As it turns out, the principles of action of the Estonian CIT are not always transparent. In the recipe Article 28j(2)(2) The CIT Act does not specify whether the calendar or tax year is mentioned. Consequently, it is unclear whether the obligation to employ an employee on an annual basis is updated at the end of the calendar year or at the end of the tax year where the tax year of the start-up company does not coincide with the calendar year.
It seems that the legislator meant the tax year – but this is not explicitly stated in the provision.
In order to reduce the problems with the use of Estonian CIT taxation, we encourage you to use our services.
General principle
one it is necessary to employ a certain number of employees from the conditions to be able to benefit from the tax on company income (the so-called Estonian CIT). General rule concerns the requirement to employ 3 employees. It is specified in Article 28j(1)(3) point (a) of the CIT Act, which provides that flat-rate taxation may be subject to the taxable person if:
employ on the basis of an employment contract at least 3 persons on a full-time basis, other than shareholders, shareholders or shareholders of that taxpayer, for a period of at least 300 days in the tax year and where the tax year is not a subsequent period twelve calendar months - for at least 82% the days of the tax year.
Specific regulation
For taxable persons starting to operate, the legislator provided specific rules in Article 28j(2)(2) CIT Act.
According to that provision, the condition referred to in the above mentioned. section 1 point 3, does not apply to the year of commencement of that activity and 2 tax years immediately following it, except that from the second tax year the taxpayer is obliged to increase employment annually by at least 1 full-time work up to the level of employment laid down in that provision.
Therefore:
- In first the tax year of the company does not have to employ any employee,
- In the second tax year the company must employ at least 1 the employee,
- In third the tax year the company must employ at least 2 employees,
In fourth the tax year the company must employ at least 3 staff and the number to be maintained in subsequent years (complying with other conditions included in Article 28j(1)(3) point (a) of the CIT Act.
A similar view is also presented by the doctrine:
"I believe that the company designated as a taxable person starting business in 2022 does not have to meet the condition in question and 2023 will have to employ at least 1 a full-time person. If the company in question is a small taxpayer in subsequent years, it will not have to increase employment. If the small taxpayer is not, in 2024 It will be necessary to increase employment to at least 2 full-time workers and 2025 to at least 3 Full-time people" (T. Krywan, LEX Legal Information System, QA 1886597 of 14 February 2022).
Therefore, there is no doubt about the above in cases where the tax year of the company from the beginning coincides with the calendar year - i.e. if the company started operations with 1 January under the Estonian CIT regime.
Where the tax year of the start-up company is different from the calendar year
Doubts arise when the tax year of the company does not coincide with the calendar year because Article 28j(2)(2) CIT Act in verse first does not specify whether it refers to the tax year. However, it should be assumed that this is the case - reading this provision, including the general regulation contained in Article 28j(1)(3) point (a).
Consequently, for example, if the company started operating in September 2021 Its tax year may last until August 2022 or until December 2022
According to Article 28e(1) The CIT Act the tax year of a taxable person taxed a lump sum on company income is the financial year within the meaning of the Accounting Act.
According to Article 3(9) Accounting Act for the financial year shall be understood as a calendar year or other period of time 12 subsequent complete calendar months, also applicable for tax purposes. The financial year or its amendments shall be determined by the statutes or by the contract under which the unit was established.
If the entity has started operations in second half of the financial year adopted, the accounts and financial statements for that period may be combined with the accounts and financial statements for the following year.
In case of change of financial year first after the change, the financial year should be longer than 12 consecutive months.
In order to reduce the problems with the use of Estonian CIT taxation, we encourage you to use our services.
Mateusz Krawczyński. About the author: 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 the Law at Lazarski University. Previous professional experience in tax matters gained 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.