Situation and challenge
Estonian CIT, the common name for Poland's lump-sum corporate income tax regime (ryczałt od dochodów spółek), can be attractive to companies seeking to reinvest profits, reduce current tax burdens and simplify corporate income tax compliance. In practice, however, switching to Estonian CIT requires careful preparation. A company must meet specific statutory conditions, correctly submit the ZAW-RD notification, prepare its books for the change of tax regime and continually monitor whether it remains eligible.
A client approached TOP Outsourcing with plans to organise its business structure across two entities. The first company was already established and operational. The second was yet to be incorporated and was intended to apply Estonian CIT from the start.
The client wanted to know whether both entities could use the lump-sum regime, how to manage the transition properly, which documents to prepare, how to account for the initial adjustment in the existing company and how to avoid losing eligibility in subsequent years.
TOP Outsourcing's task was to guide the client through the whole process: from assessing eligibility for Estonian CIT, preparing the ZAW-RD notification and analysing the initial adjustment, to reminding shareholders about OSW-RD and monitoring continued eligibility for the regime.
The problem: electing Estonian CIT for two companies in different formal circumstances
The client had two entities at different stages of development. Each required a different approach.
The first entity was an existing Polish limited liability company (sp. z o.o.). It had accounting records, employees, revenue, contracts with customers and suppliers, and a history of tax filings. This required an analysis of existing data, verification of eligibility for Estonian CIT and preparation of data for the initial adjustment.
The second entity had yet to be incorporated. The client wanted the new company to use Estonian CIT from the outset. The key issues were planning the incorporation date, tax year and ZAW-RD submission correctly, and subsequently completing the documentation once the Polish tax identification number (NIP) had been assigned.
The main challenges included:
1. Verifying eligibility for Estonian CIT
A company using the lump-sum corporate income tax regime must meet conditions relating to matters such as legal form, ownership structure, revenue types, employment, the absence of holdings in other entities and statutory exclusions. For example, the Polish Ministry of Finance indicates that shareholders should be individuals only, the company should not hold shares in other companies, and passive revenue should remain below a specified threshold.
The client needed a practical assessment of whether both entities could enter the regime and which risks needed to be addressed before submitting ZAW-RD.
2. Different approaches for an existing company and a new company
For the existing company, we needed to analyse historical data, revenue, employment, related-party transactions, potential hidden profits, prior tax losses, the initial adjustment and any tax consequences of entering the lump-sum regime.
For the new company, the priority was to plan its structure from the outset: shareholders, business activities, financing arrangements, employment, related-party relationships and document workflows.
3. The initial adjustment for the existing company
For an existing company, entering Estonian CIT also requires analysis of the initial adjustment of revenue and expenses (korekta wstępna). This concerns differences between accounting and tax results that must be identified when moving to the lump-sum corporate income tax regime.
TOP Outsourcing analysed the company's accounting data for differences that might need to be disclosed in the initial adjustment. In practice, this meant reviewing revenue and expenses previously recognised only for accounting or only for tax purposes, and preparing the data needed to report the adjustment correctly in CIT/KW. The Ministry of Finance states that revenue and expense differences are reported in the CIT/KW attachment to CIT-8, and that tax arising from the initial adjustment is not paid if the taxpayer remains in the lump-sum regime for four tax years.
4. Submitting ZAW-RD for the new company before receiving its NIP
A practical issue arose for the newly formed company: the client wanted to apply Estonian CIT from the start, but its NIP was not yet available during incorporation. At the same time, electing the regime requires a ZAW-RD notification to be submitted by the end of the first month of the first tax year in which it will apply.
We adopted a precautionary approach: we prepared the ZAW-RD notification using the new company's available identification details and, once its NIP had been assigned, prepared a further notification with the correct NIP to complete the documentation and reduce formal risks.
5. Shareholders' OSW-RD obligations
When entering Estonian CIT, it is important to remember not only the ZAW-RD form submitted by the company. OSW-RD is also relevant: it is a declaration submitted by an individual shareholder or partner to the company taxed under the lump-sum regime. It concerns entities in which the shareholder holds rights. The Ministry of Finance form specifies submission by the end of the first month of each tax year in which the regime applies, and when the facts change.
TOP Outsourcing reminds the client of this obligation, can provide practical assistance with completing the form and highlights points requiring attention. However, we do not submit OSW-RD on behalf of shareholders: it is their declaration to the company.
6. The risk of losing eligibility for Estonian CIT after entering the regime
Entering Estonian CIT does not end the process. A company must regularly monitor whether it still meets the conditions for the lump-sum regime. Relevant areas include ownership structure, employment, passive revenue, related-party relationships, hidden profits, non-business expenses and the way accounting records are maintained.
The client needed ongoing accounting oversight of Estonian CIT conditions, not merely one-off assistance with ZAW-RD.
