Estonian CIT in a limited liability company: conditions and when it does not pay off
Short answerEstonian CIT (a lump-sum tax on company income) lets a limited liability company avoid paying CIT on its current profit, and the tax is paid only when profit is distributed. The conditions, however, are strict: only individuals can be partners, the company cannot hold shares in other companies, and passive income cannot exceed 50% of revenue.
The most important conditions
- Partners. Only individuals. A partner in the form of a company, foundation or fund rules out the lump-sum tax.
- Shares in other entities. As a rule the company cannot hold them.
- Employment. As standard at least 3 people on an employment contract are required, with more lenient rules for small taxpayers and new companies. Check the exact conditions in art. 28j of the CIT Act or with an accountant.
- Passive income. Income from, among other things, interest, loans, copyrights and transactions with related entities cannot exceed 50% of total revenue.
Rates
| Taxpayer | Lump-sum rate |
|---|---|
| A small taxpayer or a new company (revenue below EUR 2 million) | 10% |
| Others | 20% |
The tax is paid when profit is distributed, and taking the dividend tax into account the effective burden is described as about 20% for small taxpayers and about 25% for the others. The lump-sum tax also covers so-called hidden profits, i.e. benefits for partners without a business justification, e.g. loans to partners and private expenses.
When the lump-sum tax may not pay off
- When the company makes losses.
- When you plan to sell shares or liquidate the company within four years.
- When you want to bring in an investor in the form of a company or a fund.
Losing the lump-sum tax (e.g. by failing to meet a condition) blocks a return to it for 36 months after the year in which it was lost.
When it is not for youThe Ministry of Finance is working on changes to Estonian CIT planned from 1 January 2027. Before deciding, check the current rules and consult a tax adviser.
Frequently asked questions
Does Estonian CIT have to be chosen when setting up the company?
No. The decision on the lump-sum tax is separate from registering the company, and it is chosen in accordance with the CIT rules.
Can I have a partner in the company that is itself a company?
Not if you want to use the lump-sum tax. Only individuals can be partners.
Related guides
The information is general in nature and is not legal advice.