The lump-sum tax on corporate income, commonly referred to as Estonian CIT, has enjoyed unwavering popularity since its introduction into the Polish legal system. Its main advantage is that it defers taxation until the distribution of profits to shareholders. However, restrictive and complex regulations regarding the loss of this form of taxation mean that any reorganization of the capital structure raises legitimate concerns among management boards and business owners.
The business scenario analyzed by the tax authority involved two related limited liability companies with the same sole shareholder, a natural person. Both companies had been enjoying the benefits of the Estonian corporate income tax since July 2023. To optimize administrative costs and simplify mutual settlements, a decision was made to implement a restructuring process. The plan assumed a classic merger by acquisition, in which one company acquires all assets of the other, becoming the sole continuator of the business.
The primary concern for taxpayers facing mergers is the risk of automatic exclusion from the Estonian corporate income tax system. The Corporate Income Tax Act establishes a general rule in this regard, according to which the acquisition of another entity results in the loss of the right to lump sum taxation at the end of the year preceding the year of the acquisition. Fortunately, the legislature has provided significant exceptions to this rule, which, with proper transaction planning, allow for the retention of existing privileges.
In the case at hand, the key factor was that not only the acquiring company, but also the acquired company, had the status of a flat-rate taxable entity. The Director of the National Tax Information Service explicitly confirmed that in this configuration, the condition stipulated in Article 28l, paragraph 1, item 4, letter c of the Corporate Income Tax Act is met. Since the acquired entity also applies the flat-rate tax at the time of the merger, the restructuring does not have the negative effect of losing the acquiring company's right to Estonian Corporate Income Tax. The acquiring company can continue this form of settlement in subsequent tax years without any problems.
The second, much more complex issue the tax authority had to address was the potential generation of income from changes in the value of assets, as defined in Article 28m, Section 1, Item 4 of the Corporate Income Tax Act. This provision requires taxation of the excess of the market value of acquired assets over their tax value. The tax authority introduced this solution to prevent situations in which restructuring results in a tax-free, silent revaluation of assets.
To precisely assess the tax risk, the applicant referred to the provisions of accounting law and the methodological assumptions of the planned merger. It was indicated that the transaction would be accounted for using the pooling of interests method, governed by the provisions of the Accounting Act. This method applies in situations where the merger does not result in the loss of control of the merged entities by the existing owners, which ideally suited the situation of an identical, sole shareholder in both companies.
The choice of the pooling of interests method has fundamental consequences for the presentation of financial data. In this model, the assets and liabilities of the acquired company are not measured at fair or market value. Instead, individual balance sheet items are aggregated at their current book values. The balance sheet structure also does not establish a purchase price, meaning that no positive or negative goodwill is created in the assets or liabilities of the acquiring company. The entire process relies solely on the continuity of accounting valuation, which is identical to the tax value of the assets.
The Director of the National Tax Information fully agreed with the taxpayer's argument, finding his position to be correct. In its justification, the authority emphasized that since all the merger's monetary parameters will be based solely on the existing book values, and the assets of the acquired company will be entered into the books of the acquiring company without changing their value, the applicant will not incur any excess of market value over its tax value.
The absence of the aforementioned surplus automatically means that the provision of Article 28m, Section 1, Item 4 of the Corporate Income Tax Act will not be implemented. Consequently, the acquiring company will not generate income subject to Estonian Corporate Income Tax. This position is consistent with the established, rational interpretation of the tax authorities, providing entrepreneurs with a high level of legal certainty when planning similar reorganization processes.
The presented interpretation, dated September 2, 2025 (ref. 0111-KDIB1-1.4010.416.2025.1.AND), provides extremely valuable practical guidance for those responsible for finance and taxes in capital groups. A prerequisite for full tax success is a meticulous analysis of the accounting aspects of the transaction before adopting formal merger resolutions. The key to tax neutrality in terms of changes in asset value is maintaining the principle of continuity of valuation and correctly identifying the grounds for applying the pooling of interests method. Any deviation from the acquisition method, which involves fair value measurement, could dramatically change the company's tax position and generate an immediate tax liability.
The individual tax ruling described here is an excellent example of how Estonian corporate income tax regulations, while stringent, allow for efficient and tax-free internal business reorganizations. However, this requires understanding the relationship between accounting and tax law and precisely adapting legal procedures to the economic realities of a given company.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of June 19, 2026.
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