Estonian CIT, which is a term commonly used to describe a lump sum on the income of capital companies, is a relatively new solution because it has been functioning in the Polish tax law since 1stJanuary 2021.
However, a great amount of conditions and restrictions associated with a possibility to use this solution, resulted in a fact that it hasn’t become very popular and it’s been clear that it was necessary to introduce some amendments, which entered into force on 1stJanuary 2022. A purpose of these amendments is, above all, to simplify this instrument, which will result in making this form of taxation more attractive for entrepreneurs. Some of those conditions will remain unchanged. They include, among others, requirement that only natural persons can be company’s partners, or that the company may not hold shares in other companies. Requirements concerning a number of employees must also be met.
One of more significant changes concerns entities, which will be entitled to benefit from this form of taxation. Until now, only capital companies had a chance to use so called Estonian CIT. With the entry into force of those amendments, this solution becomes available for limited partnerships, limited joint-stock partnerships and a simple joint-stock company. Another simplification concerns abolishing the limit of an annual income, which, till the end of 2021, amounted to 100 mln PLN. Therefore, medium and big companies belonging to individuals, will be able to benefit from this form of taxation. A condition, according to which taxpayers were obliged to keep their investment costs or expenditure on salaries at a certain level, has been erased. Also, an important change concerns lowering a lump sum rates, which, under the new legislation, amounts to 10% for small taxpayers and 20% for others. Company will pay the tax only at the time of profit distribution to an associate. It may contribute to increase company’s financial liquidity, as well as its investment abilities. In terms of profit distribution, tax will also have to be paid by a partner himself. However, it will be deducted adequately by 90% or 70% of the tax that has been already paid by the company. It is worth mentioning, that by transitioning into a lump sum, company won’t be able to be subject to, so called minimum income tax, which might be beneficial for those companies that have been covered by this obligation. This solution appears to be opportune for entrepreneurs also due to lack of obligation to pay the tax in case of reinvestment of generated income. The lump sum on the income might appear to be attractive for those individual entrepreneurs, due to an increase in liabilities concerning health insurance contributions, who are considering a change in the form of their business.