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Estonian CIT in pre-consultation – only „Estonian according to the Ministry of Finance”

On the website of the Ministry of Finance, there is more and more information and preliminary introduction dates on the Estonian version of CIT, widely discussed in the media, which would enter into force at the beginning of 2021.

On July 31, 2020, the Ministry of Finance published a pre-consultation brochure, i.e. its own thoughts on possible new solutions regarding the introduction of the Lump sum on the income of capital companies. The topic concerns a huge number of companies, therefore it must be properly analyzed. The draft itself will soon appear in the List of Legislative Works of the Council of Ministers, but it should be noted that this content may still be subject to many changes.

We wrote more about the structure and benefits of this form of taxation:

In the above-mentioned The materials presented two potential solutions that cannot be combined.

The first option is a solution similar to the Estonian and neighboring countries. Binding taxable income with the categories of balance sheet law and consisting in a significant modification of the basic principles of taxation. There is a special chapter in the CIT Act devoted only to this form of taxation due to its specific nature. It is associated with many guidelines and the resignation from many discounts.

The second option for companies that do not want to use the first option is a special investment fund. It will allow you to maintain the existing allowances and, additionally, benefit from faster depreciation.

The variants are intended for start-ups, micro, small and medium-sized companies not exceeding the threshold of PLN 50 million.

Necessity to invest as a requirement

In the current form, the regulations stipulate that in order to be included in the canon of companies that can benefit from Estonian tax, a minimum of:

  • 15%, but not less than PLN 20,000 over two consecutive years
  • 33%, but not less than PLN 50,000 over four tax years,

The investment objectives are characterized and will certainly not serve the personal purposes of the company’s shareholders. These are mainly fixed assets from KŚT from groups 3-8. It can be concluded that companies investing in new technologies will not benefit from it – no intangible assets are included.

Another requirement is that the structure should be simple. Only natural persons who do not have shares in:

  • in the capital of another company,
  • participation titles in an investment fund or collective investment institution,
  • all rights and obligations in a company that is not a legal person or other property rights related to the right to receive a benefit as a founder / founder or beneficiary of a foundation, trust or other entity or a legal trust relationship.

When deciding on such a solution, you have to commit to a 4-year settlement period, something like Tax Capital Group. Same here, the right to use the lump sum is lost if the conditions are broken.

If you exceed the threshold of 50 million in revenue in a four-year cycle, you will have to add an additional tax liability.

As we read in the draft, rate of taxation of the lump sum is:

  • 15% of the tax base for smaller entities
  • 25% for larger entities

Unfortunately, the solutions presented in their current form do not have much to do with CIT as it functions in Estonia. First of all, it is the possibility of entering and leaving the lump sum system, which is already highly complicated and needs to be regulated – in Estonia, each taxpayer is settled on a flat-rate basis from above. The experts argue that by the criterion that will force development expenditure to be spent on fixed assets rather than on patents and intangible assets in general. Companies with foreign capital will not use this solution. However, it should be remembered that this is only the first project and such issues will be worked out. However, the indicated differences between the Estonian model and the „Estonian by MF” model do not inspire optimism.