Estonian CIT from 2022

What does Estonian CIT mean:

It is a mechanism to pay less tax on dividends under certain conditions. Using this model for companies with revenues of up to EUR 2 million per year, CIT and dividend tax will total 20%

For whom Estonian CIT:

Taxation with the Estonian CIT will be addressed to limited liability companies, joint-stock companies, simple joint-stock companies, limited partnerships and limited joint-stock partnerships from 2022. The condition will be, however, that their shareholders, partners or shareholders, are only natural persons (they can be both Polish and foreign tax residents).

 

What conditions must be met:

In order to take advantage of the Estonian CIT, the company will need to:

  1. employ at least 3 people on the basis of an employment contract (or other contract subject to ZUS) full-time for most of the tax year;
  2. for small taxpayers (up to EUR 2m of revenue) in the first year, the condition is hiring 1 employee under an employment contract;
  3. there are additional preferences for taxpayers starting their business;
  4. the company may not hold shares or stocks in other entities;
  5. the company must generate the majority of its operating income (passive income, inter alia, from receivables, interest, sureties and guarantees cannot constitute more than 50% of income);
  6. the company may not prepare financial statements in accordance with the International Accounting Standards.

 

When to report to an Estonian CIT:

From 2022, it will be possible to enter the Estonian CIT settlement model during the fiscal year.

Pursuant to the new regulations, the company will not pay the tax until the profit is paid to the partner. In this case, the lump sum (Estonian CIT paid by the company) will be:

  • 10% for small taxpayers
  • A taxpayer who wants to leave the lump sum taxation regime (with Estonian CIT) and will not pay out the profit will not be obliged to pay the tax – the tax will be payable only on the date of the actual profit distribution.

 

An example of a large taxpayer paying 19% CIT

Estonian CIT (large taxpayer) Classic CIT (large taxpayer)
Taxation of the company Taxation of the company
taxable profit – 1 000 000 taxable profit – 1 000 000
Estonian CIT (20%) – 200 000 CIT tax (19%) – 190 000
profit to be paid  – 810 000
Taxation of a partner – dividends Taxation of a partner – dividends
paid profit – 1 000 0000 paid profit – 810 000
dividend tax (19%) – 190 000 dividend tax – 153 900
tax reduction (70%) – 140 000
tax on dividends after reduction – 50 000 Total tax – 343 900 (34,39%)
Total tax – 250 000 (25%)

 

When you lose your right to tax your Estonian CIT:

You will lose the right to tax with a flat rate on company income in the event of:

  1. submitting information on resignation from flat rate taxation
  2. failure to meet any of the conditions for taxation of Estonian CIT
  3. not keeping tax books or keeping them in a way that does not allow to determine the net financial result within the meaning of the Accounting Act
  1. the acquisition of another entity by merger or division of entities or receiving an in-kind contribution in the form of an enterprise or its organized part, not taxed with a lump sum.
  2. If you lose your right to lump-sum taxation, you may choose these rules again 36 months after the calendar year in which the loss occurred.

 

What is subject to Estonian CIT taxation

Lump sum tax on companies’ income is subject to income determined as:

1.net profit earned in the period of lump-sum taxation in the part in which it was intended for payment to shareholders or partners (income from distributed profit) or to cover losses incurred in the period preceding the period of lump-sum taxation (income from profit intended to cover losses) )

2.hidden profits in the form of pecuniary, non-pecuniary, paid, free or partially payable benefits, made for the benefit of shareholders, partners or entities directly or indirectly related to them, in particular:

  1. a) the amount of loans granted by the company to a shareholder, shareholder or partner together with interest, commissions, remuneration and fees on these loans
  2. b) services provided by the company for a private or family foundation
  3. c) the excess of the market value of the controlled transaction above the agreed transaction price
  1. d) the surplus of the amount of the additional payment returned to the company in accordance with separate regulations, over the amount of the additional payment
  2. e) remuneration paid from the profit for the redemption of shares (shares) or the reduction of the value of the share (shares), from the partner’s withdrawal from the company, from the reduction of the shareholder’s share in the companies value of the profit intended for increasing the share capital
  3. f) donations, including gifts and offerings of all kinds
  4. g) representation expenses
  5. h) the amount of non-business related expenses
  6. i) surplus of the market value of the assets being taken over or contributed in kind over the tax value of these assets (income from changes in the value of assets) – in the case of mergers, divisions, transformations of entities or contribution by in-kind contribution of the enterprise or its organized part
  7. j) the sum of net profits achieved in each tax year of applying lump-sum taxation in the part in which these profits were not distributed profits or were not intended to cover the loss (income from net profit) – in the case of a taxpayer who ended lump-sum taxation
  8. k) the value of revenues and costs subject to accounting in the tax year and inclusion in the net profit (loss) in accordance with the accounting regulations, which were not included in the net profit (loss) (income from undisclosed business operations)
  9. l) surcharges paid in the event of a merger or division of entities
  10. m) interest on capital participation, paid to a shareholder by the company
  11. n) profit intended to supplement the capital share of a partner in the company
  12. o) cash and non-cash benefits paid in the event of a reduction in the shareholder’s capital share in the company.

 

How much is the Estonian CIT

The lump sum on income is paid when the profit is paid and in a different amount than the standard CIT.

For small taxpayers and for taxpayers starting business activity on these principles, it is 10% of the tax base. In the case of other taxpayers, it is 20% of the tax base.

The tax base is:

  1. total of income from distributed profit and income from profit intended to cover losses – determined in the month in which the resolution on the division or coverage of the net financial result was adopted
  2. total income from hidden profits and income from expenses not related to business activity – determined in the month in which the benefit was provided or the payment was made or the expense was made
  3. income from changes in the value of assets – achieved in the month in which the merger, division, transformation of entities or in-kind contribution took place
  4. net profit income – achieved in the tax year in which lump-sum taxation was completed.

 

When you settle and pay Estonian CIT

By the end of the third month of the tax year, the taxpayer must submit a declaration of the amount of income obtained for the previous tax year. The declaration is submitted to the tax office electronically – on the CIT-8E form.

The declaration is informative – the tax is paid regardless of the submission of the declaration, and the payment date depends on the subject of taxation of Estonian CIT:

  1. lump sum on income from distributed profit and income from profit intended to cover losses should be paid by the 20th day of the seventh month of the tax year
  2. lump sum on the distributed income from net profit should be paid by the 20th day of the month following the month in which the income was paid in full or in part or it was distributed in any other form, no later than by the 20th day of the seventh month of the year tax, in which this disposition was made
  3. lump sum on income from undisclosed business transactions should be paid by the end of the third month of the tax year following the year in which the income or expenses should be accrued
  4. lump sum on income from hidden profits and income from non-business related expenses must be paid by the 20th day of the month following the month in which the payment or expense was made or the benefit was provided
  5. the lump sum on the income due to the change in the value of the assets should be paid by the 20th day of the month following the takeover, transformation or in-kind contribution.

 

How is the partner’s dividend taxed

Tax on dividend payment from a company taxed with Estonian CIT is paid on preferential terms, i.e. it is reduced by:

  1. 90% of the amount of tax due to the partnership per shareholder – in the case of a payment from a small taxpayer company
  2. 70% of the amount of tax due to the partnership per shareholder – in the case of a payment from a non-small taxpayer company.
Estonian CIT from 2022


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