What does the Estonian CIT consist of?
Estonian CIT is a way of accounting for companies on a lump sum basis on income. This means that a company using this form of taxation does not have to pay tax every month or quarter, but only when dividends are paid. This helps many growth-oriented companies that want to invest the funds they gain. With this solution, the company retains control over the timing of its tax liability and can better plan its expenses. However, there are more benefits.
You can learn all about the Estonian tax for companies by reading the article we have devoted entirely to this issue: Estonian CIT – what does it consist of and who is entitled to it?
How does factoring work?
In order to fully grasp how factoring and Estonian CIT can affect each other, let’s first remind ourselves on what principles factoring financing works.
Factoring is a financial service in which businesses can sell invoices that they have issued to their counterparties, but are still waiting for payment on them. The factor (the company providing the factoring service) buys the receivables in exchange for cash, so that the factor (the taxpayer using the service) can keep the company’s liquidity. The cost of the service is usually the factor’s commission. The big advantage of factoring is that it usually takes a few hours from the time the assignment of receivables agreement is signed to the receipt of the funds – so the taxpayer quickly recovers the frozen funds and can dispose of them without hindrance.
Estonian CIT terms and conditions vs. factoring
In order to be accounted for using Estonian tax, a company must meet a number of criteria. One of them – particularly relevant in the context of this article – is to ensure that the company’s level of passive income is less than 50% of the company’s annual income.
The problem – in the context of using factoring – is that the tax authorities consider the sale of an invoice to a factor as one type of passive income. So does this mean that financing a company’s activities with factoring excludes the possibility of applying Estonian CIT? The answer to this question is – unfortunately – still ambiguous.
First: revenues from factoring and other passive revenues would have to total a minimum of 50% of the company’s total revenues. Keeping passive income below this level makes it possible for the company to remain under Estonian tax accounting.
Second: there are a number of institutions in Poland that deal with the interpretation of laws. In doing so, there is no shortage of contentious issues, mainly due to the way the laws and their accompanying justifications are worded. In the following text, we will zoom in on some interpretations of the National Court Information and the judgments of the Provincial Administrative Courts, which – at least in the assumptions – are intended to help answer the question: does factoring constitute passive income for a company?
Important!
The doubts are grounded in the CIT Law. Art. 28j para. 1 of the same says that a taxpayer may be subject to lump-sum taxation if he meets several conditions. One of them is that less than 50% of the business income earned in the previous tax year, calculated including the amount of goods and services tax due, must come from:
- Claims,
- Interest and benefits on all types of loans,
- The interest portion of the lease payment,
- warranties and guarantees,
- Copyright or industrial property rights,
- Disposal and exercise of rights from financial instruments,
- related party transactions.
It is the word “receivable” contained in this provision that is the reason for considering the sale of receivables as the moment when passive income arises.
Factoring and Estonian CIT – interpretations
Recall: the Estonian CIT in the Polish legal order appeared in 2021. We did not have to wait long for the first interpretation on the disposal of receivables.
General interpretation of the Ministry of Finance
As early as February 2021. the Finance Minister’s general interpretation No. DD5.8201.11.2020 on the rules for determining the amount of deductible expenses on the disposal of own receivables under a factoring agreement was issued.
In the body of the document we will find information stating that the use of factoring services – according to the MF – leads to the creation of revenue.
Moreover – the transaction of sale of goods and/or services should be considered independently of the transaction of sale of receivables.
This means that a taxpayer who first sells goods and then finances an invoice with the help of factoring earns income twice – from the sale of goods (i.e., the primary transaction that results in the receivable) and from the sale of that receivable.
You can find the entire six-page MF interpretation here.
Interpretation by the Director of KIS
It can be presumed that it was the general interpretation of the Minister of Finance that became the basis for the interpretations issued by the Director of the National Judicial Information Service. In the documents issued, the chairman of the NIS considered that an entrepreneur who obtains funds from the sale of receivables to a factor receives income from receivables, which fulfills letter a of Art. 28j para. 1 pt. 2 of the CIT Law.
Moreover, this was not a one-time position – the same interpretation was reiterated by the Director of the NIS on several occasions between 2022 and 2024. We can easily verify this by reviewing the following documents:
- Individual interpretation dated December 23, 2022, ref. 0111-KDIB1-1.4010.489.2022.1.BS,
- Individual interpretation dated December 29, 2022, ref. 0111-KDWB.4010.84.2022.2.AZE,
- individual interpretation dated dn. November 10, 2023. ref. 0111-KDIB1-2.4010.484.2023.2.EJ
- individual interpretations of dn. May 17, 2024. Ref. 0111-KDIB1-1.4010.143.2024.2.BS oraz 0111-KDIB2-1.4010.115.2024.3.AR,
- individual interpretation dated dn. June 16, 2024. ref. 0111-KDIB1-2.4010.202.2024.2.AW.
In most of these interpretations, the rationale for the position taken was similar. In the opinion of the Director of the KIS, a taxpayer disposing of a receivable should consider this as a separate event (independent of previous business operations resulting in income due).
