Estonian CIT what is it and who is entitled to it?

What are the key features of the Estonian CIT?

1. Deferred taxation of distributed profits:

Tax is only levied at the time of profit distribution, e.g. in the form of dividends. This means that profits reinvested in the business are not subject to taxation, which encourages capital accumulation and company growth

2. Lower tax rates:

• • for small taxpayers and new companies, the rate is 20% (CIT + PIT), whilst under general rules it reaches 26.29%.
  • for larger taxpayers, it is 25% compared to 34.39%.

3. Minimisation of administrative obligations:

Estonian CIT eliminates the need to maintain separate tax accounts. The company operates in accordance with accounting regulations, which saves time and reduces administrative costs.

4. Improved cash flow:

The absence of a requirement to pay advance tax payments allows the company to retain more funds, which can be allocated to current operating expenses or investments.

Conditions for using the Estonian CIT

Companies wishing to use this taxation model must meet the following criteria:

• Sources of revenue:

Over 50% of revenue must come from operating activities, rather than passive activities such as receivables, interest and income from loans of any kind, the interest portion of lease payments, sureties and guarantees, copyright or industrial property rights (including from the sale of such rights), from transactions with related parties, where no economic value is added in connection with such transactions or where such value is negligible

• Form of business:

Joint-stock companies, limited liability companies, simple joint-stock companies, limited partnerships and limited joint-stock partnerships.

• Simple ownership structure:

Only natural persons may be shareholders, and the company may not hold shares in other entities.

• Employment:

A minimum of three employees employed under an employment contract or on the basis of civil law contracts (in this case, an additional criterion applies regarding the amount of remuneration paid, which must be at least three times the average monthly remuneration in the enterprise sector for remuneration paid to persons employed under a contract other than an employment contract). However, shareholders and partners of the company are not included in the above limit.

• Non-application of IAS

The taxpayer does not prepare financial statements in accordance with IAS for the period subject to lump-sum taxation pursuant to Article 45(1a) and (1b) of the Accounting Act.

• Notification

A formal requirement for opting for the Estonian CIT is the submission of a notification of the choice of this form of taxation, in accordance with the prescribed form, to the competent head of the tax office by the end of the first month of the first tax year in which the flat-rate tax is to be applied.

Importantly, there are also a number of entities excluded from the possibility of using this form of taxation, such as financial enterprises, lending institutions, those benefiting from CIT zone exemptions, those placed in bankruptcy or liquidation, and taxpayers established as a result of various types of transformations and reorganisations (e.g. mergers, divisions, contributions in kind – including enterprises or organised parts of enterprises), as well as those who participated in such activities.

Estonian CIT – key information

Estonian CIT is an advantageous solution for entrepreneurs planning to reinvest profits and expand their business. Thanks to simplified rules, lower tax rates and financial liquidity support, this model can be an optimal form of taxation, particularly for small and medium-sized enterprises. However, the decision to switch to Estonian CIT should be preceded by an analysis of the company’s individual needs and capabilities. If you require support or advice on the subject of Estonian CIT, please contact HWW Hewelt Wojnowski Lindner & Partners.

Author

Piotr Magda

Radca prawny, Senior Associate

The practice includes ongoing advice on administrative and tax law. He has extensive experience in handling judicial, administrative, tax and judicial-administrative proceedings concerning both individual clients and business entities, including that gained through many years of providing services to local government units and other units of the public finance sector.

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