From 1 January 2021, It was introduced into the provisions of the CIT Act a flat-rate income tax on capital companies, also called the Estonian CIT. This completely new form of taxation was introduced into the Polish legal order under Act dated 28 November 2020 amending the Corporate Income Tax Act and some other laws 30 November 2020 item 2122.
This form of taxation is fundamentally different from the method of tax settlement. With it, taxpayers do not pay monthly or quarterly advance payments for income tax. During the period of application of the lump sum, there will be no tax as long as the profit is used for the company.
The amendments do not alter the fact that the regulations in question are still substantially complex and subject to a number of additional conditions which must be met by the entity interested in applying a lump sum on company income
As a general rule, there will be a tax obligation only when shareholders pay their profits or when the form of taxation changes. Consequently, the longer the funds will be inside the company, the greater the tax benefit will be achieved.
Following the entry into force of 1 January 2022 implementing provisions Polish Deal, First, it should be noted that the name of this form of taxation has changed from ‘flat on the income of capital companies’ to ‘flat on the income of companies’. It can now be subject not only to companies with limited liability and public limited liability as before, but also to simple limited liability companies, limited liability companies and limited liability companies, but only to companies whose shareholders, shareholders or shareholders are only natural persons.
The transfer of the tax obligation at the time of the distribution of profits, and therefore the basic principle of the lump sum, is intended to be an investment incentive for taxpayers. Previous state of the law (before 1 January 2022) This preferential form of taxation was subject to a number of fairly far-reaching conditions.
Liberalisation
Introductory Act Polish Deal provided for the extension of the possibility and relaxation of the conditions for the application of the lump sum. In particular, the amendments concern:
Repeal point 1 under Article 28j Under section 1 CIT Act – this caused the upper limit to be removed 100,000,000 PLN the revenue as a condition for the use of the Estonian CIT, so that the entities previously identified can choose the Estonian CIT regardless of their revenue (in compliance with the other conditions of this Article). At this point, however, it should be stressed that changes in the income limit are neutral from the point of view of the majority of taxpayers because it was set at a relatively high level;
Repeal Article 28q CIT Act, which referred to the calculation 5% the addition to the income ceiling imposed on taxpayers. If the income limit has been abolished, then the right of being has also lost an additional tax;
Repeal Article 28g The CIT Act, which resulted in the abolition of a severe obligation to incur investment expenditure. Before that, the specific requirement imposed on taxable persons benefiting from the Estonian CIT was the obligation to incur direct investment. They had to reach an established percentage of the initial value of fixed assets included in the group 3-8 OT classification. Thus, buildings and premises (group) could not be included. 1 water infrastructure equipment (group) 2. These limits were:
- at least 15% baseline at two following tax years (but not less than 20,000 PLN) either
- in the case of the execution of an investment ‘significant to the activity’ and the notification to the head of the tax office, the taxable person may have chosen another option in which expenditures should be increased by 33% in four-year terms (but not less than by 50,000 PLN).
In addition, investments did not include investments in fixed assets primarily for the personal purposes of partners or their families, e.g. the purchase of a passenger car and leasing charges.
An alternative to carrying out investment expenditures was the systematic increase in wages. The taxpayer did not have to meet the requirements for new investments if it increased the expenditure on salaries of natural persons employed (excluding shareholders) at least by 20% (but not less than 30,000 PLN) in respect of such expenditure in the year preceding the two-year period of flat taxation;
reduced rates of Estonian tax. They are now taking 10% for small and 20% for the other CIT taxpayers, and they are applied regardless of the level of investment. In the previous state of the law, the small taxpayers subject to the Estonian CIT paid 15% or 10%, and bigger – 25% or 20% CIT. Lower rates depended on the level of investment. If the taxable person was liable:
- - expenditure of at least 50% on investment outlays in each two-year period – then the tax rate was reduced from 15% to 10%,
- - expenditure of at least 110% on investment outlays in each four-year period – then the tax rate was reduced from 25% to 20%.
Benefits continued
Furthermore, in case of dividend payment, the shareholder receiving it must pay the PIT. The standard tax rate is 19%, In contrast, in the case of Estonian CIT, there was already a mechanism in force to deduct the CIT tax paid by the company from its shareholder’s PIT for dividends. This leads to a reduction in effective taxation (CIT including PIT).
After these changes were introduced, this mechanism was not only preserved, but it was also attractive - according to the new sound Article 30a(19) PIT Act. Consequently, it is currently possible to deduct more CIT from the PIT of the company than in the legal state prior to 1 January 2022 The effective tax rate is therefore lower. According to Polish Deal, partner (natural person) receiving a dividend has the right to reduce 19% PIT on dividend o 70% or 90% paid by CIT - depending on whether the company is taxed at a flat rate, respectively 20% or 10%. In the previous state of the law, the shareholder could make a deduction of:
- - 41% paid CIT by the company if it was taxed at 15% lump sum,
- - 37% paid CIT by the company if it was taxed at 25% lump sum,
- - 71% paid CIT by the company if it was taxed at 10% lump sum,
- - 51% paid CIT by the company if it was taxed at 20% lump sum.
Importantly, the lump sum settlements will result in the taxpayer not being subject to a new minimum income tax (written down) under Article 24ca CIT Act. This exclusion is due to Article 28h CIT Act, according to which a taxable person taxed a lump sum on company income is not subject to taxation on the basis, inter alia, of the rules laid down, inter alia, under Article 24ca the abovementioned Act.
There was a carrot, there's a stick.
Liberalisation of part of the Estonian CIT legislation introduced in Polish Deal should be taken as a positive step to make this tool more attractive. Nevertheless, the ministry still left a large part of restrictive conditions such as:
the need to employ at least 3 persons (without taking into account shareholders/shareholders/shareholders) or carrying monthly expenses of 3-times the average monthly remuneration to employees under other contracts at least 3 natural persons who are not shareholders/shareholders/shareholders (lighter conditions apply to start-ups and small taxpayers);
a provision stating that only natural persons must be shareholders, shareholders or shareholders in the company;
the principle that the company cannot hold shares in the capital of another company;
the provision that operating income must be higher than passive revenue; i.e. must be above 50% revenue from total activities achieved in the previous tax year (including the amount of VAT due) — this concerns:
- - claims,
- - interest,
- - the percentage part of the leasing instalment,
- - guarantees and guarantees,
- - copyright/industrial property rights,
- - the sale and implementation of rights from financial instruments,
- - related party transactions where the value added in economic terms is not generated or the value is negligible;
- there is no possibility to draw up financial statements in accordance with International Accounting Standards;
- the need to submit a notice to the Revenue Office of the selection of the lump sum.
In summary
The amendments do not alter the fact that the regulations in question are still substantially complex and subject to a number of additional conditions which must be fulfilled by the entity interested in applying a lump sum on company income.
Last year the Ministry of Finance reported that since January 2021 (moment of introduction of the provisions on Estonian CIT) by mid-May 2021 only benefitted from Estonian CIT 360 companies. Initially, the government estimated that In the first A year will be theirs even 200,000.
However, following implementation of the above changes, it is expected that Estonian CIT 2.0. will be a more accessible option for a wider range of taxpayers.
Author: Mateusz Krawczyński. Junior tax consultant in Russell Bedford Poland. Graduated from bachelor's degree in Logistics and Master's degree in Finance and Accounting. He is currently studying law at the Łazarski University. Previous professional experience in one of the so-called Big Four companies. He specializes in tax on goods and services, in particular with regard to VAT settlements in local government units.