Starting from 2021, the possibility of tax-free reinvestment of the earned income, the so-called Estonian CIT will be introduced into the Polish tax system. Recently, a draft law initiating the changes has been published, which allows us to learn details of the adopted solution.
What is the Estonian CIT
The basic assumption of Estonian CIT (in the amending law called "lump sum") is to postpone the payment of tax only at the moment of the distribution of profit by a capital company. Thus, even though the company achieves income, it does not pay tax advances and does not pay them after the end of the tax year as long as it does not transfer the profit to its shareholders (e.g. in the form of a dividend).
The system supports the reinvestment of profits, and the absence of the need to calculate the tax due on an ongoing basis allows for simplification in the records kept for tax purposes. The financial accounting of the taxpayer should be sufficient to calculate the lump sum tax.
The Estonian CIT will be voluntary
The Estonian CIT will only be an alternative to the current CIT regulations and it is the taxpayer who will decide whether they will use the proposed solutions. If such a choice is made appropriate notification will need to be submitted to the head of the tax office.
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The taxpayer's choice should be carefully thought out, as the use of Estonian CIT no longer allows the use of the allowances and settlements provided for in the CIT law (e.g. allowances for research and development activities, or deductions from the tax base for donations made). It should also be kept in mind that the choice of an alternative tax method will be binding on taxpayers for the next four tax years. Moreover, a taxpayer who, in the years preceding the first year of application of the Estonian CIT, achieved a tax loss will, as a rule, lose the right to deduct it. However, if the taxpayer terminates the lump sum taxation before the end of four years, the loss may be deducted (under certain conditions).
Who will be able to use the Estonian CIT
The possibility of using Estonian CIT will be subject to a number of conditions. The lump sum is addressed to micro, small and partially also medium-sized enterprises, as well as start-ups. The law, however, introduces restrictions which will exclude entities which, despite the relatively small size of their business, undertake activities not approved by the legislator, e.g. create extensive structures, do not conduct real business activities, carry out restructuring, etc. from the Estonian CIT.
In simple terms, meeting the following combination of conditions will be required in order to be able to apply the Estonian CIT:
- the total revenue generated in the previous tax year may not exceed PLN 50 million (calculated including the amount of VAT due),
- within the structure of these revenues, the so-called passive revenues (e.g. from interest, guarantees, exercise of rights from financial instruments) must be less than 50%,
- the average employment is at least three employees employed on a full-time basis (note: the stakeholders or shareholders of the taxpayer are not included),
- the business is conducted in the form of a limited liability company or a joint stock company whose shareholders are exclusively natural persons,
- the taxpayer does not hold shares or stocks in the capital of another company,
- The taxpayer does not prepare financial statements in accordance with IFRS.
Entities starting their business activity will be exempt from the obligation to meet certain conditions (in the first tax year no income limit will be taken into account, the employment level requirement will be treated more leniently).
Regardless of meeting the above conditions, a number of restrictions of a subjective nature are also provided for. The new regulations will not be available to financial enterprises, loan institutions, companies operating in SEZ/Polish Investment Zone (PSI), companies in bankruptcy or liquidation and entities that have undertaken certain restructuring processes.
A special requirement imposed on taxpayers using the new regulations will be the obligation to bear direct investment expenditures. They will have to reach a fixed percentage of the initial value of fixed assets classified in groups 3-8 of the Classification.
These limits are set:
- 15% (but not less than PLN 20 thousand) over two consecutive tax years, or
- 33% (but not less than PLN 50 thousand) over four fiscal years.
The reference value for determining the increase in investment expenditures is the initial value of fixed assets established on the last day of the tax year preceding the two-year or four-year lump sum taxation period respectively.
Investment expenditure includes expenditures on the purchase of brand new fixed assets or the production of fixed assets, and in special cases, also the fees established in lease and rental agreements (excluding the operating lease agreement, in the part constituting the repayment of the initial value of the fixed assets). Investment expenditures will not include passenger cars, selected means of transport and other assets serving mainly personal purposes of the shareholders or their family members.
Subject of taxation, tax rates, payment deadline
The subject of taxation in the Estonian system is the effective distribution of profit from a capital company to its shareholder. However, the provisions are not only limited to the taxation of dividends. The legislator has sealed the system by introducing a wide range of taxations to prevent the hidden distribution of profit to shareholders (e.g. in the form of donations to shareholders).