Example:
In an individual interpretation dated December 23, 2022, ref. 0111-KDIB1-1.4010.489.2022.1.BS, the Director of the KIS states that:
The company will in fact receive revenue from the sale of receivables. Therefore, to the value of revenues referred to in Art. 28j para. 1(2)(a) of the CIT Law should include the value of revenues from the sale of own receivables under a factoring agreement. Consequently, if the revenue from this exceeds 50% of the business income earned in the previous year calculated including the amount of the value added tax due, the Company will not be able to use the flat rate on corporate income as a form of taxation of its business activity.
So where does the ambiguity come from that prompts more companies to request individual interpretations?
The source of the confusion is the justification
The authors of the justification emphasize that the conditions referred to in Art. 28j of the law, and which we have already cited above, are intended to “limit the possibility of lump-sum taxation for entities not actively engaged in business activities, but directed to derive income mainly from passive sources of revenue.” In a situation where a company decides to sell invoices to a factoring company in order to unfreeze funds and regain liquidity, it can hardly be said that it is not engaged in active business activity, but is focused on drawing passive income.
Many taxpayers came out with the same or similar assumption and decided to raise the case in the Provincial Administrative Courts.
The full text of the justification can be found in Parliamentary print No. 643, available here.
Factoring and Estonian CIT – judgments of provincial administrative courts
In the case of judgments issued by the WSA, the case is radically different. Currently, we have several judgments clearly favorable to taxpayers – only one turned out to be unfavorable, actually duplicating the interpretation adopted by the Director of National Judicial Information.
Verdicts favorable to taxpayers
- The first verdict that resolved the case in favor of the taxpayer was delivered back in June 2023 in Warsaw (ref. III SA/Wa 553/23).
- Another one just a few days later – on July 6, 2023. (ref. III SA/Wa 627/23).
- Another of the rulings that turned out to be positive for taxpayers was the decision of the WSA in Gliwice, a ruling dated dn. March 27, 2024. (ref. I SA/Gl 11124/23).
In all these rulings, the Courts referred to the fact that the conceptual scope of the aforementioned Art. 28j para. 1 pt. 2(a) of the CIT Law does not include the taxpayer’s acquisitions obtained under an agreement to invoice its own receivables.
Example:
In a ruling by the Warsaw WSA dated dn. July 6, 2023. reads:
If a specific adoption is, in fact, a form of external financing of the taxpayer’s ongoing business activities, then the contribution of this adoption to income from the perspective of the regulations on the
Restricting the taxpayer’s ability to settle with a lump sum on corporate income (Estonian CIT) has no legal significance.
Obtaining external financing […] in no way qualifies as obtaining […] passive income under the above provision.
And just when it would seem that the situation is under control, with the administrative courts siding unanimously with taxpayers, a verdict to the contrary appeared in February 2024.
Judgment unfavorable to taxpayers
The Voivodship Administrative Court in Bydgoszcz has issued a ruling in a similar case, which for taxpayers means reopening discussions and having to wait for decisions at the highest level. The case concerned a newly established company that wanted to start using a lump sum on the company’s income (Estonian CIT). Representatives of the company pointed out that the company had entered into an agreement with a factoring company and was using a non-recourse factoring service. In this situation, a doubt arose as to whether the revenue from the disposal of receivables meets the condition of earning less than 50% of revenue from receivables trading activities.
Justification of the judgment dated dn. February 21, 2024. (ref. I SA/Bd 24/24) states that. A receivable “may be the subject of trade, and its disposal for consideration gives rise to income within the meaning of the income tax. Income from the disposal of a receivable against payment arises both when the subject of the disposal is a foreign receivable […] and when the taxpayer sells his own receivable .
The authors of the justification in this case refer to the judgment of the WSA in Wroclaw dated July 30, 2019, ref. I SA/Wr 321/19. The further part of the justification sounds similar to the interpretations issued by the KIS, which we have already cited in a previous paragraph. The court emphasizes that income from the sale of one’s own receivables should be treated as separate from income from the originally concluded transaction (which resulted in the receivable being sold).
Resolution needed right away
At the moment, taxpayers’ eyes are on the Supreme Administrative Court. In the face of the mutually exclusive rulings of the provincial administrative courts and the tough stance of the Director of the Supreme Administrative Court, only an unambiguous ruling by the Supreme Administrative Court can dispel doubts in a way that allows taxpayers to benefit from Estonian CIT while financing current operations with the help of a factoring service.
Summary
As of now, in July 2024, the matter remains unresolved – the rulings of the Provincial Administrative Courts give reasonable hope to companies using lump sum and factoring. However, we are not in a situation that justifies invoking the judgments of the Provincial Administrative Courts that have already been issued – to ensure peace of mind and the possibility of benefiting from the Estonian tax, the company should apply to the competent administrative court. Only after receiving a judgment in its case will it be possible to say with certainty that factoring and Estonian CIT do not interfere with each other. At least until the Supreme Administrative Court issues a ruling that ends the discussion.
