What entities cannot benefit from the Estonian CIT?

Estonian CIT is not a solution aimed at all taxpayers – in fact, the legislator has defined particular groups of entities that cannot benefit from this taxation system. These exemptions can be divided into permanent and temporary.

Permanent exemptions
Absolutely and indefinitely, the following entities cannot benefit from the Estonian CIT:

  • financial companies;
  • lending institutions;
  • taxpayers with tax-exempt income from activities carried out in a special economic zone (SEZ) or from the implementation of an investment specified in a support decision;
  • taxpayers placed in bankruptcy or liquidation.

Temporary exemptions
A temporary exemption of application is provided for taxpayers making or arising in the following reorganization activities:

  1. taxpayers formed as a result of a merger or division;
  2. taxpayers formed by entities contributing by way of contribution assets obtained as a result of liquidation of entities in which they were shareholders;
  3. taxpayers that were divided by spin-off;
  4. taxpayers to which, in the year of incorporation or the following year, a previously operated enterprise, an organized part of an enterprise or assets of that enterprise with a value exceeding EUR 10,000, or assets obtained by that taxpayer as a result of the liquidation of other taxpayers were contributed as capital; if that taxpayer held shares (stocks) of those other liquidated taxpayers;
  5. taxpayers acquiring another entity or receiving an in-kind contribution.

Exclusion of the right to opt for Estonian CIT taxation is provided for in the tax year of the taxpayer’s formation or reorganization activity and in the following year for no less than 24 months.

Practical issues
According to tax interpretations issued, a limited liability company formed from the conversion of a sole proprietorship may benefit from Estonian CIT[1].

In addition, an entity that is authorized to operate in an SEZ and has incurred costs related to the investment, but has not generated income that is subject to the corresponding exemption, has the right to elect to be taxed with Estonian CIT[2]. On the other hand, if the obstacle to the use of Estonian CIT is an existing support decision, the administrative repeal of this decision, prior to generating income based on it, will allow the taxpayer to choose Estonian CIT[3]. Only after the repeal or expiration of the support decision can the taxpayer choose this form of taxation[4].

[1] 0111-KDIB1-1.4010.675.2021.2.BS dated March 18, 2022.

[2] 0111-KDIB1-3.4010.52.2021.1.APO dated 02.06.2021.

[3] 0111-KDIB1-3.4010.76.2022.1.JKU dated 19.04.2022.

[4] 0111-KDIB1-1.4010.430.2022.1.SG dated 23.09.2022.