Estonian CIT – announcement of changes in regulations

The Ministry of Finance has announced modifications to the regulations concerning Estonian CIT.

On September 16, 2025, a draft bill amending the PIT and CIT regulations was presented. It appears that for companies applying Estonian CIT, the chosen direction is primarily to increase the tax burden. However, there are also solutions that may resolve existing disputes in a manner favorable to taxpayers.

In the following section, we outline the most significant planned changes to Estonian CIT and their potential implications for entrepreneurs.

Extension of the definition of hidden profits

In accordance with the prevailing legal framework, benefits transferred to partners or related entities are subject to taxation, provided that they are related to the right to share in profits. This wording means that in the case of certain transactions, there are disputes as to whether the condition of a connection between a given benefit and the right to share in profits is met. For instance, in the context of loans granted by taxpayers subject to Estonian CIT, certain courts have held that the pro-fiscal stance adopted by the authorities may be in conflict with the regulatory framework.

The proposed amendment would remove the condition of a connection between the benefit and the right to participate in profits. Furthermore, there are plans to expand the list of hidden profits to include additional categories of benefits, such as fees arising from lease or tenancy agreements, fees for the use of trademarks, costs of intangible services, and benefits provided under Article 176 of the Commercial Companies Code.

Transactions such as renting an office from a related company or leasing fixed assets from a partner were not subject to taxation, provided that they were carried out on market terms. Following the implementation of these changes, the aforementioned payments will be classified as hidden profits and will be subject to taxation, irrespective of any indication of overcharging or abuse.

Definition of expenses not related to business activity

Currently, the regulations do not contain a definition of expenses not related to business activity. The ministry proposes that such expenses be considered to be any costs incurred for purposes other than achieving, maintaining, or securing a source of income. According to the Ministry’s plans, all public law liabilities of a punitive nature (e.g., public law interest, penalties) are also to be considered expenses.

Based on the proposed provision, it can be assumed that the changes in this area will only be of a clarifying nature and will not affect the actual extension of the scope of expenses not related to business activities subject to taxation in accordance with the current practice.

Presumption of payment of Estonian profits

According to the current wording of Article 28h(4) of the CIT Act, it is presumed that in the case of dividend payments after the end of the application of Estonian CIT, profits earned during the lump-sum taxation period are distributed last.

This presumption is beneficial to taxpayers, as the distribution of profits from the Estonian CIT period generates CIT (on the part of the company) and PIT (on the part of the shareholders) charges, and therefore its total effective taxation is higher than the distribution of other profits.

The proposed change is intended to reverse this rule – the Ministry of Finance wants to introduce a presumption that any distribution of profits after the end of the Estonian CIT period will be treated as coming from profits generated during the lump sum period. The draft amendments may lead to the conclusion that in the case of dividend payments after January 1, 2026, it will not be possible to rebut this presumption, even by specifying this in the resolution on the payment of dividends.

Liberalization of formal requirements for choosing Estonian CIT

The draft contains one change that aims to eliminate excessive formalism. It concerns companies implementing Estonian CIT during the tax year, which involves the obligation to prepare and sign financial statements on time. The Ministry of Finance assumes that the lack of signatures of management board members or their late submission will not result in the loss of the right to enter into a lump sum agreement, provided that all other conditions and obligations have been met. Importantly, the change will only apply to companies that started applying Estonian CIT before September 1, 2025.

Although the planned change is definitely good news for taxpayers, and the new approach means a departure from the negative effects of minor irregularities, it is difficult to find justification for the exclusively retroactive effect of the regulations.

Summary

Although the content of the regulations may change in the course of legislative work, it is already worth analyzing which areas of the company’s activities may be covered by the amendment.

On the one hand, entrepreneurs can expect greater transparency, thanks to, among other things, the introduction of a definition of expenses not related to business activity and the relaxation of formal requirements when choosing a lump sum.

However, it should be noted that some of the proposals may present certain disadvantages. These measures primarily concern the reversal of the rules on the order of settling profit distributions and a significant expansion of the list of hidden profits. They also concern the risk of taxation of transactions with related entities, even when they are conducted on market terms.

In practice, this means that taxpayers applying Estonian CIT will have to monitor their economic relations with related entities even more closely and plan their profit distribution more carefully. Despite these changes, Estonian CIT remains a highly effective and straightforward method of settling income tax for companies with private owners, whether Polish or foreign.