Estonian CIT – how to meet the employment condition?
The Estonian CIT, or flat rate on corporate income, is a popular tax arrangement that defers taxation of company profits until they are distributed. However, to take advantage of this favorable system, entrepreneurs must meet several conditions. One of the most important is the employment requirement. In this article we explain what this condition is and how to meet it.
Who must be employed to meet the condition?
According to the regulations, a company benefiting from the Estonian CIT must employ at least three individuals who are not shareholders, stockholders or partners of the company. This condition can be met by hiring employees under an employment contract or under taxable civil law contracts, such as a contract of mandate.
If the company employs part-time employees, their working time can be aggregated. For example, two part-time employees converted into one full-time employee. In the end, the key is that the sum of working time should be at least three full-time positions.
What forms of employment are acceptable?
The most preferred form of employment is an employment contract. Those employed full-time on this basis fully meet the requirements. However, it is also possible to take into account people employed under civil law contracts, as long as their salaries are subject to full social security contributions. It is important to note, however, that sole proprietorships (B2B) cannot be considered for this requirement.
Exceptions for microenterprises
Companies that do not employ three people, but meet the other conditions of the Estonian CIT, can also benefit from this model. The regulations stipulate that a company may employ one individual, provided that this person’s monthly salary is at least three times the average gross salary in the national economy (this data is announced by the CSO). This salary must be taxed and taxed in Poland.
When must the employment requirement be met?
Fulfillment of the employment condition is verified at the end of each fiscal year. If a company fails to meet this requirement in a given period, it loses the right to benefit from Estonian CIT. Such a situation means that the company will have to return to traditional CIT taxation rules and pay outstanding tax on profits that were previously untaxed.
What are the penalties for failure to meet the requirement?
Failure to meet the employment requirement carries serious consequences. The company loses the right to preferential taxation, which entails the need to immediately settle CIT under the general rules. In addition, the company may incur a higher tax burden if the tax authorities find that the condition has not been met within the required time.
How to plan for compliance with the condition?
Thoughtful employment planning is the key to successfully benefiting from Estonian CIT. It is a good idea to regularly monitor the level of employment and ensure that it always meets the required criteria. If a company employs part-time employees, it is necessary to carefully recalculate working hours to ensure that the required three full-time positions are achieved.
For companies employing one or two people, it is particularly important to consider increasing wages to meet the criterion of minimum three times average wages. It is also a good idea to consult a tax advisor to help understand the complexities of the regulations and avoid mistakes.
Summary
The Estonian CIT is an extremely favorable tax arrangement that allows companies to defer taxes on profits and reinvest them in growth. However, the key element without which the use of this system is not possible is the fulfillment of the employment condition. Entrepreneurs who properly plan their personnel policies and adjust their employment structure to meet the requirements can not only meet the required criteria, but also reap the full benefits of this taxation model. Meeting the employment condition is the foundation on which success in using the Estonian CIT is built.