The Estonian CIT was introduced into the Polish legal order on 1 January 2021. Contrary to expectations, this institution caused little interest. Therefore, the legislator decided to impose changes aimed at making it more attractive. They were introduced by the Act of 29 October 2021 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts (Official Journal of 2021, item 2105), hereinafter referred to as the amending Act. Thus, the changes to the Estonian CIT occurred as part of the Polish Order and took effect from 1 January 2022.
1. Novelty in Polish law
From 1 January 2021, companies can benefit from a lump sum on company income, commonly known as Estonian CIT. This institution was introduced into the Polish legal order by the Act of 28 November 2020 amending the Corporate Income Tax Act and certain other acts (OJ 2020, item 2122).
The Estonian CIT constitutes a modern way of taxation, promoting investments and minimising formalities when settling taxes. This structure is based on the assumption that, in the course of the activities, the company doesn’t pay tax on current income, and taxation of income takes place only when dividends are paid to partners. Therefore, the essence of the Estonian CIT is expressed in the postponement of the moment when the tax liability arises. The company doesn’t pay CIT as long as the profit remains in the enterprise and is allocated to investments. Only when it’s decided to distribute profits, the company will have to pay tax.
2. Who can and who can’t benefit from the Estonian CIT?
Until now, only capital companies, i.e. limited liability companies and joint stock companies, could benefit from the Estonian CIT. Under the amending Act, the catalogue of entities entitled to benefit from the Estonian CIT was extended to include: a simple joint-stock company, a limited partnership, a limited joint-stock partnership (Article 28j(1)(4) of the Corporate Income Tax Act of 15 February 1992 (i.e. OJ 2020, item 1406, as amended, hereinafter referred to as the CIT Act).
It should be emphasised that a company wishing to benefit from the lump sump should have an appropriate ownership structure. Only natural persons should be shareholders, stockholders or partners. Moreover, thay can’t have property rights related to the right to receive a benefit as founders (funders) or beneficiaries of a foundation, trust or other entity or fiduciary relationship (Article 28j(1)(4) of the CIT Act).
The catalogue of entities that can’t use the lump sum institution is very wide. These include:
- financial undertakings referred to in Article 15c(16) of the CIT Act;
- lending institutions within the meaning of Article 5 point 2a of the Consumer Credit Act of 12 May 2011 (i.e. OJ 2019, item 1083, as amended);
- taxpayers earning income referred to in Article 17(1)(34) or (34a) of the CIT Act;
- taxpayers in bankruptcy or liquidation;
- taxpayers that were created:
- as a result of a merger or division either
- by legal persons, individuals or organisational units without legal personality, contributing, as in-kind contributions to the taxpayer’s capital, assets obtained by these persons or units as a result of liquidation of other taxpayers, in the event that these persons or units hold shares of those other liquidated taxpayers either
- by legal persons, individuals or organisational units without legal personality, in the event that in the tax year in which the taxpayer was established, or in the tax year immediately following it, there was contributed to its capital a previously run enterprise, an organised part of an enterprise or assets of this enterprise with a total value exceeding the PLN equivalent of EUR 10,000, converted according to the average euro exchange rate announced by the National Bank of Poland on the first working day of the month preceding the month in which these assets were contributed, rounded up to PLN 1,000, with the value of these assets calculated applying the provisions of Article 14 of the CIT Act
– in the tax year in which they started their activity, as well as in the tax year immediately following it, but not less than for a period of 24 months from the date of creation;
- taxpayers that:
- were divided by separation or
- brought as a contribution to another entity, including to capital:
– a previously run enterprise, an organised part of an enterprise or assets of this enterprise with a total value exceeding the PLN equivalent of EUR 10,000, converted according to the average euro exchange rate announced by the National Bank of Poland on the first working day of the month preceding the month in which these assets were contributed, rounded up to PLN 1,000, with the value of these components calculated using respectively the provisions of Article 14 of the CIT Act, or
– assets obtained by that taxpayer as a result of the liquidation of other taxpayers in the event that this taxpayer held shares of those other liquidated taxpayers,
in the tax year in which the division took place or the contribution was made, as well in the tax year immediately following it, but not less than for a period of 24 months from the date of the division or contribution (Article 28k § 1 of the CIT Act).
A company that wants to benefit from the lump sum can’t hold shares in the capital of another company, as well as participation titles in an investment fund or a collective investment institution. It can’t also have all the rights and obligations in a company that isn’t a legal person and other property rights related to the right to receive a benefit as a founder (funder) or beneficiary of a foundation, trust or other entity or legal relationship of a fiduciary nature (Article 28j(1)(5) of the CIT Act).
