What entities can benefit from the Estonian CIT?
In order to benefit from Estonian CIT, it is necessary to meet a number of conditions indicated by the CIT Law including, in particular:
Taxpayer structure condition
Estonian CIT may be used by entities operating in a certain legal form, i.e., limited liability company, joint-stock company, simple joint-stock company, limited partnership and limited joint-stock limited partnership.
The partners of such a company can only be individuals who do not have the right to receive a benefit as founders/founders or beneficiaries of a foundation, trust or other entity of a similar nature.
Revenue condition
A taxpayer may implement Estonian CIT taxation if less than 50% of its business income (calculated with the VAT due) earned in the previous tax year is derived from:
- receivables,
- interest and benefits on loans of any kind,
- the interest portion of lease installments,
- from sureties and guarantees,
- from copyrights or industrial property rights, including from the disposal of such rights,
- from the sale and exercise of rights from financial instruments,
- from transactions with related parties – where no or negligible economic added value is generated in connection with these transactions.
Guidance on the understanding of the above requirement is provided by the interpretation practice of tax authorities. For example, tax authorities indicate that revenue from the sale of dedicated IT systems in the form of licenses should be qualified as revenue from copyrights or industrial property rights[1], while revenue from the sale of digital versions of games by providing customers with the ability to download a copy of the game on an external platform in its view no longer constitutes such revenue[2].
With regard to transactions with related parties, the authority pointed out that this condition applies only if no or negligible economic added value is generated in connection with these transactions[3]. In addition, the right to benefit from Estonian CIT is not excluded by earning income from profit sharing in a limited partnership (as this is not a transaction)[4] or the sale of all rights and obligations in a general partnership to a related party[5].
Condition on ownership of shares, stocks, total rights and obligations of other taxpayers
A taxpayer who wishes to opt for Estonian CIT taxation cannot own shares (stocks) in the capital of another company, participation titles in an investment fund or mutual institution, total rights and obligations in a company that is not a legal entity, and other property rights related to the right to receive a benefit as a founder or beneficiary of a foundation, trust or other entity of a similar nature.
Ownership of membership shares in a cooperative bank[6] or shares in the reserve capital of a mutual insurance company[7] does not exclude the possibility of being taxed with Estonian CIT. However, taxpayers who hold shares in the capital of foreign companies[8] cannot benefit from Estonian CIT.
Employment condition
If a company wishes to opt for the Estonian CIT taxation system, it must meet one of the following conditions:
- employ under an employment contract at least three persons – other than partners – on a full-time basis for at least 300 days in the tax year, or, if the tax year is not a period of twelve consecutive calendar months, for at least 82% of the days falling in the tax year, or
- incur monthly expenses in an amount equal to at least three times the average monthly salary in the enterprise sector for the payment of salaries to at least 3 individuals (other than partners) employed under a contract other than an employment contract, if the taxpayer is required to collect advance personal income tax payments and certain contributions in connection with the payment of such salaries.
Condition on the form of financial statements
An entity wishing to implement Estonian CIT must not prepare financial statements in accordance with IAS (applies to issuers of securities and group entities). In order to take advantage of Estonian CIT taxation, a taxpayer should file the appropriate notice on the choice of this form of taxation within a strict deadline.
Preferences for individual taxpayers
The requirements to be met have been relaxed for two types of taxpayers – taxpayers starting a business (among other things, recognition that the condition of income structure is met in the first year of flat taxation) and so-called small taxpayers (among other things, restriction of the condition of employment size in the first year of using Estonian CIT).
[1] 0111-KDIB1-1.4010.381.2022.3.SS dated 14.09.2022.
[2] 0111-KDIB1-3.4010.37.2022.2.MBD dated 11.08.2022.
[3] 0111-KDIB2-1.4010.245.2021.3.AR dated 20.09.2021.
[4] 0111-KDIB2-1.4010.5.2022.1.AR dated 01.07.2022.
[5] 0111-KDIB1-3.4010.135.2022.2.IM dated 13.06.2022.
[6] 0111-KDIB1-1.4010.139.2022.1.BS dated 25.08.2022.
[7] 0111-KDIB1-2.4010.138.2022.1.DP dated 22.08.2022.
[8] 0111-KDIB2-1.4010.380.2022.2.AR dated 16.09.2021.
