
Estonian CIT in 2025: has anything changed?
Estonian CIT is becoming more popular among Polish companies every year. Suggestions periodically arise for changes to make it clearer, resolve interpretative doubts, organise it and adapt it to current economic and legal realities.
Although the Council of Ministers' legislative work list mentioned amendments to income tax laws in the last quarter of the previous year, no changes affecting Estonian CIT ultimately took effect at the start of 2025.
There is still much discussion about potentially extending the definition of hidden profits subject to Estonian CIT to include, among other things, all payments to related parties. Ending the lower 10% rate for small taxpayers is also under consideration.
Those changes, which could substantially reduce its profitability, may eventually arrive. For now, however, Estonian CIT remains a very interesting alternative to general corporate income tax rules.
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Summary
Interested in today's simplifications and preferences under Estonian CIT? Read the other articles on our blog about this topic.
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