What TOP Outsourcing did
The solution: comprehensive preparation for Estonian CIT
TOP Outsourcing proposed a complete process for bringing both entities into Estonian CIT. We divided the work into two tracks: one for the existing company and one for the new company that had yet to be incorporated.
Step 1: Analysing the business model and ownership structure
The first stage was to analyse the client's existing and planned business structure. We checked the activities of both entities, who their shareholders would be, their sources of revenue, relationships with other entities and whether the companies would hold shares in other companies.
Among other things, we reviewed:
- the companies' legal forms
- shareholding structures
- the status of shareholders
- personal and capital relationships
- planned transactions between the entities
- sources of revenue
- the cost structure
- how the business would be financed
- the risk of hidden profits
- the risk of non-business expenses.
At this stage, we explained which elements of the structure presented no identified concerns and which required further analysis or consultation with a tax adviser.
Step 2: Verifying the conditions for the existing company
For the company already in operation, we carried out a detailed analysis of accounting and tax data.
Among other things, we checked:
- the revenue structure
- the proportion of passive revenue
- employment
- agreements with employees and contractors
- related-party transactions
- transactions and balances with shareholders
- payments to owners
- loans, leases, management services and other benefits
- the history of tax losses
- assets and liabilities
- how the accounting records were maintained
- potential adjustments on entering the regime
- data needed for the initial adjustment.
The objective was to determine whether the company could properly enter Estonian CIT and what action was needed before submitting ZAW-RD.
Step 3: Analysing the initial adjustment for the existing company
Analysis of the initial adjustment of revenue and expenses was a separate stage. For a company already operating, checking eligibility for Estonian CIT alone was insufficient. Differences between accounting and tax treatment also had to be analysed.
TOP Outsourcing prepared the data needed to determine whether the company had differences requiring disclosure in the initial adjustment. The analysis included:
- revenue previously recognised for accounting but not tax purposes
- expenses previously recognised for tax but not accounting purposes
- revenue previously recognised for tax but not accounting purposes
- expenses previously recognised for accounting but not tax purposes
- accruals and deferrals
- provisions
- impairment allowances
- differences in the recognition of selected expenses and revenue
- data for CIT/KW.
The aim was to organise the transition from standard CIT to the lump-sum corporate income tax regime and reduce the risk of overlooking differences.
Step 4: Preparing the existing company to enter Estonian CIT
Once the analysis was complete, we prepared a list of actions to take before entering the lump-sum regime.
As part of the preparation, we:
- put the accounting data in order
- analysed balances, receivables and payables
- reviewed passive revenue
- checked whether the employment condition was met
- analysed transactions with shareholders
- identified potential hidden-profit risks
- prepared data for the initial adjustment
- discussed with the client the consequences of losing the right to deduct tax losses
- prepared a timetable for the transition to Estonian CIT.
If a company switches to the lump-sum regime during a tax year, it must close its books and prepare financial statements as at the last day of the month preceding the first month under the regime. This also ends the previous tax year.
Step 5: Preparing the new company for Estonian CIT from the start
The second entity had yet to be incorporated. TOP Outsourcing therefore supported the client while the company was still being planned.
We analysed:
- the proposed shareholding structure
- the planned tax year
- the revenue model
- the employment plan
- sources of financing
- planned related-party transactions
- arrangements for transactions with shareholders
- organisational provisions relevant to accounting
- the timetable for registration and notifications.
For the new company, it was particularly important to avoid introducing arrangements that could make entering Estonian CIT or remaining in the regime more difficult.
Step 6: ZAW-RD for the new company without a NIP, followed by resubmission once the NIP was assigned
For the new company, the client wanted to elect Estonian CIT from the start, but its NIP was not yet available. To reduce the risk of missing the deadline, we prepared the ZAW-RD notification with the available company identification details, despite the absence of a NIP.
Once the NIP was assigned, we prepared a further ZAW-RD notification with the correct number. This completed the documentation and gave the client an organised record of the actions taken to elect the lump-sum corporate income tax regime on time.
This step requires careful assessment in each case. For new companies, the practical issue is that the ZAW-RD deadline may already be running before all identification details are available. In more complex or disputed cases, we recommend consulting a tax adviser alongside the process.
Step 7: Preparing and submitting ZAW-RD for the existing company
For the existing company, we prepared the ZAW-RD notification after verifying eligibility for Estonian CIT and analysing the initial adjustment.
The process included:
- confirming the appropriate period of taxation under the lump-sum regime
- verifying the competent tax office
- preparing data for the form
- checking the submission deadline
- agreeing the date of entry into Estonian CIT
- confirming whether the books needed to be closed for a mid-year transition
- preparation of data for CIT/KW
- preparing the client for subsequent record-keeping obligations.
ZAW-RD is the official notification of an election to be taxed under the lump-sum corporate income tax regime. The current form is provided by the Polish Ministry of Finance.