3. Amount of revenue and sources of revenue
Before the entry into force of the provisions of the amending Act, the condition for benefiting from the lump sum was that the company had to generate revenues of up to PLN 100,000,000. The legislator abandoned this requirement. Thus, in the new legal situation, companies whose revenues exceed PLN 100,000,000 may use the lump sum.
However, the condition for benefiting from the Estonian CIT is to limit the amount of revenue received by the company from certain sources. According to the amended wording of Article 28j(1)(2) of the CIT Act, less than 50% of the revenues from activities achieved in the previous tax year, calculated taking into account the good and services tax due, comes from:
a) receivables,
b) interest and benefits on all types of loans,
c) the interest portion of the leasing rate,
d) warranties and guarantess,
e) copyrights or industrial property rights, including from the sale of these rights,
f) the sale and exercise of rights from financial instruments,
g) transactions with related entities within the meaning of Article 11a(1)(4) of the CIT Act – if in connection with these transactions no or little added value is generated in economic terms.
4. Requirement of employment
Companies using the lump sump are required to employ at least 3 persons who aren’t their shareholders, stockholders or partners under the contract of employment, for at least 300 days in a calendar year ot 82% of days in a tax year other than the calendar one. As an alternative to the condition in question, the legislator assumed that the company should incur monthly expenses in the amount of at least three times the average monthly salary in the corporate sector for remuneration for at least 3 natural persons who aren’t shareholders, stockholders or partners of the company, engaged on the basis of a contract other that the employment one, in the event that, in connection with the payment of these salaries, the company is obliged to collect advance payments for personal income tax and social security contributions (Article 28j(1)(3) of the CIT Act).
5. Application of the principles specified in the Accounting Act
A company taxed with a lump sum is obliged to keep books of account and financial statements based on the provisions of the Accounting Act of 29 September 1994 (i.e. OJ 2021, item 217, as amended). However, the method of keeping the above-mentioned documents should ensure the correct determination of: the amount of net profit/loss, the tax base and the amount of tax due. It should also allow for the correct determination in equity: the amount of undistributed profits and the amount of distributed profits recognised in equity, generated in the years of lump sum taxation, as well as the amount of uncovered losses incurred in the years of lump sum taxation (Article 28d(1) of the CIT Act)..
A negative premise for lump sum taxation is the application of International Accounting Standards (IAS) in financial reporting by stock exchange issuers or applying for admission to trading on one of the regulated markets of the countries of the European Economic Area or entities that are members of the corporate group in which the parent company prepares consolidated financial statement (Article 28j(1)(6) of the CIT Act).
6. Period of using lump sum taxation
Lump sum taxation covers the period of 4 consecutive tax years indicated by the taxpayer in the declaration on choosing such taxation (Article 28f(1) of the CIT Act). It is extended for successive periods of the 4 consecutive tax years. The extension won’t occur if the company renounces taxation with a lump sum in the declaration submitted for the last tax year in which the taxpayer was taxed with a lump sum (Article 28f(2) of the CIT Act).
The provisions precisely determine the moment when the use of analysed form of taxation ends. According to Article 28l(1) of the CIT Act, the taxpayer taxed with a lump sum loses the right to this taxation at the end of:
- the tax year of the period referred to in Article 28f(1) or (2) of the CIT Act – in the event that the taxpayer submits information concerning resignation from lump sum taxation;
- the tax year in which the taxpayer didn’t fulfil one of the conditions referred to in Article 28j(1)(2 and 3) of the CIT Act,
- the year preceding the tax year in which:
a. the taxpayer didn’t fulfil any of the conditions referred to in Article 28j(1)(4-6) of the CIT Act;
b. the taxpayer didn’t keep fiscal books or the data resulting from fiscal books doesn’t allow to determine the net financial result,
c. the taxpayer will take over another entity by way of merging or dividing entities or receiving an in-kind contribution in the form of an enterprise or its organised part, unless:
– the entity being acquired, divided or making in-kind contribution is taxed with a lump sum either
– the entity being acquired, divided or making in-kind contribution, as from the date of acquisition or making a contribution, will close books of account, prepare financial statement and make settlement and decisions concerning transactions related to the acquired assets,
d. the taxpayer will be taken over by another entity through a merger or division of entities, including a division by separation, or making an in-kind contribution in a form of an enterprise or its organised part, unless the acquiring entity is taxed with a lump sum.
