Strona Kancelarii » Estonian CIT in Poland – Practical Guide for Foreign Shareholders

The Estonian CIT (a lump-sum tax on company income, i.e. a system where the company pays tax only when profits are distributed as dividends, and not on an ongoing basis) is one of the most attractive forms of taxation available to Polish capital companies. Under this regime, the company does not pay income tax until it distributes profits to its shareholders. In practice, this means that profits retained in the company can be reinvested without additional taxation. Since its introduction in 2021, the Estonian CIT has been gaining popularity – also among companies with foreign shareholders.

The Estonian CIT is an attractive method of deferring taxation, but it requires compliance with several statutory conditions. The key ones include:

A. Shareholding structure – only natural persons may be shareholders (their citizenship or tax residency is irrelevant). This means that foreign individuals can be shareholders of a company applying the Estonian CIT.
B. Sources of revenue – the company cannot generate the majority of its revenues from so-called passive income (e.g. receivables, copyrights, financial instruments). The purpose of this restriction is to ensure that the company carries out genuine business activity rather than merely deriving income from interest or licensing.
C. Employment – the company must employ at least three employees under employment contracts (excluding shareholders). Alternatively, it may cooperate with individuals under other types of contracts (e.g. service contracts), provided that the total remuneration expenses meet the statutory threshold.
E. Formal requirements – the company must maintain full accounting records and submit a notification of opting for the lump-sum regime.
F. No shareholding in other entities – the company cannot hold shares in another capital company or interests in a partnership.

Main benefits for the company and shareholders

The principal advantages of applying the Estonian CIT include:

1. Deferral of taxation – no current CIT on profits retained within the company.

2. Improved liquidity – the ability to reinvest profits in the company’s growth.

3. Simplified tax compliance – fewer declarations and no need to calculate tax-deductible costs on an ongoing basis.

4. Attractiveness for foreign investors – profits can be reinvested in Poland tax-free until distributed as dividends.

Tax rates

The lump-sum tax on company income is paid at the moment of profit distribution and is levied at different rates than standard CIT:

For small taxpayers (with annual turnover up to EUR 2 million) and for taxpayers commencing business activity under this regime – 10% of the tax base.
For all other taxpayers – 20% of the tax base.

At the shareholder level, the personal income tax (PIT) due on dividends from a company taxed under the Estonian CIT is reduced as follows:

by 90% of the company’s CIT attributable to the shareholder’s shareholding – in the case of a small taxpayer,
by 70% of the company’s CIT attributable to the shareholder’s shareholding – in the case of other taxpayers.

As a result, the effective tax rate under the Estonian CIT amounts to:

1. For a small taxpayer – 18.1%,

2. For other taxpayers – 21.2%.

By comparison, the effective taxation of a standard limited liability company (spółka z o.o.) amounts to approx. 26.29% for small taxpayers and 34.39% for other taxpayers

Practical example

Let us assume that a limited liability company generates a gross profit of PLN 100,000:

Classical CIT (small taxpayer): the shareholder receives PLN 73,710 net.
Classical CIT (large taxpayer): the shareholder receives PLN 65,610 net.
Estonian CIT (small taxpayer): the shareholder receives PLN 81,900 net.
Estonian CIT (large taxpayer): the shareholder receives PLN 78,800 net.

As the above illustrates, choosing the Estonian CIT allows shareholders to retain even several percentage points more in net profit compared to standard corporate taxation.

If you are looking for legal support in this issue, please contact us.

Attorney at law - Michał Kubiak

e-mail: biuro@kancelariakubiak.pl or

phone/Whatsapp +48724293339

724 293 339

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