Estonian CIT or family foundation – which is more profitable?
The introduction of the Estonian CIT and the family foundation under the “Polish Order” has opened up new tax optimization opportunities for entrepreneurs. Both of these forms have their unique advantages and disadvantages, which are worth considering before deciding on the right structure for your business.
Advantages of Estonian CIT
Estonian CIT involves shifting the timing of taxation of income until it is distributed to shareholders. This allows companies to reinvest profits without an immediate tax burden, which increases their liquidity and promotes growth. Administrative simplicity is another advantage, as companies do not have to keep complicated tax records, and settlements are based on accounting data. The effective tax rate for small taxpayers is 20%, and for larger taxpayers it is 25%, which is more favorable compared to the classic CIT.
Disadvantages of the Estonian CIT
Using the Estonian CIT comes with strict eligibility requirements. Companies must meet certain criteria, such as no passive income above 50% and limiting shareholders to individuals only. In addition, conversion to Estonian CIT requires an initial adjustment, which can be complicated and time-consuming.
Family foundation – principles and benefits
A family foundation primarily serves the purpose of securing assets in the event of the founder’s death and meeting the needs of beneficiaries by providing cash benefits. If the beneficiary is a person in the so-called zero tax group vis-à-vis the founder, the payment of benefits is exempt from income tax and inheritance and gift tax. A family foundation may carry out business activities, but only to a certain extent to enjoy income tax exemption.
Limitations of a family foundation
The activities of a family foundation are limited to selected forms, such as renting and leasing, disposing of property, participating in commercial companies, making loans, and acquiring and disposing of securities. If the foundation undertakes activities outside this scope, its income will be taxed at a 25% CIT rate.
Comparison of effective taxation
When comparing the two structures, it is worth noting effective taxation. In the case of a family foundation, if the income is earmarked for beneficiaries in the zero tax group, taxation may be lower than in the case of an Estonian CIT.However, for activities beyond a certain range, the foundation’s effective taxation may be much higher.
Estonian CIT or family foundation – summary
The choice between an Estonian CIT or a family foundation depends on many factors, such as the type of business, ownership structure and long-term business goals. Before making a decision, it is advisable to carefully analyze all aspects and consult a tax advisor to choose the most favorable solution.
If you have questions about Estonian CIT or a family foundation, contact our Martini Tax law firm. Our experts will help you choose the best tax optimization strategy tailored to the specifics of your business.