Estonian CIT Guide: Tax Optimization for Entrepreneurs in Poland

The Estonian CIT, introduced into the Polish tax system in 2021, is one of the most intriguing tax optimization options available to entrepreneurs in Poland. Inspired by a system that has been in place in Estonia for over 20 years, it brings a revolutionary approach to taxing capital companies – tax is paid only when profits are distributed, not when they are earned.

This fundamental shift in the philosophy of taxation can bring significant financial benefits to companies focused on growth and reinvestment of profits. However, like any tax solution, the Estonian CIT has its limitations and is not a universal tool for optimization for all businesses.

1. What is the Estonian CIT and where did it come from?

The origins of the Estonian Tax System

Estonia introduced its revolutionary tax system in 2000 as part of a broader economic transformation strategy following the country’s regained independence. The main goal of the Estonian reform was to support entrepreneurship and attract foreign investment by creating a simple and business-friendly tax environment.

The key innovation was moving away from the traditional model of taxing profits when they are earned and instead taxing only distributed profits. In practice, this means that as long as a company reinvests its earnings into growth, it does not pay income tax.

The results of this reform were impressive – Estonia quickly became one of the most dynamic countries in Europe in terms of entrepreneurial growth, and its tax system consistently ranks at the top of international competitiveness indices by the Tax Foundation.

Implementation in Poland

The Polish version of the Estonian CIT was introduced on January 1, 2021, and later modified and expanded in 2022. Like the original, its core idea is to tax profits only when they are distributed to shareholders.

The legal basis for the Estonian CIT in Poland can be found in the Corporate Income Tax Act, specifically in Chapter 6b, titled “Lump-Sum Tax on Company Income.” While inspired by the Estonian model, the system has been adapted to Polish economic and legal realities, which introduces certain limitations and modifications compared to the original framework.

2. Who can benefit from Estonian CIT?

The Estonian CIT in Poland is not available to all entrepreneurs. The legislator has outlined a set of criteria that must be met collectively.

Eligible legal forms

The following entities can benefit from the Estonian CIT:

• Limited liability companies (spółka z o.o.)
• Joint-stock companies (spółka akcyjna)
• Simplified joint-stock companies (prosta spółka akcyjna)
• Limited partnerships (spółka komandytowa)
• Limited joint-stock partnerships (spółka komandytowo-akcyjna)

Notably, sole proprietorships, civil law partnerships, and general partnerships are not eligible for this solution.

Revenue limits

Following amendments in 2022, the revenue threshold for eligibility to use the Estonian CIT was significantly raised:

• The current limit is PLN 100 million per year (previously also PLN 100 million, but the scope was clarified). More details on the amendments can be found on the Polish Ministry of Finance website.
• This amount refers to gross revenue from sales and financial operations.

This change has made the Estonian CIT accessible to a much broader group of businesses, including medium and larger companies.

Employment and structure requirements

To qualify for the Estonian CIT, a company must:

• Employ at least 3 people (excluding shareholders) on full-time employment contracts, or
• Incur monthly salary expenses for at least 3 people (excluding shareholders) at a level of at least three times the average monthly salary in the enterprise sector.

Additionally, the company must not:

• Hold shares in other entities.
• Have been created through a merger, division, or transformation (with certain exceptions).
• Operate as part of a tax capital group.

Industry and entity exclusions

The following entities cannot use the Estonian CIT:

• Financial institutions (banks, insurance companies, investment funds)
• Companies operating in special economic zones
• Companies in bankruptcy or liquidation
• Entities generating income from gambling activities

3. How does the Estonian CIT work?

The Estonian CIT fundamentally differs from the traditional corporate tax system. Let’s examine the key elements of its mechanism.

Core principle: tax deferral

In the classic CIT system, a company pays tax on its profits in a given tax year, regardless of whether those profits are distributed to owners or retained for investment.

In the Estonian CIT:

• No tax is paid as long as profits remain in the company.
• Taxation occurs only when profits “leave” the company (e.g., through dividend payments or other forms of distribution).
• Reinvested profits remain untaxed, increasing the capital available for growth.

Tax rates

The Estonian CIT applies two main tax rates, depending on the size of the taxpayer:

For small taxpayers (annual revenue up to EUR 2 million):

• 10% – when the dividend is paid to an individual
• 20% – when the dividend is paid to a legal entity

For other taxpayers:

• 20% – when the dividend is paid to an individual
• 25% – when the dividend is paid to a legal entity

Importantly, the Estonian CIT involves single taxation – the CIT paid by the company upon dividend distribution is the final tax (individual shareholders do not pay additional income tax on received dividends).

Hidden profits and non-business expenses

The Estonian CIT introduces the concepts of “hidden profits” and “non-business expenses”, which are also subject to taxation, even if they are not formally dividends. These include:

Hidden profits:

• Salaries or benefits for shareholders disproportionate to their duties
• Loans granted to shareholders
• Assets provided to shareholders for use on terms more favorable than market conditions
• Donations or sponsorships unrelated to business activities

Non-business expenses:

• Representation costs exceeding specified limits
• Expenses related to the use of luxury cars
• Fines and penalties
• Membership fees for non-mandatory organizations

Identifying and correctly taxing these categories is one of the biggest challenges for companies using the Estonian CIT.

