AGN EMEA Tax Committee News
Looking to grow and reinvest profits without an immediate tax hit? Poland’s Estonian Corporate Income Tax (CIT) model offers an attractive solution.
The model was introduced based on solutions implemented in Estonia’s tax system—hence the commonly used term “Estonian CIT.” In practice, it refers to a lump-sum taxation of company income, effective only when profits are distributed to shareholders.
This taxation model is rapidly gaining popularity in Poland. More than 20,000 taxpayers are already using this system.
Under the traditional taxation system: The effective income tax rate is 34.39%, which includes CIT at the company level (19%) and personal income tax (19%) on dividend payouts.
Under the Estonian CIT model: The effective income tax rate on profit distributed to shareholders—covering both company income and dividends—generally amounts to 25%.
In practice, as long as the profit remains in the company and is reinvested, the company does not pay income tax. Upon distribution, the applicable rate is 10% (for small taxpayers) or 20% (for others), which, when combined with dividend tax, results in a total tax burden lower than that of the classical CIT model (20% and 25% respectively). Moreover, under the lump-sum model, companies are not required to pay income tax advances, and the moment of taxation is effectively postponed until the profit is paid out (as dividends). Profits for the period during which the lump-sum regime is applied are determined according to accounting regulations, simplifying and lowering bookkeeping costs.
This taxation model is applied for a consecutive period of four years and can be extended for further four-year terms.
In recent years, the 30% ruling has become increasingly popular among expats who want to come to the Netherlands and work for a Dutch employer (this could be a Dutch affiliate of the foreign employer) for a couple of years.
Who Can Use the Estonian CIT?
Businesses may opt for the Estonian CIT if they simultaneously meet the following conditions:
- Operate as: a limited liability company (sp. z o.o.), a joint-stock company (S.A.), a simple joint-stock company (P.S.A.), a limited partnership, or a limited joint-stock partnership.
- Their shareholders/partners are exclusively natural persons who do not hold property rights associated with receiving benefits as founders or beneficiaries of foundations, trusts, or similar fiduciary arrangements, excluding founders and beneficiaries of family foundations.
- The company does not hold shares (equity) in other companies, participations in investment funds or collective investment institutions, or rights and obligations in partnerships that are not legal persons.
- Passive income in the preceding tax year does not exceed 50% of total revenue—this includes revenue from receivables, copyrights, industrial rights, interest, or income from various loans, which must not dominate over operational activity.
- Employ at least 3 employees (excluding shareholders or partners), calculated in full-time equivalents, for at least 300 days in the tax year or incur expenses on civil law contracts that amount to at least three times the average monthly wage in the enterprise sector.
- Maintain accounting records in compliance with the National Accounting Standards at the time of entering the Estonian CIT regime.
Some of the above conditions are relaxed for newly established businesses and small taxpayers during their first year under the Estonian CIT model.
To apply for Estonian CIT, a business must notify the appropriate head of the tax office by the end of the first month of the first tax year in which the new rules are to apply. The decision to change the tax settlement method can also be made during the tax year—in such cases, accounting books must be closed and financial statements prepared on the last day of the month preceding the switch.
Who Cannot Use the Estonian CIT?
Entities excluded from the lump-sum taxation model include, among others, financial institutions (including domestic banks), lending institutions, companies in bankruptcy or liquidation, and—temporarily—companies formed through mergers or splits. This regime is also unavailable to holding companies, subsidiaries with legal entity shareholders, investment funds, and venture capital vehicles.
Reinvestment Instead of Tax – Potential Benefits for Companies
The Estonian CIT model can deliver real benefits to businesses—particularly through tax deferral, simplified tax settlements, and improved liquidity thanks to the ability to reinvest all profits. The model rewards companies that actively invest and expand their operations. This form of taxation is available to companies with simple ownership structures—those whose shareholders are exclusively natural persons. These may be both Polish and foreign tax residents.
However, companies must carefully analyse their financial situation and operational structure before opting for the Estonian CIT—considering both tax advantages and potential risks related to failure to meet statutory conditions or reporting errors. Under this regime, not only the actual profit is taxed, but also so-called “hidden profits.” These are benefits received by shareholders of a company under Estonian CIT that are treated as equivalent to dividends by law (e.g., when a legal transaction leads to the same economic result as a dividend payout, such as interest payments on loans, renting property, or providing company cars to shareholders). It is therefore essential to analyze all benefits exchanged between the company and its shareholders in terms of their potential classification as hidden profits. If such transactions occur, it is crucial to ensure that they are carried out on market terms.
Brought to you by the AGN EMEA Tax Committee
If you have any questions in relation to this article, please get in touch with Tomasz.
Tomasz Paszkowski.
Tax Advisor, JRD
Web: https://jrd.pl
Email: tomasz.paszkowski@jrd.pl
Phone: +48 22 654 02 14
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