Newcomers do not lose their preferences by being hired during the year
In order to apply the Estonian CIT, it is not required that every year during the transition period, every employee newly hired on a contract of employment must have worked 300 days, according to a tax interpretation reported by Rzeczpospolita.
Marek Kończak, legal counsel and senior manager at Thedy & Partners commented on this interpretation in the newspaper. He stressed that lump-sum taxation on company income (the so-called Estonian CIT) is one of the more attractive solutions allowing for optimisation of tax liabilities. However, taxation of a company with Estonian CIT and functioning within its framework is subject to a number of conditions and restrictions, the non-fulfilment of which may entail dropping out of the system and negative tax consequences.
One of the conditions for taxation under Estonian CIT is the employment of at least three persons for at least 300 days per year. However, the legislation introduces some simplifications for start-up companies. For a start-up taxpayer, the employment condition does not apply to the start-up year of the business and the 2 tax years immediately following it. However, from the second tax year onwards, the taxpayer is obliged to increase its employment by at least 1 FTE each year until the employment figure specified in this provision is reached
This is the factual situation in which a tax interpretation was issued by the Director of the KIS, in which the position favourable to taxpayers with regard to the minimum employment condition was confirmed.
The applicant, who started his business in 2022, indicated that he intends to hire a non-shareholder employee on a full-time employment contract in the second half of 2023. In addition, it also assumes to hire at least one new non-shareholder employee on a full-time employment contract in each subsequent fiscal year, i.e. in 2024 and in 2025.
In the individual interpretation issued in the aforementioned factual situation, the Director of the KIS confirmed that due to the fact that in the first tax year, i.e. in 2022, the taxpayer did not employ any full-time employee, while in the second tax year (in the second half of that year), i.e. in 2023, it intends to employ a full-time employee and assumes the employment of at least one employee in the subsequent tax years, i.e. in 2024 and in 2025, it will thus lead to an annual increase in employment by at least one full-time employee. The fact that the period of employment of an employee in 2023 and in the subsequent tax years, i.e. 2024 and 2025, will not amount to 300 days in a tax year does not affect the fulfilment of the employment size condition.
In practice, the position of the authorities means that the condition of an increase in employment by 1 FTE each tax year can (in extreme cases) be interpreted as the necessity to employ an employee at least on the last day of the respective tax year.
The entire article was published in Rzeczpospolita of 27 November 2023, page D7