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04
April 2023

Estonian CIT Rate Depends on…

...one key factor.When applying so-called "Estonian" CIT, companies can take advantage of deferring tax until profit is distributed. However, when planning settlements, it is important to remember that in order to achieve the lowest effective tax rate, as much of the profit as possible should be paid out when using this solution. It is important that the CIT paid on profits should reduce the net financial result while the taxpayer is still applying Estonian CIT.In the guidelines of the Ministry of Finance dated 21 December 2021, we find the effective tax rate (i.e. combined CIT and PIT) for this form of taxation is 20% for 'small' taxpayers and 25% for 'large' ones.Penteris Head of Tax Piotr Prokocki explains:"The calculations presented in the Ministry guidelines do not take into account one element i.e. the Corporate Income Tax paid by the company reduces its balance sheet. In turn, the balance sheet - in the case of entities applying Estonian CIT - has an (indirect) impact on the tax base. This is because the company's distributed income is taxed as a rule. The amount of these distributions depends on the amount of net profit generated by the company as it cannot exceed the amount of net profit."When the CIT paid on net profit reduces the company's net profit in the period in which the company applies Estonian CIT, the effective tax rate is 18.18% for small taxpayers and 20.83% for large ones. In both cases, therefore, it will be a few percentage points lower than indicated in the tax guidelines of the Ministry.Piotr Prokocki adds: "In order to achieve the lowest effective tax rate, as much of the profit as possible should be distributed before the end of the application of Estonian CIT; in advance, allowing the CIT paid on these profits to reduce the financial result while the taxpayer is still applying Estonian CIT. Only in such a situation will the tax paid have an (indirect) impact on the tax base.""However, if the tax is already paid after exiting Estonian CIT, the effective tax rate will be higher (20% for small taxpayers and 25% for large ones). When exiting Estonian CIT, taxpayers who do not distribute profits on an ongoing basis must decide which they care most about: a lower effective tax rate or tax deferral. If they choose the former, they should pay the tax before exiting Estonian CIT, notes Piotr Prokocki.Originally published 28.03.2023 by (Wolters Kluwer) prawo.pl