4. Benefits of choosing the Estonian CIT

The Estonian CIT offers entrepreneurs a range of tangible benefits, especially for those focused on growth and profit reinvestment.

Improved financial liquidity

The most significant advantage of the Estonian CIT is improved cash flow:

• Funds that would have been used to pay tax in the standard CIT system remain available to the company.
• The company has a larger pool of cash for operations and investments.
• It becomes easier to navigate economic downturns with greater financial resources.

Accelerated growth through profit reinvestment

The absence of tax on reinvested profits provides a strong growth incentive:

• The company can allocate its entire profit to investments.
• It enables faster expansion, infrastructure upgrades, or innovation implementation.
• It helps build a competitive advantage through increased investment potential.

Example: An IT company generating PLN 1 million in annual profit under the standard CIT (19%) would pay PLN 190,000 in tax. With the Estonian CIT, reinvesting all profits allows the company to retain these funds for growth, saving PLN 950,000 over 5 years for investments.

Simplified tax reporting

The Estonian CIT introduces significant administrative simplifications:

• No need for detailed tracking of revenue-related costs.
• Simplified depreciation rules.
• Fewer tax declarations.
• Reduced risk of disputes with tax authorities regarding cost accounting.

An effective tool for business succession

For family businesses and those planning succession, the Estonian CIT can be an attractive solution:

• Enables gradual and controlled profit transfers to successors.
• Offers flexibility in planning profit distribution over time.
• Supports a long-term perspective on family business growth.

5. Challenges and potential pitfalls

Despite its many advantages, the Estonian CIT comes with certain challenges and risks that entrepreneurs should be aware of before adopting this system.

Transformation income and initial adjustment

One of the biggest challenges when entering the Estonian CIT system is the need to calculate and tax the so-called “transformation income”:

• The company must determine the difference between the tax and book value of its assets.
• This income is taxed at the standard CIT rate (19%).
• The tax can be paid in installments over 2 years (for small taxpayers) or 4 years (for others).

This “entry fee” can be a significant barrier, especially for companies with substantial tangible or intangible assets.

Consequences of exiting the system

Thanks to recent legislative changes, entrepreneurs now have greater flexibility in using the Estonian CIT:

• There is no longer a minimum required period for remaining in the Estonian CIT system.
• A company can exit the system at any time.
• Upon exiting, the company must settle taxes on undistributed profits accumulated during the period of using the Estonian CIT.

This change provides significant relief, eliminating one of the main risks previously associated with this tax solution.

Monitoring hidden profits

Companies using the Estonian CIT must rigorously monitor all transactions with shareholders:

• All related-party transactions must be conducted at market rates.
• Detailed transfer pricing documentation is required.
• There is a risk of tax authorities challenging and reclassifying certain expenses as hidden profits.

Limitations on deducting past losses

When entering the Estonian CIT system, a company loses the ability to deduct tax losses from previous years:

• Unsettled losses are forfeited and cannot be deducted in the future.
• This is a significant limitation for companies that incurred substantial losses in recent years.
• It requires careful calculation of profitability in the context of existing losses.

6. Who benefits most from the Estonian CIT?

The Estonian CIT is not a one-size-fits-all solution. Its profitability depends on the company’s specifics, growth strategy, and ownership structure.

Ideal candidate profile

The Estonian CIT is particularly beneficial for:

Companies in a phase of intensive growth:

• Tech startups with plans for rapid expansion
• Businesses planning significant investments in infrastructure or research and development
• Companies entering new markets or expanding their product range

Businesses with a stable financial situation:

• Companies generating consistent profits
• Entities with low debt levels
• Firms with equity higher than liabilities

Companies with a simple ownership structure:

• Businesses with a small number of shareholders
• Family businesses with a clear succession plan
• Companies whose owners are not reliant on regular dividend payouts

Who might find the Estonian CIT unprofitable?

On the other hand, this system may be disadvantageous for:

Companies regularly distributing profits:

• Businesses whose model relies on regular dividend payouts
• Companies with investors expecting a quick return on investment

Businesses with significant past losses:

• Companies with unutilized tax losses that could reduce the tax base in the standard CIT system

Entities with high depreciation rates:

• Companies with large investments in fixed assets, where the benefits of depreciation in the standard CIT system are substantial

7. How to switch to the Estonian CIT? A step-by-step process

Switching to the Estonian CIT requires careful preparation and completing several key steps.

Profitability analysis

Before deciding, you should:

• Conduct a detailed financial analysis tailored to your company’s specifics.
• Run tax simulations for different growth scenarios.
• Consult a tax advisor specializing in the Estonian CIT.
• Compare the benefits of the Estonian CIT with other available optimization options.

