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Estonian Corporate Income Tax – State of the Art Tax solution

BACKGROUND 
A new domain for a living has claimed a new dimension of policies and administration by the government of various countries to established the better regulations that can help the companies and small scale industries to survive along with big giants on better footing.  
Several countries have already revisited and changed their government policies and regulations under various laws in light of prospective needs of the companies and industries, especially policies and regulations affecting the tax structures of the company.
The Polish government with the vision to create a positive impact on the industries of Poland has announced a new tax regime, namely Estonian Corporate Income Tax (Estonian CIT).
ESTONIAN CORPORATE INCOME TAX (ESTONIAN CIT)
On 17.06.2020, the Polish government has announced a new tax regime namely Estonian CIT, which will come into force from the year 2021. It is a new form of taxation that allows the companies to invest and provides for the minimum formalities for tax settlements. The introduction of the Estonian CIT is a traditional form of taxation whose roots have been emerged from the taxation system prevailing in the country of Estonia which was introduced 20 years ago, wherein the point of corporate taxation shift from the moment of earning the profits to the moment of distribution of profits.
Under Estonian CIT, retained profits are not taxable until they are distributed. It does not exempt companies from tax; rather it defers the point of corporate Income Tax. Under this unique taxation system, tax on corporate profits is postponed until the profits are distributed in a form of dividend or distributed in a form of expenses, transfer pricing adjustments, etc.
This CIT system has already been adopted by some countries like Georgia from January, 2017 and Latvia from January, 2018. The Estonia CIT system stands in stark constant to other CIT system in countries like USA, United Kingdom and many other countries.
OVERVIEW OF THE ESTONIA CIT – POLAND
Assumptions
Under the new taxation regime in Poland, the point of collection of CIT will be shifted from the time of earning profits to distribution of their profits. Companies having its residence in Poland would be taxed on the profits distributed from their worldwide income; however the non-resident companies may be taxed only on profits distributed from income derived from Poland.    
Companies will be exempt from the annual/ monthly and quarterly payment of their corporate tax and would be taxable at the time of redistribution of their profits.
Companies may enter into this new tax regime for 4 consecutive years, with the liberty to enhance their period subject to the fulfilment of the required conditions
Implementation
The new tax regime in Poland will be applicable on 2 fronts which would be voluntary;
1. Estonian solution – In this approach, the taxation will be levied on only redistributed profits
2. Fund/ Investment – This approach will be based on the usage of regular CIT settlement methods wherein a separate investment account has to be operated which would allow deductions from CIT.
Scope
The new tax regime in Poland will apply to the companies having a turnover of more than 11 million euros
The new tax regime will apply only to private limited companies and joint-stock companies. As per the reports over 2 lakh firms and more than 95% of the limited companies and joint-stock companies would be eligible to opt for this new tax regime.
The real objective of the Polish government behind Estonian CIT is to promote small and medium enterprises (SMEs), which would be a silver lining for SMEs and other industries in wake of COVID-19.
The new tax regime will not be accessible to any partners of partnerships firms and to the companies which are holding the shares of other separate companies.

CONCLUSION
Estonian CIT will be a revolutionary step for the taxpayers of Poland in terms of more investments and employment, more liquidity, creditworthiness, productivity, and an increase in the companies’ equity. The Estonian CIT favours the investments.
As per the reports, another objective behind the new tax regime in Poland is to restrict the practice of the tax avoidance that prevails under the shelter of partnership firms.
However, encouragement of investments in Poland by virtue of new tax regime may have execution difficulty in terms of present uncertainty in economy due to current pandemic. 
The exclusion of certain entities from the ambit of the new tax regime may result in distortion in Poland. However, time will be the essence to see the real portrait of the new tax regime in the Polish market.
ABOUT US
AMLEGALS is a multi-specialised law firm. We would love to hear your views, queries, feedback and comments on anand@amlegals.com or siddharth.kakka@amlegals.com 

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