Estonian CIT in 2026

The Estonian CIT is a form of lump-sum taxation introduced in 2021 for companies such as limited liability companies, which has gained increasing popularity year after year due to the deferred taxation moment (in principle, as long as the funds remain in the company and are reinvested, there is no tax obligation). By 2025, the main benefits of the Estonian CIT include:

no monthly or quarterly tax advances;
a lower effective tax rate compared to traditional forms of taxation (20% for small taxpayers and 25% for other entities);
encouragement to reinvest earned profits.

Planned changes by the Ministry of Finance

The Ministry of Finance has prepared a draft amendment[1], which, upon coming into force in 2026, will change the operating principles of the Estonian CIT in 4 following areas:

(1) Expansion of the definition of hidden profits

The most important change in this area is the removal of the condition of "connection with the right to participate in profits." Currently, only those benefits that can be considered a substitute for dividends or lack economic justification are recognized as hidden profits. After the change, any benefit to a partner or related entity may be classified as hidden profit.

The catalog of hidden profits is planned to be expanded to include:

fees for rental and lease of property from partners;
receivables for the use of copyright and industrial property rights
costs of intangible services;
remuneration for partners for recurring benefits;
fees for licenses and trademarks.

In practice, this means that even market-based transactions concluded with related entities may be subject to taxation as hidden profits.

(2) Definition of expenses not related to business activities

For the first time, regulations will include a clear definition of expenses not related to business activities. Such expenses will be recognized as those incurred for purposes other than generating revenue or maintaining a source of income, including:

all kinds of penalties, fines, and interest on tax arrears;
fees and public law receivables of a sanctioning nature.

Such expenses are to be automatically excluded from tax costs and may be subject to additional tax burdens.

(3) Presumption of profit distribution from the Estonian CIT period

Currently, there is a favorable presumption for taxpayers that profits not earned during the Estonian CIT taxation period are paid out first. The proposed changes reverse this principle, and from next year, any dividend payment after leaving the Estonian CIT will be automatically treated as coming from the lump-sum period.

The consequence of this change could be triple taxation in the same period, i.e., CIT + capital gains tax + Estonian CIT. For example, when generating 1 million PLN in profit and wanting to distribute it as dividends, the following tax obligations will arise:

current CIT tax on profits earned after the lump-sum ends (9% or 19%) - 90,000 / 190,000 PLN;
dividend tax (19%) upon distribution to partners - 154,000 PLN PIT;
additional Estonian CIT (10% or 20%) due to the presumption of origin from the lump-sum period - 81,000 / 162,000 PLN;
total tax burden = 425,000 / 500,000 PLN.

Thus, as a result of adopting the above changes, the effective tax rate may exceed even 50%, whichde factowould make the use of this form of taxation unreasonable for many taxpayers and pose a risk of excessive taxation.

(4) Liberalization of formal requirements

One of the next proposals is a change regarding issues with preparing financial statements when transitioning to the Estonian CIT. The absence of signatures from board members on the financial statement will no longer result in the loss of the right to lump-sum taxation, provided it is prepared on time and in electronic form. Unfortunately, this relief is intended to operate on an abolition basis and is meant to apply only to entities that chose this form of taxation before September 1, 2025.

Consequences for entrepreneurs

The planned changes, on the one hand, address certain issues of the Estonian CIT, while simultaneously introducing restrictions that may prove unfavorable for a broader group of CIT taxpayers.

If the proposed changes come into force, entrepreneurs benefiting from the Estonian CIT must prepare for:

a thorough review of all transactions with related entities and partners;
restructuring business relationships to avoid classification as hidden profits;
the assessment of the profitability of continuing to use the Estonian CIT in light of new burdens.

Entities currently benefiting from the Estonian CIT, as well as those planning to choose this form of taxation in the future, should monitor the progress of legislative work, keeping in mind that the time to make a decision is limited and the consequences of being unprepared can be very costly.

From our side, we can support your activities on this difficult and winding path by providing extensive explanations and advice regarding these complex and multifaceted changes.

[1] https://legislacja.rcl.gov.pl/projekt/12402157