Formal notification

Once the decision is made:

• Submit a notification of choosing lump-sum taxation (ZAW-RD form) to the relevant tax office.
• Deadline: By the end of the first month of the tax year in which the Estonian CIT will be applied.
• For newly established companies: Within the deadline for submitting the first tax declaration.

Determining transformation income

This stage involves:

• Inventory and valuation of the company’s assets.
• Calculating the difference between the tax and book value of assets.
• Determining the transformation income subject to taxation.
• Choosing the tax payment method (one-time or in installments).

Adjusting financial and accounting policies

After switching to the Estonian CIT, you need to:

• Implement procedures for monitoring expenses related to hidden profits.
• Adjust accounting policies to meet Estonian CIT requirements.
• Train accounting and financial staff.
• Prepare new documentation and reporting templates.

8. Estonian CIT vs. other tax optimization options

It’s worth comparing the Estonian CIT with other available tax optimization tools to choose the best solution for your company.

Comparison with IP Box

IP Box offers preferential taxation of income from qualified intellectual property rights at a 5% rate.

Compatibility: The Estonian CIT and IP Box are mutually exclusive – you must choose one.

When IP Box Might Be More Beneficial:

• For companies whose main income source is intellectual property
• When the company regularly pays dividends
• When the company incurs significant R&D expenses and holds patents

Comparison with R&D tax relief

R&D tax relief allows additional deductions from the tax base for costs incurred on research and development activities.

Compatibility: The Estonian CIT excludes the use of R&D tax relief.

When R&D Tax Relief Might Be More Beneficial:

• For companies with significant R&D expenditures
• When the company regularly generates losses from R&D activities
• When the company receives grants for innovation activities

Comparison with Special Economic Zones (SEZ) / Polish Investment Zone (PIZ)

Special Economic Zones (SEZ) and the Polish Investment Zone (PIZ) offer income tax exemptions for a specified period.

Compatibility: The Estonian CIT excludes the use of SEZ/PIZ exemptions.

When SEZ/PIZ Might Be More Beneficial:

• For companies planning significant infrastructure investments
• When the company meets the quantitative and qualitative criteria required by PIZ
• When the company operates in a region with high public investment support

9. Case studies: Estonian CIT in practice

Let’s look at a few examples of how the Estonian CIT can work in different business scenarios.

Tech startup

Profile: A software company developing SaaS applications, 5 years on the market, 30 employees, annual revenue of PLN 10 million, profit of PLN 3 million, plans for international expansion.

Benefits of the Estonian CIT:

• Deferring tax on PLN 3 million in profit provides an additional PLN 570,000 annually for growth.
• No dividend payouts during a 5-year expansion plan saves PLN 2.85 million.
• These funds were used to hire additional developers and fund international marketing.

Result: The company doubled its revenue within 3 years without needing external financing.

Manufacturing company

Profile: A metal components manufacturer, 15 years on the market, 80 employees, revenue of PLN 40 million, profit of PLN 5 million, planning to modernize its machinery.

Benefits of the Estonian CIT:

• Tax deferral generated an additional PLN 950,000 annually.
• Over 3 years, the company accumulated PLN 2.85 million for investments.
• The purchase of modern CNC machines was accelerated, increasing productivity by 30%.

Challenge: A significant transformation income (PLN 2 million) upon entering the system required spreading tax payments over 4 years.

Family business in succession

Profile: A building materials wholesaler, 25 years on the market, the owner plans to transfer the business to their children, revenue of PLN 25 million, profit of PLN 2 million.

Benefits of the Estonian CIT:

• Flexible planning of payouts for the retiring owner and successors.
• Tax deferral on profits retained in the company for growth.
• Organized finances before the succession process.

Result: Spreading the asset transfer over 6 years optimized tax burdens and ensured a smooth business takeover by the younger generation.

10. Frequently Asked Questions (FAQ)

11. Conclusion: is the Estonian CIT right for you?

The Estonian CIT is a potentially highly attractive tax optimization tool, especially for companies focused on growth and profit reinvestment. However, like any tax solution, it has its advantages and limitations.

Key benefits

• Tax deferral until profits are distributed
• Increased financial liquidity and investment potential
• Simplified tax reporting
• Support for long-term business growth
• Flexibility – ability to exit the system at any time

Major challenges

• The need to tax transformation income upon entering the system
• Loss of the ability to deduct past tax losses
• Strict requirements for monitoring hidden profits

Recommended decision-making process

1. Conduct a detailed financial analysis tailored to your company’s specifics.
2. Consult a tax advisor specializing in the Estonian CIT.
3. Consider alternative optimization options (IP Box, R&D tax relief, PIZ).
4. Run simulations for different business scenarios (growth, stagnation, expansion).
5. Assess your plans for profit distribution in the short and long term.

The Estonian CIT is best suited for companies with a clear, long-term growth strategy, stable financial standing, and plans to reinvest profits. For such entities, it can be a powerful tool for building a competitive advantage and accelerating growth.