The Finance Ministry has published a questionnaire for entrepreneurs allowing them to check whether they are eligible for the “Estonian CIT”, which is due to take effect in Poland from next year. What should You know about this tax solution?
Summary:
- The Finance Ministry has published a questionnaire for entrepreneurs allowing them to check whether they are eligible for the "Estonian CIT", which is due to take effect in Poland from next year. What should You know about this tax solution?
- If the Estonian CIT is a tax credit.
- Whether the Estonian tax model was beneficial to their economy.
- Where to find the Ministry of Finance questionnaire for the initial verification of whether an entity is eligible for entry into Estonian CIT taxation.
Prime Minister Mateusz Morawiecki, during a meeting conducted by Academic Entrepreneurship Incubators at the National PGE in Warsaw in June this year, gave further details on the so-called Estonian CIT, which “is intended to serve Polish companies, strengthen Polish capital and the middle class”. What do these changes mean? To summaries, as the Prime Minister explained, a company with up to PLN 50 million in turnover (…) will not have to pay CIT tax until it begins to draw profits from it. As Deputy Finance Minister Jan Sarnowski explained on Polish Radio 1 Programme, it is an incentive for business owners to invest (at the expense of consumption of profits by owners or shareholders of companies), especially for those entities that have had difficulties in obtaining credit in the past.
What exactly is Estonian CIT supposed to do?
The Estonian model assumes that the company is obligated to pay the CIT tax not on the profit it has made in a given year, but only when it decides to withdraw it in the form of, for example, dividends. In practice, this means that as long as the money remains in the company – i.e. is reinvested in subsequent development projects – no CIT tax payment is required. It must be paid only when the owner decides to use the assets earned in the company, e.g. to finance a completely new business venture, or simply to cover dividend payments. The companies that will benefit from the Estonian model will not pay monthly or quarterly CIT payments, nor will they be required to submit annual accounts for the period during which their profits will be invested in their own development.
Important
As Dariusz Bednarski, managing partner of Grant Thornton has noticed, the Estonian Prime Ministers’ planned CIT model is a form of tax credit for investments.
What are the details of the planned Estonian tax in Poland?
The announced Estonian CIT by the Prime Minister and subsequently more widely presented by the Minister of Finance is to apply in Poland from 1 January 2021. According to the latest information provided by the Finance Ministry last week (and previously announced by Minister Kościński), the bill is due to go to external consultations this month. The new tax solution according to the Estonian model is to be introduced in Poland in two variants:
- in which all profits will be spent on investments (as in Estonia)
- an alternative in which taxpayers can transfer part of the return on investment to a special investment account.
UPDATE: 22.07.2020
According to the Polish Legal Daily newspaper (Dziennik Gazety Prawnej) of 21 July this year, the rates of the Estonian CIT are to be:
- 25% or 20% (in the case of a reduced rate) for larger entities and
- 15% or 10% for smaller entities, respectively.
According to the DGP, despite the nominal increase in CIT, effective taxation (i.e. integrated) is to be significantly reduced by up to 9 percentage points, as the Estonian CIT model includes a mechanism for the partial cit calculation paid by the company at shareholder level. This means that the total rate – i.e. CIT plus PIT will be:
- 30% or 25% for larger taxpayers – out of the current 34.39% and
- 25% or 20% for smaller taxpayers – out of the current 26.29%.
Is Estonian CIT for all taxpayers?
Although the Estonian tax is addressed to companies of all types, in practice, due to the revenue limit of PLN 50 million per year, it will mostly cover small and medium-sized capital companies (limited liability and joint stock companies) whose shareholders are only private individuals and in addition meet the following joint criteria:
- have no interest in other entities,
- employ at least 3 employees, in addition to shareholders,
- whose passive revenue does not exceed operating income,
- can demonstrate investment capital.
According to the current assumptions of the Finance Ministry, taxpayers will be able to choose Estonian CIT for 4-year periods. This may be extended for a further 4 years if, in the fourth year of use of the Estonian model, the company still meets the criteria for this solution. This applies even if a company exceeds the threshold of PLN 50 million within a 4-year period. However, in order to stay in the Estonian CIT system, each company will have to record an increase of 15% in investment over two years.
The key assumptions of the Estonian CIT in Poland are illustrated by the infographic below.
Can Polish companies benefit from the Estonian model and in what way?