In the event of the loss of the right to lump sum taxation, the company may submit a new notification of taxation in this form after 3 tax years, but not earlier than after 36 months following the calendar year in which the taxpayer lost the right to lump sum taxation (Article 28l(2) of the CIT Act).
7. Tax base
According to Article 28n(1) of the CIT Act, the basis for lump sum taxation is:
- the sum of income from distributed profit and the income from profit allocated to cover losses, determined in the month in which the resolution on the distribution or coverage of the net financial result was adopted;
- the sum of income from hidden profits and income from expenses not related to economic activity, determined in the month in which the benefit was provided or the payment or expense was made;
- income from the change in the value of assets achieved in the month in which the merger, division, transformation of entities or in-kind contribution occurred;
- income from net profit earned in the tax year in which the end of lump sum taxation took place;
- income from undisclosed economic operations achieved in the tax year.
When calculating the tax base, events occurring before the first year of lump-sum taxation shall be taken into account, provided that the settlement of these events is continued in accordance with the accounting principles adopted by the taxpayer (Article 28n(3) of the CIT Act).
8. Rates
The legislation provides for two base rates for taxpayers taxed in the form of a lump sum. The first one is 10%. It applies to a small taxpayer and a taxpayer starting an activity. For other entities, the rate is 20% (Article 28o(1) of the CIT Act).
9. Notification to the tax authorities and information obligations
An entrepreneur who wants to be taxed with a lump sum should submit notifications to the tax authorities. This should occur by the end of the first month of the first tax year in which the company wishes to be taxed with a lump sum (Article 28j(1)(7) of the CIT Act). The notice may also be submitted before the end of the tax year adopted by the taxpayer. This may take place provided that the books of account are closed and the financial statements are prepared in accordance with accounting regulations on the last day of the month preceding the first month of lump sum taxation. In this case, the books of account are opened on the first day of the month of lump sum taxation (Article 28j(5) of the CIT Act).
The form of taxation in question doesn’t exempt from the obligation to submit a tax return. The declaration must be submitted to the appropriate tax office by the end of the third month of the tax year. This document shall be presented by means of electronic communication (Article 28r(1) and (2) of the CIT Act).
A taxpayer who has received income from net profit and will distribute this income in whole or in part in the period following the end of the application of the lump sum, is obliged to submit a declaration to the competent tax office and pay a lump sum on the value of the distributed income from net profit. This should take place by the 20th day of the month following the month in which this disposal was made (Article 28r(3) of the CIT Act). The obligation in question doesn’t arise if the taxpayer pays once a lump sum in the amount corresponding to the lump sum due on income from net profit by the end of the third month of the tax year following the last year of lump sum taxation (Article 28t(2) of the CIT Act).
It should be noted that in connection with the obligation to submit a declaration and pay a lump sum on the value of distributed income from net profit, the legislator created a legal fiction. According to Article 28r(3), sentence 2, of the CIT Act: In the event that the distribution of income from net profit was made after the end of the sixth month of the tax year, it’s assumed that it occurred on the last day of that sixth month.
The CIT Act also imposes a special information obligation on shareholders, stockholders, partners of a company subject to lump sum taxation. They are obliged to submit to the taxpayer taxed with a lump sump a declaration on entities in which they hold, directly or indirectly, at least 5% od shares in the capital, total rights and obligations, titles of participation in an investment fund or collective investment institution either other property rights related to the right to receive a benefit as a founder (funder) or beneficiary of a foundation, trust or other entity either legal relationship of a fiduciary nature. The statement shall be made on the OSW-RD form by the end of the first month of each tax year of the taxpayer in which lump sum taxation is applied. In the event of a change in the facts, this document shall be sent within 14 days from the date of the modification (Article 28s(1) of the CIT Act).
The company provides a copy of the statement, upon request, to the head of the tax office competent for the taxpayer or to the head of the tax office competent for the shareholder/stockholder/partner (Article 28s(3) of the CIT Act).
If a natural person who is a shareholder, stockholder or partner of a taxpayer taxed with a lump sum fails to comply with the obligation to submit the declaration, the taxpayer informs the head of the tax office competent for the taxpayer and the head of the tax office competent for this individual. The notification shall be made within 30 days from the date of expiry of the deadline for its execution (Article 28s(4) of the CIT Act).
10. Legal notice
The study is a work within the meaning of the Act of 4 February 1994 on Copyright and Related Rights (OJ 2006, No. 90, item 631, consolidated text, as amended). Publishing or reproducing this study or its part, quoting opinions, as well as disseminating in any other way the information contained therein without the written consent of Crede sp. z o.o. is prohibited.