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Estonian CIT in a nutshell

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Preliminary consultations are under way regarding the introduction of new, optional tax rules into the CIT Act. The draft provides for two alternative variants: the Flat Rate Tax on company income, modelled after the solutions adopted in Estonia and therefore nicknamed the Estonian CIT, and the Investment Fund, modelled after the German investment reserve. Below, we present the key provisions of the Flat Rate Tax.

Catalogue of eligible taxpayers

  • micro, small and partly medium-sized enterprises, operating as limited liability companies (sp. z o.o.) or joint-stock companies (S.A.) whose shares are held exclusively by natural persons,
  • the entities must not hold shares in other companies, or the entirety of the rights and obligations in a partnership,
  • the overall revenue from operations (including VAT) may not exceed PLN 50 million,
  • passive income may not account for 50% or more of revenues,
  • headcount – at least three employees,
  • all of the above criteria must be met cumulatively.

Temporary limitation

Entities involved in divisions, consolidations and transactions involving contributions in kind in the form of an enterprise or an organised part thereof will become eligible for the Flat Rate Tax at the earliest in the second tax year after commencing operations resulting from these events.

Adopting the Flat Rate Tax

The Flat Rate Tax represents a departure from the taxation of income, understood as the difference between revenues and tax deductible costs, which is replaced by a tax on profit distribution.

Prior to adopting the Flat Rate Tax, the previous CIT settlements must be aligned with system requirements, so that the tax base reflects items which would otherwise remain untaxed and those which could be subject to double taxation.

The taxpayer should:

  • include in taxable revenues those items of revenue which had been regarded as non-taxable under the CIT Act, and the costs included in tax deductible costs but not recognised in profit or loss.
  • include in tax deductible costs those items of revenue which had been regarded as taxable under the CIT Act, but not recognised in profit or loss, and the costs not included in tax deductible costs but recognised in profit or loss.
  • determine the total amount of profits undistributed in previous years and uncovered losses, and recognise them as a separate balance sheet item, in taxpayer’s equity.
  • taxpayers arising as a result of a conversion of the enterprise of a natural person or an unincorporated body, whose first year following the conversion is at the same time the first year of applying the Flat Rate Tax, will be obliged to determine the income from such a conversion.

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Requirement of investment outlay

To be eligible for the Flat Rate Tax, the company must systematically increase its tangible assets by producing or acquiring new physical assets classified under groups 3-8 (excluding cars, yachts and aeroplanes) worth:

  • 15%, no less than PLN 20,000 over two years, or
  • 33%, no less than PLN 50,000 over four years,

When applying the Flat Rate Tax, the taxpayer is not eligible for:

  • deducting donations,
  • R&D and IP Box tax relief,
  • bad debt relief,
  • carrying forward losses from a prior year.

The new tax regime is to be adopted for four-year periods, with an option to continue in the subsequent 4 years.

What income will be subject to the Flat Rate Tax?

The Flat Rate Tax will be applicable to:

  • income from profit distributions,
  • income from profit allocated to cover losses, if these losses arose in the period preceding the application of the Flat Rate Tax,
  • income from hidden profit distributions (including e.g. business entertainment expenses),
  • income from expenses unrelated to business operations,
  • income from asset revaluation,
  • income from undisclosed business transaction,
  • for taxpayers who ended the application of the Flat Rate Tax – income determined as total net profit generated in each tax year of application, in the part that such profits had not been (during the period of application of the Flat Rate Tax) distributed to shareholders or allocated to cover losses.

The Flat Rate Tax can be applied only to profits generated during the period of application of the Tax, also if they are allocated to cover losses originating before that period.

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What is the tax base?

The tax base will include:

  • income from profit distributions, including those allocated to cover losses,
  • income from hidden profit distributions and expenses unrelated to business operations,
  • income from asset revaluation in the case of restructuring measures,
  • income from net profit.

Tax rate:

  • 15% of the tax base for those qualifying as small taxpayers
  • 25% of the tax base for other taxpayers

The amount of tax will be reduced by 5% for taxpayers who have made significant investment outlays (50% over 2 years, 110% over 4 years).

If the taxpayer’s revenues exceed the PLN 50 million cap, the taxpayer will be able to continue with this form of taxation, with a condition that all income generated in the following tax year will be subject to additional taxation at 5% of the tax base.

Two-tier taxation will still apply:

  • CIT flat rate tax when the company distributes profits, and
  • PIT from individuals on dividends.

However, it will be possible to deduct from PIT a portion of the tax paid at the company level (CIT), so as to achieve total taxation at:

  • 25% for small taxpayers (which can be reduced by 5% for significant investment outlays)
  • 30% for the others (which can be reduced by 5%).

Eligibility for the Flat Rate Tax will be forfeited due to:

  • submitting notification of withdrawal from the Flat Rate Tax scheme,
  • lack of investment outlay on the part of the taxpayer in the required amount,
  • failure to meet the requirements related to the average headcount,
  • discontinuation of bookkeeping by the taxpayer,
  • acquisition of another entity by way of consolidation or division of entities, or contribution in kind,
  • acquisition by another entity by way of consolidation or division of entities.

Having lost the eligibility for the Flat Rate Tax, the taxpayer may submit another notification about the adoption of this form of taxation after 3 tax years have passed.

The preliminary draft of amendments to the CIT Act has been published on the website of the Ministry of Finance and may be subject to changes in the course of the legislative process. The proposed solutions are anticipated to come into effect as of 01 January 2021.

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