A so-called Estonian corporate income tax (CIT), new form of taxation introduced in Poland in 2021, is becoming more popular among the taxpayers.
In 2022 the regulation on Estonian CIT was significantly amended in favour of taxpayers – some of the most restrictive conditions for entry were deleted or softened while the incentives (lower tax rate) became even more attractive. What is particularly worth mentioning is that this solution is allowed not only to Polish taxpayers but also to foreign investors – as long as they are individuals and invest through Polish company.
The main advantage of the Estonian CIT is that the tax is not payable until the profit is distributed. From 2022, an effective tax rate may attract taxpayers to choose this form of taxation.
While the tax burdens for companies paying taxes in regular way and sole entrepreneurs are getting higher, Estonian CIT allows to get the public duties burden to the level of 18%–25%; and this is the effective rate, including CIT, personal income tax (PIT) and social securities. If this is not attractive enough one should remember that in the Estonian CIT tax is not payable on a monthly or yearly basis, but only when the profit is actually distributed (even if that is to happen in next five years or more).
The main question that may be posed is whether this is possible for the foreign investor. The simple answer to the question is ‘yes’ and there are no exceptions.
The Estonian CIT may be chosen by a Polish company owned by individual investors from abroad, regardless if it is from the US, Europe or any other jurisdiction. The only thing to remember about is that the Estonian CIT is a form of taxation projected for companies (CIT taxpayers) – so, if the foreigner wants to use it, the foreigner needs to establish a company in Poland (LLC, LP, joint stock company) through which the business operations or investments will be carried out; but this is exactly the same as for Polish investors.
In fact, the Estonian CIT may in some circumstances be even more favourable for foreigners than for the Poles. That is because the Polish tax regulation provides for a special relief in PIT upon the distribution of profits (dividends) by the Estonian CIT company.
The relief allows between 70% to 90% reduction of PIT due on dividends – which in Poland is calculated at the rate of 19%. In case the dividends are paid out by a Polish company to foreign investors, the tax rate (withholding tax) is usually lower and range between 5% to 15% – which should further decrease the level of taxation due in Poland.
The Polish company that chose Estonian CIT may also carry out activities out of Poland. The income from those activities may also be subject to Estonian CIT unless it has been taxed out of Poland (in such case, non-Polish tax shall decrease Estonian CIT base).
It is worth noting that the Estonian CIT is allowed for any businesses (with one exception being the broadly interpreted financing activity).
As long as there this is a real investment, generating non-passive income (such as interest or royalties), Estonian CIT may be chosen. The Estonian CIT may be a perfect solution for medium- and long-term investments generating on going profits.
If you invested PLN 100 million with a rate of return (income) at 5% annually. The annual profit of PLN 5 million will cost you approximately PLN 1 million of CIT – which you have to pay regardless of whether the gain has been distributed or not – plus another PLN 800,000 of PIT (if the profit is actually distributed). Multiply these numbers for five or ten years depending on how long the investment lasts and the numbers become significant. Now imagine what happens to the Estonian CIT – if you do not pay out the profits, you pay nothing, zero.
While the tax environment in Poland is generally getting more and more complicated, it is even more important than ever not to miss the opportunities that are offered by the legislator. The Estonian CIT is perfect example of that – and it may be used by foreign investors as well.
Łukasz Kosonowski
Partner, MDDP
