Estonian corporate income tax – what it is and how it may affect Poland?
Tax law changes which may affect companies in Poland are currently being developed and are to be introduced on January 1, 2021. The draft of the act was published recently on Polish Ministry of Finance website and on its basis we can define the basic assumptions concerning Estonian corporate income tax. The most important fact is that this solution will be dedicated to small and medium-sized capital companies with revenues not exceeding 100 million PLN.
1. What are the grounds to implement this tax solution?
According to Polish Minister of Finance, Tadeusz Koscinski, the Estonian system is a solution that stimulates development and innovation, which are vital in the fight against the crisis. The government's priority is to help entrepreneurs and support them back on the path of growth. Retaining profits in the company is one of the ways to increase the financial liquidity of companies and protect them against crisis.
2. What is Estonian CIT about?
NO TAX - you do not have to pay tax as long as the profit remains in the company,
FACILIATION - considering there is no tax, there are also no accountancy or tax returns,
SIMPLICITY - a taxpayer does not have to determine what is a tax deductible cost, calculate depreciation charges, apply a minimum tax, or spend time and resources on tax optimization.
3. What are the benefits of introducing Estonian CIT?
When it comes to the companies, they may gain greater resistance against recession, as well as greater production abilities. We may also notice an increase in productivity and innovation. The benefits will also be that less time will be spent on tax settlements.
At the national economy level, the benefits will largely lie in greater resilience to crises and elimination of development barriers for the Polish small and medium companies (undercapitalization). There should also be employment growth and an increase in Poland’s investment attractiveness.
4. Who will this solution be addressed to?
Estonian CIT is dedicated to small and medium-sized capital companies (with limited liability and joint stock companies) with revenues not exceeding 100 million PLN in which the shareholders are only natural persons. This means that it can be used by the vast majority of Polish CIT taxpayers in which the investor is close to the company, and the company's structure is transparent and simple.
5. What additional requirements must these companies meet?
they cannot have shares in other entities,
they must employ, on the basis of an employment contract or other basis, at least 3 persons who are not shareholders (1 person for a small taxpayer),
their passive income cannot exceed the income from operating activities,
they must demonstrate investment outlays,
What is important, criterias indicated in previous paragraphs must be met simultaneously.
6. How long will it be possible to benefit from the Estonian CIT?
The taxpayer chooses the Estonian system for 4 years and will be able to extend it for further 4-year periods. Extension is possible in the last, fourth year of taking the benefit from the solution, if the entrepreneur still meets the aforementioned criterias.
Economic effects of the CIT reform in Estonia.
In Estonia, the investment rate doubled in three years (an increase of 17.2 pp). The increase in investments in this country over three years was by approximately 40 pp faster than in neighboring countries. Entrepreneurs liquidity was higher by 2-3 pp and they had 8 pp higher share of reinvested earnings after the reform. What is more, loan debt decreased by 17 pp.
Increased savings helped surviving the economic crisis in 2008 – 99 % of Estonian entrepreneurs confirmed that fact. The tax reform led to a 9.1 % increase in the balance sheet of capital turnover, a 1.4 % increase in consumption and 2.9 % increase in Estonia’s GDP.
The departure from the annual tax collection has significantly reduced the profitability of aggressive tax optimization. The CIT reform also resulted in a significant reduction in hiding revenues by companies and, consequently, increasing the tightness of the tax system.