Deputy Finance Minister Jan Sarnowski described the Estonian model on Radio 1 Poland as “a truly Copernican tax breakthrough”. He also pointed out its advantages for entrepreneurs:
- security in times of crisis,
- more liquidity,
- fosters development culture, with incentives that strengthen expansion prospects,
- further employment opportunities,
- use of new technologies.
Sarnowski also argued that the Estonian CIT aims to: “multiply the fixed assets of companies, reduce their legal risks, save time for administration by simplifying procedures, and in addition protect them from Tax Office controls”.
Does the Estonian model really work and will it work in Poland?
This solution was the first to be introduced by Estonia (hence the name ‘Estonian CIT’) as early as 2000 (during the tax reform). In 2016, researchers from neighboring Latvia wrote about whether this model was effective through their publication: “Introduction of Corporate Income Tax Deferral, an Essential Factor for Economic Development of Latvia”. It showed that in the four years since the introduction of this solution in Estonia, the average level of investment in the country had increased by around 20%, which resulted in:
- Estonia’s economic growth increased to 10.6% of GDP in the first year after the changes
- economic growth ranged from 6.1% to 10.6% of GDP up until the 2008 financial crisis,
- after the 2008 crisis, investment in Estonia remained higher than the European average (in nominal terms and in terms of GDP).
The key objective of the Estonian model was the implementation of a solution encouraging entrepreneurs to invest, and as evidenced by data also cited by Piotr Arak, director of the Polish Economic Institute, this brought the expected results. Thanks to this model, many foreign investors, including from Poland turned to Estonia. Overall, between 1999 and 2018, the average investment rate in Estonia increased to 29.5% of GDP. In comparison, the rates in Lithuania were 21.4% and in Poland and the EU on average 21.3%, which resulted in dynamic economic growth in Estonia.
But not only Estonia took advantage of this mutually beneficial solution for private investment. In Germany, for example, a similar tax model helped deliver “the economic miracle” in the 1950s, while more recently, the Estonian model has been introduced to Georgia (since 2017) and Latvia (since 2018). Currently, the Estonian model is being considered – apart from Poland – also in Ukraine, but has been temporarily suspended due to the pandemic.
Dariusz Bednarski, together with Grant Thornton discussed whether introducing the Estonian CIT model to Poland would bring the expected results, in an article published by Forbes (17 June 2015, titled: “Estonian CIT in the Polish version. A recipe for a crisis or just a half-hearted solution?”). Our expert noticed amongst other things that “the fundamental disadvantage is that this solution will not be widely available, but only for companies that meet the stated criteria (…)”. He also concluded that, “if the reform enters into force in its current form in Poland we will have cit taxation and dividend taxation”.
Ważny fragment
The questionnaire to see if a company can use the “Estonian CIT”, prepared by the Ministry of Finance, is available on the www.podatki.gov.pl website. The Ministry warns that “in the course of the work on the project, the indicated criteria are subject to change”.
Why are private company investments so important?
The decline in private business investment is dangerous for the economy, mainly due to the expected slowdown of public investment at the end of 2023 (i.e. at the end of the current EU financing model), as well as the prospect of a global economic downturn that analysts had warned even before the coronavirus pandemic had broke out.
However, the level of private investment in the national economy has not been satisfactory for several years, despite the favorable economic situation so far. The importance of this issue was raised by many entities, including the government’s Strategy for Responsible Development for Poland. For the record, it assumed an investment rate of 22-25% of GDP, and a result of around 20% of GDP (“inherited” by the United Right after the PO-PSL party) was described as “low and unsatisfactory”. Unfortunately, the 2017 figures were the lowest in the previous 20 years and amounted to only 16.8% of GDP. The information for 2018 and 2019 was also poor and indicated a level of private investment of 18.2 and 18.8% of GDP respectively.
All the more self-confident are the current efforts of the government to introduce an Estonian model in Poland. The key challenge is to design a solution that entrepreneurs can use to spark development and overcome the challenges they face.
The Estonian CIT boomerang effect
Estonian CIT became a popular topic in Poland when, last year (November 19, 2019), Prime Minister Mateusz Morawiecki gave an exposé at the lower house of parliament in Poland. In it he proposed a number of solutions for entrepreneurs, among which (as part of the tax proposals) was The Estonian model, which, according to the Prime Minister, would intensify private investment of domestic companies and facilitate their development. However, in Grant Thornton we talked about an Estonian solution much earlier than the Prime Minister. This concept was widely presented and discussed on 23-24 February 2018 at a conference organized by the Think About the Future Foundation in Muszyna.
AUTHOR: Honorata Zakrzewska-Krzyś
