Additional financing of the Company and the Estonian CIT
One of the most common forms of providing cash to business entities is concluding a loan agreement with a partner. However, it should be remembered that this form of financing, despite its popularity, may burden the company’s balance sheet.
Lump sum from company income and taxation
The situation of taxpayers benefiting from lump-sum taxation on company income deserves particular emphasis. As a rule, they do not pay income tax in advances, but calculate and pay it only when funds are withdrawn from the company or when the so-called transaction is concluded. “hidden profits”.
Hidden profits and lump sum transactions
In the CIT Act, the legislator presents an open catalog of activities that will be classified as hidden profits. This means that these are only examples of transactions, and the authority may also recognize others as subject to lump sum taxation.
The company, when returning the loan with interest to the partner, will be obliged to recognize the interest as a hidden profit, which results in taxation of this transaction. In accordance with the provisions of Article 28m. 4 of the CIT Act, hidden profits do not include the amount of a loan (credit) returned to a shareholder or partner, with the exception of interest, commissions, remuneration and fees. As a result, the company will be obliged to withhold tax of 20% (or 10% if it meets the criteria of a small taxpayer) from the interest paid.
When is a company a small taxpayer?
According to the statutory definition, a small taxpayer is a company whose sales revenue (including VAT) did not exceed the equivalent of EUR 2,000,000 in the previous tax year, which in 2023 was the equivalent of PLN 9,654,400, and in 2024 – PLN 9,218 000 PLN.
KIS interpretation and hidden profit
In the individual interpretation of the Director of KIS of April 13, 2023, reference number 0111-KDIB1-2.4010.65.2023.2.AW, the Authority found that the loan granted by the Applicant to the shareholder’s father (who is also the president of the management board – i.e. a related entity) will constitute the so-called hidden profit and will be subject to lump-sum taxation on the companies’ income. Therefore, it should be remembered that the loan should be repaid only in the amount of the borrowed capital, without interest. To the detriment of taxpayers, this position of the tax authorities has been consistent and unchanged for a long time.
The position of the Provincial Administrative Court and the hidden profit
However, the position of the Tax Authority is not always upheld by Administrative Courts. The Provincial Administrative Court in Gliwice, in its judgment of May 12, 2023, reference number I SA/Gl 93/23, indicated that every loan granted by a company on the Estonian CIT should not be treated as a hidden profit. The key criterion should be whether the loan was granted in connection with the right to profit participation.
Alternative forms of company financing
Additional payments to the company should be considered as such a possibility. They are repayable financing that does not burden the Company’s balance sheet. It is important to provide for their introduction already in the Company’s agreement. This will allow you to avoid costs related to changes to the partnership agreement at the notary’s office.
The additional payments themselves, when subject to Estonian CIT, will not be treated as a hidden profit and therefore will not be subject to taxation. Only the excess of the refunded subsidy amount over the amount paid would be subject to taxation.
Tax on civil law transactions and surcharges
However, it is worth bearing in mind that the additional payments introduced, regardless of the method of taxation of the company, are subject to a tax on civil law transactions of 0.5%, calculated on the value of the transaction. Importantly, the legislator did not provide for the obligation to tax the refund of subsidies with tax on civil law transactions, which is an advantage for taxpayers.
Author:
Maciej Szkutnik
Specialist in the field. Taxes
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