Step 8: Reminding shareholders about OSW-RD
Shareholders have an additional obligation relating to OSW-RD. This declaration is submitted by the shareholder to the company, rather than by the accounting firm on the shareholder's behalf.
TOP Outsourcing:
- reminds the client of the OSW-RD obligation
- identifies the declaration's submission deadline
- can provide practical assistance with completing the form
- explains which information may be needed
- reminds shareholders to update the declaration when the facts change
- helps the company organise the archiving of declarations received.
We do not submit OSW-RD on behalf of shareholders. Each shareholder submits the declaration to the company and is responsible for the accuracy of the information it contains.
Step 9: Adapting the accounting to Estonian CIT
After electing Estonian CIT, adapting the accounting to the new tax regime was essential. Estonian CIT requires a different approach to monitoring business transactions than standard CIT.
Among other measures, we introduced:
- appropriate identification of transactions with shareholders
- monitoring of payments to related parties
- checks on potentially non-business expenses
- analysis of hidden-profit risks
- checks on payments and benefits provided to shareholders
- ongoing monitoring of employment conditions
- checks on the revenue structure
- monitoring of OSW-RD obligations
- a procedure for regularly reviewing Estonian CIT conditions.
The aim was not only to enter the regime correctly, but also to operate within it with confidence in the following months and years.
Step 10: Regular monitoring of continued eligibility for Estonian CIT
TOP Outsourcing introduced periodic monitoring of the conditions for remaining in the lump-sum corporate income tax regime. This is particularly important because losing eligibility can have serious tax and organisational consequences.
We regularly analyse:
- the ownership structure
- employment
- the level of passive revenue
- related-party transactions
- payments to shareholders
- loans, leases, cars and other benefits
- potential hidden profits
- non-business expenses
- changes in the business model
- reorganisations
- OSW-RD obligations
- the risk associated with preparing financial statements under IAS, where relevant.
As a result, the client treats Estonian CIT as a tax model requiring ongoing control, rather than a one-off notification.
Results and summary
Results: a controlled transition to Estonian CIT and ongoing oversight of eligibility
With TOP Outsourcing's support, the client was able to organise a controlled transition to Estonian CIT for both entities.
The existing company was prepared for Estonian CIT
We analysed historical data, the revenue structure, employment, transactions with shareholders and potential risks. The client therefore understood whether the company met the conditions for the lump-sum regime and what needed to be done before submitting ZAW-RD.
The initial adjustment was analysed before entry into the regime
TOP Outsourcing reviewed differences between accounting and tax results and prepared data for the initial adjustment and CIT/KW. This ensured that the transition to Estonian CIT was also organised from an accounting and reporting perspective.
The new company was designed for Estonian CIT from the outset
TOP Outsourcing supported the client in planning the new company's structure, notification timetable and accounting. ZAW-RD was initially prepared with the available details and then prepared again after the NIP was assigned.
The client was informed about OSW-RD
Shareholders were informed of their obligation to submit OSW-RD to the company. TOP Outsourcing reminded them of the deadline, identified the data required and provided practical assistance with preparing the form, without submitting the declaration on their behalf.
Accounting was adapted to the lump-sum corporate income tax regime
Accounting processes were set up to identify risks specific to Estonian CIT on an ongoing basis: hidden profits, non-business expenses, transactions with shareholders and related parties, employment conditions and OSW-RD obligations.
TOP Outsourcing monitors continued eligibility for Estonian CIT
The client received ongoing support both when entering Estonian CIT and subsequently operating within the regime. Regular reviews of the conditions help identify risks earlier and allow action before they become tax problems.
Summary
This case study shows that switching to Estonian CIT requires more than submitting ZAW-RD. It also involves a detailed assessment of the conditions, proper preparation of the books, analysis of the initial adjustment, reminders to shareholders about OSW-RD and ongoing monitoring of the company's position.
By working with TOP Outsourcing, the client benefited from:
- an assessment of whether it could enter Estonian CIT
- verification of the conditions for the existing company
- analysis of the initial adjustment
- preparation of data for CIT/KW
- support with designing the new company for Estonian CIT
- preparation of the ZAW-RD notification
- assistance where the new company had not yet received its NIP
- preparation of a further ZAW-RD notification after the NIP was assigned
- reminders to shareholders about OSW-RD
- practical assistance with completing OSW-RD
- adaptation of accounting to the lump-sum corporate income tax regime
- monitoring of hidden profits and non-business expenses
- regular checks on continued eligibility for Estonian CIT.
TOP Outsourcing supports companies with the transition to Estonian CIT, preparation of ZAW-RD, assessment of eligibility, analysis of the initial adjustment, adaptation of accounting to the lump-sum corporate income tax regime and ongoing monitoring of tax compliance risks.
