A change inspired by Estonia
For many years, businesses have associated Estonia with exceptionally user-friendly tax procedures. It ranked a strong 12th in Paying Taxes 2020, compared with Poland’s 77th place. It appears an attractive place to do business, particularly through companies with share capital. Its tax procedures are not only simple and understandable to the average taxpayer but also financially advantageous.
The Polish government has decided to take inspiration from this and move towards a genuine improvement in the tax system by introducing so-called Estonian CIT. The taxation model in force in Estonia since 1 January 2000 defers tax until profits are distributed as dividends or economically equivalent payments.
The Polish Act was passed by the Sejm at its third reading on 28 October 2020, with more than 400 MPs voting in favour. It has now been sent to the President and the Marshal of the Senate. The change is planned to take effect on 1 January 2021.
Why was the proposal introduced?
The explanatory memorandum states that the taxation model is primarily intended to encourage investment. It should help businesses increase equity, improve liquidity, creditworthiness and productivity, and accelerate economic growth, competitiveness and development. It also emphasises that Estonian CIT in the form adopted in the Act is only a beginning: a pilot programme. The model represents a form of tax expenditure by the state, so the proposal initially limits the number of eligible entities. Its main purpose is to test how the preference affects companies’ development and market position. It is also intended to encourage more than two million Polish sole traders to consider converting into a company with share capital.
Key principles
The Polish version of Estonian CIT will take the form of lump-sum taxation on the income of companies with share capital. The fundamental change is to defer corporate income tax until the company distributes profits, replacing ongoing taxation. The legislature proposes allowing taxpayers to choose the regime for four-year periods, automatically renewed unless they submit a notice of withdrawal. The benefits are conditional: breaching the requirements will cause the taxpayer to lose eligibility. Rates will be 15% for small taxpayers and 25% for those with revenue above EUR 2 million but below PLN 100 million. The regime also dispenses with tax records and the need to calculate taxable income on an ongoing basis, substantially simplifying tax compliance.
Eligibility for Estonian CIT
The regime envisaged in the amendment will be available to entities meeting all the following criteria:
- the entity is a Polish limited liability or joint-stock company;
- annual revenue, including VAT, does not exceed PLN 100 million;
- less than half of that revenue is passive income, including income from receivables, interest, and disposal or exercise of rights under financial instruments;
- the company employs at least three people other than its shareholders under employment contracts for at least 300 days a year;
- all shareholders are individuals;
- the company holds no equity interests in other entities;
- the taxpayer does not prepare financial statements under International Accounting Standards in the cases specified in Article 45(1a) and (1b) of the Accounting Act;
- the taxpayer notifies the competent head of the tax office of its election.
An eligibility test is also available at: https://www.podatki.gov.pl/estonski-cit/
The provisions contain numerous exclusions. Financial undertakings, taxpayers in bankruptcy or liquidation, and companies earning income in special economic zones or the Polish Investment Zone will be among those ineligible. The criteria for Estonian CIT are therefore numerous and detailed. Taxpayers will need to examine them carefully before concluding that they qualify.
Taxpayers choosing this form of taxation must also incur investment expenditure, including investment in fixed assets and payments specified in leasing agreements. This expenditure should increase by at least 15% over two years, with a minimum of PLN 20,000, or by 33% over four years, with a minimum of PLN 50,000.
Criticism of the proposed change
The main criticism is that the proposed regime is not universally available, unlike the model operating in Estonia. As noted above, however, it is currently a pilot project. It is aimed particularly at smaller companies, which stand to benefit most from the preference over the longer term. More than 200,000 companies meet the revenue criterion, making this a reasonably representative group for testing Estonian lump-sum taxation in practice.
