Polish Deal to Liberalise the “Estonian CIT”

Reading time: 3 minutes.

From this article you will learn:

• The biggest advantages of the “Estonian CIT”,
• What amendments the government is considering,
• What the preconditions for applying alternative taxation rules will be once the planned changes enter into force.

Piotr WYRWA
Tax Manager at RSM Poland

Wawrzyniec ŻBIKOWSKI
Junior Tax Consultant at RSM Poland

On Monday, 26 July, a draft act amending the PIT Act, CIT Act and certain other acts was published, being a part of what is known as the “Polish Deal”. It rolls out many taxation changes, including more lenient conditions for applying the “Estonian CIT”.

Estonian CIT originally

Let us recall that the “Estonian CIT”, referred to in the CIT Act as “a lump sum on the income of capital companies”, was introduced in early 2021 and offers alternative taxation rules where the taxable income is linked with balance sheet law categories. You can read more about it here.

The basic assumptions behind the lump sum regime are the following:

• no tax obligation as long as the profit stays in the company,
• harmonised tax and accounting records,
• the right to apply lower tax rates.

This was intended as a pro-investment solution addressed to SMEs.

Despite the fact that these new solutions were extensively promoted, they did not become popular among entrepreneurs. In April of this year, it was reported that only 337 companies opted for it, out of 200,000 companies that could have done it. The reasons behind it were said to be the complexity of the new regulations and the associated risks. As a result, when introducing the “Polish Deal”, the government also decided to liberalise and simplify the regulations on the “Estonian CIT”.

The most important changes under the Polish Deal

In line with the contents of the said draft, the “Estonian CIT” is going to be available for limited partnerships and limited joint-stock partnerships. So far, only limited liability companies and joint-stock companies had this option.

What is important is that the increase of capital expenditure on fixed assets classified in the Act as group 3-8 in the Classification of Fixed Assets is no longer required. However, if an entity still opts for such investment, they shall have the right to apply a preferential tax rate, being a lump sum.

What is more, there are plans to completely abandon the income cap in the case of taxpayers who apply the “Estonian CIT”. So far, this cap was set at PLN 100,000,000, meaning that entities with higher revenues were denied the lump sum regime.

Lump sum on the income of capital companies still not for everyone

Despite introducing many incentives, the legislator has decided to uphold some restrictive preconditions for the “Estonian CIT”. In particular, it should be noted that in order to apply the lump sum regime, the taxpayer cannot own any shares or stocks in the capital of another company, cannot prepare financial statements in accordance with IAS and must employ a predefined number of people.

On the one hand, the planned changes are supposed to make the lump sum regime available to more taxpayers and, on the other hand, to encourage the use of the system introduced by the Polish Deal by way of new simplified procedures and risk mitigation solutions. However, this regime will remain an option.

Draft consultations will end on 30 August. For more information, visit the draft website.