Is it possible to enter Estonian CIT during the year?

The answer to this question is yes — the legislator has provided for this possibility, although its implementation is subject to a number of formal and procedural requirements. Below are the key points that a business owner should bear in mind when planning to switch to the flat-rate scheme during the tax year.

Conditions for opting for the Estonian flat-rate CIT

The basic condition for opting for the flat-rate scheme is meeting the subjective and objective criteria set out in tax legislation. In principle, capital companies whose shareholders are exclusively natural persons who do not hold shares in other capital companies are eligible. The company’s activities must be of an operational nature, and the share of passive income (including from receivables, interest, copyright or financial instruments) must not exceed 50% of total revenue.

Additionally, the company is required to meet employment requirements. The regulations provide for the possibility of exemption from this obligation during the initial period of operation; however, as the years progress, the legislator imposes an obligation to gradually increase employment. For small taxpayers, in the first year of applying the flat-rate scheme, it is sufficient to employ at least one person or to incur relevant employment-related expenses.

Procedure for changing taxation during the year

A taxpayer intending to opt for the Estonian CIT during the tax year must take into account additional procedural obligations. Firstly, it is necessary to finalise accounts under the previous taxation method (classic CIT) by the end of the month preceding the month in which the flat-rate scheme is to be applied.

A further requirement is to close the accounts as at the end of the month preceding the start of the new taxation system and to prepare financial statements as at that date. This step is crucial for correctly determining the tax base and ensuring compliance with statutory requirements.

The taxpayer is then required to submit a ZAW-RD notification to the competent head of the tax office. This notification must be submitted no later than by the end of the first month of the first tax year in which the taxpayer intends to apply the flat-rate scheme. In the event of a change during the year, the first tax year is deemed to be the part of the year from the start of the application of the lump-sum scheme until the end of the relevant tax year.

It should be emphasised that failure to fulfil any of the above obligations, in particular failure to meet the deadline for closing the books and preparing the financial statements, renders the notification invalid. Consequently, the taxpayer will not be able to apply the Estonian CIT in the chosen tax year.

Conclusions

Switching to the Estonian CIT regime during the tax year is legally permissible, but it entails the need to fulfil a number of substantive and formal conditions. This process requires particular care in complying with statutory deadlines and in the proper preparation of financial documentation.

Entrepreneurs planning to change their tax regime during the year should therefore carefully analyse their tax and legal situation and take the necessary organisational steps in good time. Proper preparation and meticulous execution of the procedure will enable the effective and lawful implementation of the Estonian CIT, and thus allow them to benefit from its potential tax advantages.

Do you need advice on tax planning or other tax law matters? Contact our firm!

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.

View profile →