On August 12th, the website of the Government Legislation Center published a bill on the so-called Estonian CIT, i.e. a solution that constitutes a real revolution in the Polish tax system.
Estonia is a country with a very specific corporate income tax system. In this small Baltic state, business companies are not required to pay tax until the profit is distributed by the company. In practice, as long as the Company does not pay dividends, it will not pay CIT at all.
The Ministry of Finance plans to some extent transfer the Estonian solutions to the Polish tax system.
How will Estonian CIT function in practice?
According to the draft, taxable income will be closely related to the balance sheet items, and taxation will be lump-sum, i.e. without taking into account tax deductible costs. The Estonian model assumes that the taxable event is, in principle, profit distribution.
The bill identifies six categories of taxable income:
- income from distributed profit
- income from profit intended to cover losses, if these losses arose in the period preceding lump sum taxation of the entity
- income from hidden profits
- income from expenses not related to business activity
- income from changes in the value of assets
- income from undisclosed business transactions
- in the case of a taxpayer who has terminated the application of lump-sum taxation, including as a result of a takeover by another entity – income determined in the amount of the sum of the net profit achieved in each tax year of applying this taxation, in the part in which the profit was not earlier (during the taxation period with lump sum) distributed profit or was not intended to cover the loss.
Of the above 6 cases, the most common tax base will probably be the distribution of profit after the end of the financial year and the transfer of it to shareholders in the form of a dividend. It should be borne in mind that we are talking about profit, i.e. the category of balance sheet law. The distribution or coverage of the taxpayer’s net financial result is made by the end of the sixth month following the last day of the tax year for which the annual financial statement is prepared.
The tax rate in this model of taxation according to the assumptions is to be set at 25% or 15%, in the case of small taxpayers.
The application of the lump sum will be optional, and before applying it, entrepreneurs should carefully analyze its profitability.
The adoption of the flat-rate model has its significant consequences in the form of losing the right to benefit from several tax benefits. According to the draft, during the period when the lump sum is applied, the taxpayer loses the right to make deductions from R&D relief, relief for bad debts or donations.
What about losses?
Entrepreneurs who achieved a tax loss in previous years should carefully check whether the CIT settlement in the flat-rate model is profitable for them. This is because in the period of application of this variant, it is not possible to deduct tax loss from the tax base. Deduction will be possible only after the end of the lump sum settlement. However, it should be noted that the five-year limitation period for loss settlement is not suspended while the lump sum is used. The tax loss can be settled if the period for its settlement has not expired.
Importantly, the draft in its current wording assumes a four-year duration of this taxation model. This includes connection with certain limitations, which are discussed later. As a rule, the taxpayer has the right to make settlements using a lump sum for a period of 4 years, after which, if he meets certain conditions, he can make settlements in this model for the next 4 years. If the taxpayer decides to return to the classic CIT accounting model, he should submit information about his resignation in the tax declaration for the last year of lump-sum taxation. This period will be shortened in the event of breach of its terms of application.
Not everyone will benefit from the new solution
Unlike in Estonia, the described facilitation will not apply to all taxpayers. In order to be able to use it, the following conditions must be met:
- functioning as a capital company
- not exceeding the revenue threshold of PLN 50 million
- stocks or shares may only be owned by natural persons
- not having shares or stocks in other entities
- employing at least 3 employees, excluding shareholders
- achieving revenues from operating activities in the amount higher than from passive revenues
- showing capital expenditure.
It is worth explaining that in the case of functioning in the flat-rate system, the threshold of PLN 50 million in revenues refers to the average revenues from activity in the period of lump-sum settlement. Therefore, exceeding the revenue threshold in one year does not have to cause negative consequences for the taxpayer.
The draft also provides a solution for taxpayers who have exceeded the annual average threshold of PLN 50 million during the lump sum settlement period. In this case, they are required to determine the tax surcharge in accordance with the formula:
(1-W) * Z
where individual letters stand for:
W – the quotient of PLN 50 million and the average taxpayer’s income
Z – income constituting the tax base obtained in the tax year.
In the event of an add-on, the tax rate will be 5% of the tax base.
No investment, no preference
One of the reasons for introducing this billing model is to encourage enterprises to make investments. Indeed, Estonia is a country where private investment as % of GDP is higher than in Poland. In order to additionally ensure that the Estonian model contributes to the growth of investments, the project makes the right to use a lump sum dependent on incurring specific investment outlays.
The draft indicates that the investment outlays are expenses for brand new fixed assets or their production and fees specified in the leasing agreement (excluding operating leasing) in the part constituting the repayment of the initial value of fixed assets – included in group 3-8 of the Classification, excluding:
- passenger cars
- means of air transport
- fleet stock and
- other assets that are used primarily for the personal purposes of shareholders or members of their families.
It should be indicated that investments according to the project should be measured over a two-year or four-year period. This means that in the event that the taxpayer has made an investment of an appropriate value in 2021, he will no longer have to incur any capital expenditure in 2022. In order to be able to extend the period to four years, the taxpayer will have to submit information to the head of the Tax Office.
The draft specifies in detail the amount of investment outlays, the incurring of which entitles to lump sum taxation. In the case of a two-year period, the increase in investment outlays should amount to a minimum of 15%, but not less than PLN 20,000, and in the case of a four-year period, it should be at least 33%, but not less than PLN 50,000.
In order to determine the increase in investment outlays, the initial value of fixed assets included in group 3-8 of the Classification, determined on the last day of the tax year preceding the two-year or four-year taxation period, respectively, with the exception of passenger cars, means of air transport, floating rolling stock and other components is assumed. property that is mainly used for the personal purposes of shareholders or members of their families.
The flat-rate taxation project seems to be an interesting initiative that may attract the attention of entrepreneurs planning to invest and expand their infrastructure, but the limitations planned by the legislator require careful preparation and planning, which will reduce the tax risk in the future.