At the turn of July 1 August The Ministry of Finance made available a preliminary draft bill amending the CIT Act, which includes the introduction of the Estonian tax. We mentioned in our website earlier that the Ministry conducted a survey on the planned solution in the area of Estonian tax, but without presenting a draft legislation. The current content of the rules allows you to learn about some important elements of the new solution, although this project is not yet in the RCL legislative path.
The essence of the new solution is to allow some CIT taxpayers (and specifically micro- and small entrepreneurs who meet certain criteria) to pay the tax only at the time of payment of the profit, e.g. in the form of dividends. Thus, until the taxpayer continues to reinvest profits, he would not pay the tax.
The reading of the proposed amendment confirms the previously known general assumptions of the new solution and allows to learn about the new conditions necessary to meet this method of taxation. After reading this document, they come across two the following conclusions:
- - rod first – the Estonian system will not benefit as many taxpayers as it may have seemed on the basis of the declarations and assumptions presented so far;
- - rod second – This tax will not be as easy to apply as the representatives of the MF declare (cf. Estonian CIT easy to apply, Dziennik Gazeta Prawna, 6 August 2020 No 152).
Excluded
Estonian CIT is addressed to limited liability companies and public limited liability companies whose annual income does not exceed 50,000,000 PLN. Only natural persons who do not hold shares in other companies or foundations may be shareholders or shareholders.
Therefore, they are almost entirely excluded from the new system of the company with foreign capital and subsidiaries/target companies, even from 100% Polish capital if the shares of such a subsidiary in some part would be covered by another capital company.
This is a significant restriction, since many companies are developing operational activities as subsidiaries that do not yet generate revenues close to the threshold per year. 50,000,000 PLN, bear significant investment expenditure.
Another restriction concerns the employment and remuneration of workers - in order to meet the conditions, the taxpayer must employ at least 3 non-shareholders, while remuneration may not exceed 5-twice the average monthly remuneration in the enterprise sector.
The surplus over this indicator will be taxed on Estonian CIT as a hidden profit (regardless of the tax on PIT on the employed side).
This condition excludes developing companies in which most of their current operating activities carry out their own effort and which mainly use external subcontractors instead of hiring their own employees. From our experience, this may be the vast majority of the smallest Polish capital companies.
The corporate exemptions from the Estonian system will apply to companies operating in financial, loan, special economic zones, bankruptcy or liquidation companies, companies resulting from acquisition or conversion.
Restrictions on the Estonian system
The provisions provide that the taxpayer will declare the choice of the Estonian CIT clearing system for the period 4 years. This is quite a long time, especially in the context of the following dynamic market developments and economic instability.
According to the present draft, the taxpayer will not be able to resign voluntarily from accounting for the Estonian system, but, in the event that it no longer meets the boundary criteria, he will have to leave the system mandatoryly.
In addition, the taxpayer will lose its ability to account for losses from previous years by choosing the Estonian system. 4-the summer period during which he uses it.
The loss will only be able to be settled after exiting the system (possibly if it does not lose the right to settle the loss due to 5-the summer deadline for its settlement and unless it actually continues to use the Estonian system).
The use of the Estonian CIT also means that it is not possible to benefit from the R & D relief or IP BOX relief.
A surprising definition of investment
The use of Estonian CIT is a key condition for spending on investment expenditure. In this regard, it is surprising that the authors of the legislation adopt the definition of investment – investment expenditure will be treated as expenditure on the production or acquisition of new fixed assets.
The proposed definition of investment does not take into account expenditure on intangible assets – this means that no investment in software licences, databases, copyrights, industrial property rights will be taken into account, and in the current stage of technological development, business is very often a significant part of the investment costs of developing companies.
The required increase in expenditure necessary to maintain the possibility of using the Estonian system is 15% during a two-year period, or 33% during the four-year period.
New tax base rates
The project provides for new rates and new rules for establishing the tax base. CIT rates in the Estonian tax are to be 25% in the case of taxable persons entitled to apply the rate at present 19% and 15% in the case of taxable persons entitled to apply the rate at present 9%.
However, higher rates are to be applied only to the profit-making tax base rather than to the entire income, so such a system can be economically viable. In addition, for companies with higher investment outlays (50% during a two-year period and 110% in a four-year period), rates 25% or 15% may be reduced by 5 percentage point
In order to apply these rates, it will be necessary to establish a tax base on new rules. The tax base is to be the profit/result determined in accordance with the provisions of balance sheet law, adjusted accordingly.
Effectively, the subject of taxation in the Estonian system is to include: split profits, gains to cover losses, hidden profits, non-economic expenditure and undisclosed economic operations, changes in the value of assets.
It will therefore be necessary to implement a new tax base calculation system, and it is highly likely that new records will also be necessary.
The issues mentioned above are only some of the elements of the planned Estonian tax system, but in my opinion it is entirely justified by the conclusions presented at the beginning of the project. It will not be a system that is either accessible or technically easy to use.
The Ministry of Finance declares that the criteria to benefit from the Estonian income tax system can meet approx. 200,000 to 219,000 Polish capital companies.
It is a little hard to believe, given the above limitations, but even if the MF changes the project and actually loosens the criteria by increasing the range of potential recipients of the new legislation, there is a question which these taxpayers will benefit from a new solution - and this will depend solely on the calculation of the tax burden and the risk of choosing new CIT clearing rules.
It is even more difficult to believe, given that, at the same time, the wide range of recipients of the Estonian Ministry's system declared by the MF announces that it is a pilot project to be extended to further entities, but that there is data available in the ministry on the basis of which the possibility of such an extension was perceived.
Author:
Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services.
He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.