The draft amendment to the Corporate Income Tax Act, which was addressed at the end of August, provides for a number of changes to the so-called Estonian CIT. They aim primarily to improve the rules that entered into force at the beginning 2022 The changes will come into force with the beginning 2023
In the next part of the study we present what elements, according to the current version of the project are to be changed, with comments.
Method of crediting the expenditure for the use of assets (e.g. passenger cars):
The amendment is intended to address the method of determining non-economic expenditure income for the use of assets (e.g. passenger cars, means of air transport) for business purposes and other non-economic purposes — 50% expenditure, depreciation and write-downs for the permanent impairment of assets not used for business purposes will not constitute non-economic expenditure — (Article 28m(4a) The CIT Act), at the same time the burden of proving that a particular asset is used solely for business purposes was passed on to the taxpayer – (Article 28m(5) CIT Act).
This means that taxpayers accounting for the so-called Estonian CIT when using assets in a mixed manner (used simultaneously for business and private purposes) will be obliged to recognise 50% expenditure incurred in using these assets as non-economic expenditure. Consequently, on such eligible expenditure, the taxpayer will be required to pay the tax.
Time limit for payment of the tax on shared profit, loss cover, advance payments and income distributed tax
The time limit for payment of the lump sum on the income from the split profit and loss income shall also apply to advances on the anticipated dividend and the lump sum on the net profit distributed. Accordingly, the advance tax on the proposed dividend can be paid by the taxpayer to the end third the month of the tax year following the year in which the resolution on the distribution or coverage of the net financial result was adopted — (Article 28t(1)(1)(2) CIT Act).
Clarification of the employment condition
The legislator also provided for clarification in the draft law one the conditions for taxation on the basis of the so-called Estonian lump sum.
More specifically, the legislator clarified that, in the case of the employment of a natural person under a contract other than a contract of employment, whether the employment in question meets the condition of employment for the possibility of applying the Estonian CIT will determine whether the CIT taxpayer would in principle be required to collect advances on PITs and contributions (Article 28j(1)(3) point (b).
The provision excludes the condition that the taxable person for the remuneration paid had to be required to collect advances on income tax and contributions.
Doubts related to the fulfilment of the above condition resulted from the fact that in the case of employment of a person who had not completed 26 in principle, the taxable person was not obliged to make advances on income tax and it was not clear whether, in the case of employment of such a person, the condition for the possibility of applying the Estonian CIT was met.
Date of payment of the tax for the so-called preliminary adjustment
The legislator also provides for clarification of the condition of termination of the tax obligation for the so-called initial adjustment. Namely, it has been specified that the expiry of the above tax obligation will take place when the Estonian CIT is applied for a period of at least 4 tax years, and therefore also for taxation for a period equal to 4 years.
Time limit for the submission of the statement and payment of the tax on the conversion income
The time limit for payment of the tax due on the income from the conversion has been clearly clarified by indicating that the taxable person is obliged to pay the tax within the time limit laid down for the submission of the testimony CIT-8 for the tax year preceding first year of flat-rate taxation, i.e. the date of payment of the tax is at the end of three months first year of taxation on company income (Article 7aa(9)(4) CIT Act).
Deadline for submission of notification to ZAW-RD
The amendment to the ZAW-RD notification is only stylistic. The time limit for the taxpayer to submit a notification of the choice of taxation on a flat-rate basis on the income of companies (ZAW-RD) must take place before the tax year adopted by the taxpayer — the right to opt for the taxation of Estonian CIT by the end of first tax year – (Article 28j(5)) CIT Act).
Summary - comment
In our opinion, the amendments proposed by the legislator in the amendment of the rules of application of the Estonian CIT will not be of crucial importance for the ultimate benefit and attractiveness of this form of income tax.
The proposal to clarify the provisions that raised some doubts should be welcomed, in particular as regards the harmonisation of the question of the date on which the tax on the split profit, including dividends, should be paid. In the current version of the rules, the taxpayer may have had difficulty making payment of the tax within the time limit.
Taxes are certainly a disadvantage to taxpayers 50% expenditure incurred in connection with the use of assets for mixed purposes. On the other hand, it should be noted that, if the assets are used in their entirety for activities, this problem will not arise.
If you are wondering whether Estonian CIT is an accessible and cost-effective form of income taxation Your company, please contact us. Our consultants will clarify the doubts and conduct appropriate analyses.