Estonian Corporate Income Tax (CIT) is a form of taxation that allows for deferred tax payment on income that has not been spent or has been allocated to company development. However, the tax must be paid if you choose to pay tax under the general rules. How to exit Estonian Corporate Income Tax (CIT) and who benefits from it is discussed in today's Taxes and Taxes.
Many entrepreneurs believe that by opting for Estonian CIT, they will be required to use this form of taxation for four years (or a multiple of four). The declaration of choosing lump sum taxation on corporate income (ZAW-RD), which we submit when switching to Estonian CIT, specifies the four tax years in which we plan to use this form of taxation. However, this does not mean that we cannot switch to general taxation earlier.
Resignation from Estonian CIT can be done in two ways:
- submitting a declaration of resignation,
- loss of conditions entitling to Estonian CIT taxation.
If we meet all the conditions for using the lump sum tax but, for various reasons, wish to switch to the general rules, we can declare our opt-out of Estonian CIT on the CIT-8e tax return, submitted by the end of the third month of the tax year following the year that will be our last year of lump sum taxation. If we opt-out, we will be required to pay tax on the distributed income from net profit. In simple terms, this means we will have to pay tax on profits that were not subject to Estonian CIT. However, the law allows us to choose the deadline for paying the tax. We can do so either as a single payment by the end of the third month of the tax year following the last year of lump sum taxation, or by the end of the third month of the tax year following the year in which the income was paid out in full or in part or otherwise distributed. Therefore, if we do not pay the tax in a single payment, we will not be required to do so until the profits from the Estonian CIT period are distributed. The exception is when a business goes into liquidation or bankruptcy, is taken over by another entity, ceases to operate for any other reason, or significantly limits the scope of its operations. In such cases, the tax must be paid before this event occurs.
The tax on distributed income from net profit may not be the only liability we will be required to pay. The timing of the termination of lump sum taxation is crucial here. If we terminate the tax period before the 4-year period has elapsed, we will also be required to pay the tax on the initial adjustment reported upon entry into the Estonian Corporate Income Tax (CIT). The tax payment deadline is the end of the first month following the last year of lump sum taxation. This liability, however, expires if we were subject to Estonian Corporate Income Tax for at least 4 tax years. However, if the initial adjustment was "0," it will make no difference whether we terminate lump sum taxation on corporate income after the 4-year period or earlier.
The second option for changing to the general taxation rules is to lose the eligibility for Estonian CIT. In this situation, we will also be required to pay tax on distributed net profit income under the same rules as for voluntary opt-out, as well as the tax on the initial correction (if the loss of the right to Estonian CIT occurs before the four-year period). The difference between these two methods comes down to the date from which we will be taxed under the general rules. While in the case of voluntary opt-out, we will be taxed under the general rules from the beginning of the tax year following the year for which we declared the last lump-sum tax return on corporate income, when losing the right to lump-sum tax, this date is no longer clear. If the majority of our business income comes from passive sources, or employment falls below three people, we will be taxed under the general rules from the year following the event. However, in the case where:
- we will change the legal form to one that cannot use Estonian CIT,
- we will acquire shares in other entities,
- we will prepare financial statements in accordance with IAS pursuant to Article 45 paragraphs 1a and 1b of the Accounting Act,
- we will cease to keep accounting books or it will be impossible to determine the net profit,
- we take over another entity or we are taken over ourselves (except when both entities are subject to lump sum taxation),
- we will settle tax according to general rules from the year in which the event occurred.
In summary, Estonian CIT doesn't eliminate the need to pay tax, but rather postpones the due date. If we opt out of Estonian CIT or no longer meet the conditions for it, we won't be required to pay tax until the profit is distributed. If we made a preliminary adjustment when starting flat-rate taxation, we'll be required to pay tax on it when we exit Estonian CIT before the four-year period has passed.
If you are wondering about the advantages and disadvantages of Estonian CIT taxation, please contact our office.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of June 3, 2024
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