In recent years taxpayers in Poland have gained two attractive tax solutions for their businesses.
First is a model of taxation commonly referred to as ‘Estonian CIT’ (the lump-sum corporate income tax), which is aimed to support the growth of businesses by enabling them to reinvest profits without taxation.
Second is a family foundation, which goal is to facilitate the succession of family business and helps to secure the family assets.
In this article we will discuss the selected tax aspects of the Estonian CIT and the family foundation, comparing them with the taxation of a ‘regular’ limited liability company (LLC).
Tax deferral
Contrary to the regular LLC, a company taxed with the Estonian CIT and the family foundation do not pay CIT on a current basis. Both solutions allow to defer payment of CIT until the profits are paid out to shareholders / beneficiaries. In other words, you do not have to pay tax as long as profits remain in the company or the foundation. The above tax characteristic enhances investment capacity of both the company and the foundation.
Effective taxation
The overall effective taxation in the Estonian CIT model and the family foundation is generally lower than in case of a standard CIT regime.
Due to special PIT deductions in the Estonian CIT model, the sum of CIT and PIT tax burdens amounts to 20% for ‘small taxpayers’ (revenue below PLN 2 M) and 25% for standard taxpayers. In the regular LLC it is correspondingly 26,3% and 34,4 %.
As regards the family foundation, the most advantageous scenario provides only 15% CIT taxation on the level of the foundation and no tax burdens on the level of beneficiaries. It occurs when a beneficiary is the founder's closest family (individual listed in the "zero" tax group in the provisions on inheritance and donation tax). There are however some catches – 15% CIT rate is not applicable to income obtained from the unallowed business activity (25% CIT) and to income from renting out assets to founders/beneficiaries/related entities, which are used for their business activity (19% CIT).
Restrictions
In the regular LLC there are no restrictions relating to the type of business activity or the structure of income.
To apply the Estonian CIT regime a company should meet the numerous requirements, among others the one referring to the ‘revenue structure’, according to which the ‘passive revenue’ (e.g. from interests, copyrights) cannot exceed 50% of a company’s total revenue. In this context applying the Estonian CIT may be problematic for example for software houses, which derive much of their profits form the transfer of IP rights. Also there are some entities explicitly excluded from the possibility to opt for the Estonian CIT taxation system, like financial companies and lending institutions.
Even more restrictions apply to the family foundation. It can conduct business activity only in a very limited scope directly indicated in the provisions. The above results from the fact, that the main purpose of a family foundation is to generate passive income, for example through dividends from family companies, and not to run the business. As regard active operations, the family foundation can among others buy and sell shares / securities and rent out real estates.
Hidden profits
The Estonian CIT and the family foundation taxation rules provide a specific category of taxable events called “hidden profits”. They are events that under the guise of other legal actions lead to benefits on the part of shareholders /founder /beneficiaries equivalent to profit distribution.
In the Estonian CIT model, hidden profits are considered to be, for example:
- loans granted to shareholders,
- donations,
- 50% of car-related expenses if the company’s car is also used for the shareholders’ private purposes,
- part of the remuneration paid out to shareholder under an employment contract exceeding the fivefold of the average monthly salary.
The hidden profits listed in the family foundation provisions are similar, though not the same. The benefits qualified as hidden profits in the family foundation include among others:
- a loan granted by a family foundation to a beneficiary for at least 10 years,
- remuneration for providing certain intangible services (e.g. management, advisory services),
- part of the remuneration for tangible services exceeding the market value.
Additional remark: In should be noted that the provisions do not allow a family foundation to have shares in companies taxed with the Estonian CIT. A person having shares in the Estonian CIT company can however establish the family foundation with assets other than shares in this company or have a status of a family foundation’s beneficiary.