The following income categories will be subject to the Estonian CIT:
- on account of the distributed profit, in particular the payment of a dividend or an advance payment of the dividend (net profit earned during the period of taxation with the Estonian CIT in the part in which it was allocated for payment or the coverage of loss),
- hidden profits (benefits provided to stakeholders, shareholders and related entities, with exclusions, e.g., remuneration for work, as long as it does not exceed five times the average remuneration),
- profit designated for loss coverage (if these losses occurred in the period preceding the Estonian CIT),
- expenses not related to the taxpayer's business activity,
- income from changes in the value of assets (resulting from selected restructuring transactions),
- income from undisclosed business operations (values of revenues and costs subject to the Accounting Law in the tax year and included in the net profit (loss), which were not included in this net profit (loss)).
In addition, in the case of taxpayers who have ceased to apply the Estonian CIT, the income determined in the amount of the sum of net profit will also be taxed, in the part in which the profit was not previously (during the period of application of the Estonian CIT) a distributed profit or was not allocated for loss coverage.
The amount of tax paid under the Estonian CIT will be as follows:
- 15% (for small taxpayers) and
- 25% (for other taxpayers);
- in special cases, the rate may be reduced by 5% (if the taxpayer makes a larger investment).
The rates of 15% for a small taxpayer and 25% for a taxpayer other than the small taxpayer are 6 percentage points higher than the current standard CIT rates (9% and 19% respectively). Therefore, Estonian CIT is primarily a preference for the moment of showing taxable income and simplifying records, rather than reducing the amount of tax paid.
The deadline for paying the tax will vary depending on the category of taxable income:
- on account of the distributed profit and income on account of the profit intended for loss coverage - by the 20th day of the seventh month of the tax year;
- on account of net profit - by the end of the third month of the tax year following the last year of taxation a lump sum;
- on account of undisclosed business operations - by the end of the third month of the tax year following the year in which revenues or costs should be booked;
- on account of hidden profits and income not related to the conducted activity - by the 20th day of the month following the month in which the payment or expense was made;
- on account of a change in the value of the components - by the 20th day of the month following the month of acquisition, transformation or contribution in kind.
Renouncement of the Estonian CIT
The choice of taxation with Estonian CIT will be binding on the taxpayer for four tax years. If the statutory conditions are met, it will be possible to continue accounting under this regime also in subsequent periods. Resigning from further use of Estonian CIT, provided that the tax authority is notified about it in the annual tax return will be allowed.
In the event of the violation of the terms and conditions of use of the preferences, the taxpayer may also lose the right to use them during the four-year period. However, if it concerns the achievement of revenues exceeding the statutory limit, it will be possible to maintain the current settlement method, although there will be a surplus of tax liability.
In the event of losing the right to preferential taxation, the taxpayer may submit a new notification of the choice of the Estonian CIT after three tax years.
"Simplified" Estonian CIT
Taxpayers will also be able to opt for a simplified "partial" model, based on a special investment account. By choosing this option, entities will continue to pay CIT under the existing rules (as well as benefit from most of the reliefs provided for in the CIT law), but will gain additional preference, i.e. the possibility of faster settlement of investment expenditures. It should be remembered that the use of this preference is conditional on meeting the same conditions as in the case of the "full" Estonian CIT.
In its basic assumption, the "simplified" Estonian CIT will consist in the right to include the write-offs for a fund created for investment purposes, which is separated in the taxpayer's reserve capital, as tax costs.
Write-offs should correspond to the value of the company's profit (or part thereof) achieved for the year preceding a given tax year and the equivalent of the cash actually paid into a dedicated account. A dedicated account should be maintained with Bank Gospodarstwa Krajowego (BGK) bank or another bank, if that bank has a cooperation agreement concluded with BGK. Moreover, the write-offs must constitute an economic/actual cost for the taxpayer (the funds cannot come from a loan, credit, grant, subsidy or other forms of financial support) and the funds must be used for investments.
Date of entry into force
According to the draft bill, the provisions of the law are to enter into force on 1 January 2021. This means that taxpayers whose tax year coincides with the calendar year will be able to apply the Estonian CIT on income earned from the beginning of the upcoming year.
Taxpayers whose tax year is different from the calendar year and started before 1 January 2021 and will end after 31 December 2020 may benefit from the new preference starting from the first tax year starting after 1 January 2021.
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