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Not quite Estonian corporate tax

Prime Minister Mateusz Morawiecki has announced plans to introduce so-called “Estonian corporate income tax” in Poland and presented the key assumptions of the scheme. If adopted, the reform would come into force from the new year. What are the benefits for taxpayers from this change? Is the Estonian CIT to be introduced into the Polish tax regulations really similar to the original scheme used in Estonia?

Planned changes and benefits

Currently, CIT taxpayers must pay monthly or quarterly income tax advances and settle their accounts annually with the tax office. Companies planning to benefit from Estonian CIT will be relieved of these obligations, and pay tax only when the shareholders decide to distribute the profit and use it for their own rather than business purposes. The longer the funds remain undistributed in the form of profit, the higher the tax benefit for the company.

According to the government’s aims, retaining profits in the company is one way to protect against the crisis. The leaders of the Ministry of Finance stress that Estonian CIT should contribute to the growth of companies’ equity, improve their liquidity, creditworthiness and productivity, and thus significantly accelerate economic growth and increase the competitiveness of the entire economy. The simplicity of the planned solution is also pointed out: the lack of tax accounting and no obligation to file declarations. As announced, the taxpayer will not have to determine what is a tax-deductible cost or calculate depreciation allowances for tax purposes, but it is difficult to imagine how these assurances would be implemented in practice.

Key assumptions of the reform

At first sight, the solution looks very attractive. Unfortunately, the enthusiasm diminishes as we delve deeper into the key assumptions of the reform. The solution is addressed exclusively to small and medium-sized companies whose annual revenues do not exceed PLN 50 million and whose shareholders are natural persons only. Moreover, a company that would like to use Estonian CIT cannot have a capital involvement in other entities, must employ at least three people in addition to its shareholders, and its passive revenues cannot exceed operating revenues. All these criteria must be met jointly. The taxpayer will be able to elect to use the Estonian system for a period of four years, with an option of extending it for further four-year periods. The extension will be possible if, in the last, fourth year of the scheme, the taxpayer still meets the indicated set of criteria. However, exceeding the threshold of PLN 50 million during the four-year period would not exclude the company from applying Estonian CIT, and this should be regarded as a positive approach.

Far from the original, far from perfect

What does the “Estonian CIT” planned in Poland have in common with the original solution developed in Estonia? Very little, it seems, apart from the key assumption that corporate income tax is only paid at the time of distribution of profits.

The original scheme does not introduce any specific conditions, thresholds or restrictions; all Estonian companies can apply it, except credit institutions. Therefore, the Estonian parliament has not limited the application of this modern solution to small and medium-sized companies. It also did not impose any restrictions related to the structure of shareholders, capital ties, employment levels, or sources of taxpayers’ income. The original Estonian CIT covers all income from operating activities and all types of passive income (e.g. royalties, dividends and interest) as well as capital gains from sale of all types of assets (including shares, other securities, and real estate).

Although in principle the planned reform should be assessed positively, it can only be hoped that over time the Polish solution will come closer to the Estonian ideal and cover a wider circle of Polish companies.

Sandra Derdoń, tax adviser, Michał Nowacki, attorney-at-law, tax adviser, Tax practice, Wardyński & Partners