As of 1 January 2022, we have a new launch of the Flat-Rate Income Tax on corporate income commonly referred to as the "Estonian CIT". The new, loosened and significantly simplified rules on Estonian CIT make it an extremely attractive form of taxation. From 2022 onwards, almost every entrepreneur should check if this would not be the best form of taxation for their business.
What are the advantages of Estonian CIT?
Companies subject to Estonian CIT do not pay tax, ... until the profits earned are paid out. As long as the partners retain the profit in the company, there is no advance tax or tax itself. Without any additional conditions for making investments from the profit generated! Of course, there is a not-so-small print with exceptions, but we will discuss that later on. The benefit of switching to Estonian CIT is the improvement of the taxpayer's cash flow. Instead of paying the tax immediately, the amount of CIT remains in circulation - this is up to 19% more! In practice, the partners themselves decide when to pay the tax. This is important in these uncertain times. But are there more benefits?How much tax will I end up paying?
The withdrawal of profit generated under Estonian CIT or using it to cover losses made before the switch to Estonian CIT generates a tax liability. Together the total tax, i.e. CIT and PIT on dividends, will be 20% for small taxpayers and 25% for others. Comparing this to the general principles, in simple terms:- small taxpayer gains 6.29% of tax - as it will pay a total of 20% tax instead of an effective tax of 26.29% (9% CIT + 19% PIT on dividends),
- other taxpayers gain 9.39% of tax - they will pay a total of 25% instead of an effective tax of 34.39% (19% CIT + 19% PIT on dividends), and potentially only on part of the profit (the part to be distributed), not the whole amount.
How to calculate Estonian CIT?
for small taxpayers - the deduction will be 90% of "Estonian CIT", the others will deduct 70% of "Estonian CIT".
After deductions, the effective tax rate for small taxpayers will be 20% and 25% for large taxpayers (according to the official position of the Ministry of Finance, although, in our view, the legislation allows for a calculation giving even lower effective tax rates).
Extra burdens - dear entrepreneur, mind the details with Estonian CIT!
The new legislation on Estonian CIT contains several categories other than profit that create an additional tax liability.These include disguised profits, i.e. any benefits other than profit received by shareholders or related parties. For example, a loan from the company to a shareholder will be a disguised profit in terms of the loan capital. In contrast, the shareholder's loan to the company will be a disguised profit in terms of the interest paid by the company. A disguised profit will also be, for example, the appropriation of profit to increase the company's share capital.
Another extra "benefit" associated with the transition to Estonian CIT is the difference between the company's accounting and tax result as determined at the time of commencement of the use of Estonian CIT, as well as the difference between the book and tax value of the company's assets if the company was formed as a result of the conversion. However, these additional tax burdens will not materialise in every case.
Who can switch to the Estonian CIT settlement model and when?
It is best to switch to the "Estonian CIT" from 1 January of a given year. To do so, a declaration must be filed with the Tax Office by 31 January stating that this form of taxation has been chosen. It is also possible to switch to CIT during the calendar year.
In practice, all CIT taxpayers can choose Estonian CIT, as long as they have a simple structure. That is, only natural persons may be shareholders in companies subject to Estonian CIT, and such companies may not hold shares or stocks in other capital or partnership companies.
Companies subject to Estonian CIT must conduct operations. No more than 49% of their income can be passive (from receivables, interest, sureties, copyrights).
It is also necessary to meet a minimum level of employment - quite meticulously specified, but the basic rule is 3 FTEs (or another contract for which the company is a payer of Social Security). The requirement for employment had been softened with regard to:
- small taxpayers, in the first year of flat-rate taxation - to 1 employee,
- taxpayers commencing their activities - exempt from the obligation to provide minimum employment in the year of commencement and in the following 2 tax years.
Unfortunately, companies that have participated in demerger, merger, or contribution-in-kind transactions in the year of the transaction and the following tax year cannot choose to be taxed under Estonian CIT.
Specialists at Skłodowscy Tax Consulting Company are here to provide you with professional tax advice!
Skłodowscy Tax Consulting Company offers comprehensive tax advisory services. Our team consists of experienced professionals who are able to provide high quality tax optimisation services and advice. We help our clients solve tax problems, such as calculating taxes, preparing submissions, and filing tax documents. Our specialists will help you choose the right strategy to optimise your taxes and avoid tax problems. We will analyse your case and suggest whether the Estonian CIT settlement model is a good solution for you. We also have a broad understanding of changes in tax and legal regulations and can provide you with updates and advice on new regulations. We guarantee full commitment, flexibility, and competitive prices for our services. We look forward to working with you.