Estonian CIT Employment Rules: Where Opportunity Meets Risk

Popular Regime with a Catch

Companies operating in Poland that meet specific conditions may choose to be taxed under the so-called Estonian CIT regime. Under this system, corporate income tax is generally payable only when profits are distributed. Unsurprisingly, this solution has become an increasingly attractive option for many businesses.

Minimum Employment Requirement

A company must maintain a workforce of at least three full-time employees (excluding shareholders) under standard employment contracts, employed for at least 300 days per tax year (or 82% of that period where the year is shorter). Alternatively, the requirement may be met by engaging at least three non-shareholding contractors, provided the company acts as their PIT or social insurance payer. This area contains several technical pitfalls that businesses should be aware of.

Start-Up Friendly Exception

There is some relief for companies at the beginning of their business activity. In their first year of operations, they may qualify for the Estonian CIT regime without employing any staff. From the second year onward, they must gradually build up employment, increasing it by at least one full-time position each year until the three-employee minimum is reached.

Narrow Interpretation from Tax Authorities

A practical issue concerns how to define a company that is “starting business activity.” The tax authorities take the view that entering the Estonian CIT regime after the first day of an already-ongoing tax year means the company is not treated as newly established. To benefit from this preference, the company must elect Estonian CIT from the first day of its initial tax year.

Flexibility on Timing

Companies that rely on the progressive employment rule must increase headcount each year. The good news is that newly hired employees do not need to work the full 300-day period, which allows even year-end hiring to satisfy the requirement.

Courts Versus Tax Authorities

There is an ongoing dispute over whether it is permissible to employ a larger number of people for a shorter period if the average employment level meets the threshold. Some administrative courts, including the Supreme Administrative Court, have accepted this interpretation. Tax authorities continue to oppose it.

Written by Konrad Gańczarczyk and originally published by Prawo.pl.