Estonian CIT, i.e. the lump-sum taxation of corporate income, has remained one of the most popular tax models chosen by entrepreneurs seeking a tax-efficient way of conducting business. The main advantage of this solution is the deferral of income taxation until profits are distributed, allowing companies to allocate a larger portion of their funds to growth and investment.

In practice, there is still a common misconception that opting for Estonian CIT automatically exempts taxpayers from transfer pricing obligations. However, both the legislation and recent case law confirm that taxpayers applying the lump-sum taxation regime for corporate income remain subject to transfer pricing regulations.

What is Estonian CIT?

The lump-sum taxation of corporate income, commonly referred to as “Estonian CIT”, is regulated under Chapter 6b of the Polish Corporate Income Tax Act of 15 February 1992. It constitutes an alternative form of taxation available to joint-stock companies, limited liability companies, limited partnerships, limited joint-stock partnerships, and simple joint-stock companies.

The essence of this model is that the company’s income is not subject to ongoing corporate income tax (CIT). Taxation arises only upon:

• distribution of profits to shareholders,
• incurring expenses unrelated to business activity,
• the occurrence of so-called hidden profits,
• or other events specified in the CIT Act.

The possibility of applying Estonian CIT is conditional upon meeting the requirements set out in Article 28j of the CIT Act.

Why Is It Incorrect to Assume That Transfer Pricing Rules Do Not Apply to Entities Using Estonian CIT?

One of the key restrictions on the application of this taxation model concerns the ownership structure. Pursuant to Article 28j(1)(5) of the CIT Act, an entity taxed under the lump-sum corporate income regime:

• may not hold shares or stocks in other companies,
• may not participate in investment funds,
• may not hold all rights and obligations in partnerships.

In practice, this means that the legislator intended Estonian CIT primarily for relatively simple business structures.

This restriction often creates the misleading impression that, since a company applying Estonian CIT cannot hold shares in other entities, it has no related parties and therefore no transfer pricing obligations. However, it should be emphasized that this restriction does not eliminate the possibility of related-party relationships within the meaning of transfer pricing regulations.

Pursuant to Article 28j(1)(4) and (5) of the CIT Act, a taxpayer applying the lump-sum corporate income regime may have only individual shareholders and may not hold shares in other entities. These regulations primarily limit “downward” ownership links characteristic of more complex corporate structures. They do not, however, eliminate “upward” links, since the company must still have shareholders who, although they must be natural persons, may simultaneously hold interests in other entities.

Consequently, if the same individual directly or indirectly holds at least 25% of the shares in both an Estonian CIT company and another entity, related-party relationships may arise between those entities. In practice, this means that companies applying Estonian CIT frequently enter into controlled transactions with related parties and may therefore be subject to transfer pricing obligations.

It is also important not to overlook the most basic relationship, namely that between a company and its shareholder. Such a relationship may arise from significant influence or from other relationships explicitly indicated in the regulations, for example between a limited partnership or limited joint-stock partnership and its general partner.

Relationships may also have a management nature, for example where an individual holds voting rights in a company’s governing bodies. Furthermore, significant influence resulting in a related-party relationship may arise from the actual ability to influence key business decisions, as well as from family relationships, including marriage and kinship or affinity up to the second degree.

As a result, even a company meeting the requirements of the Estonian CIT regime may engage in transactions with related parties which, once the relevant thresholds are exceeded, may trigger transfer pricing documentation obligations.

In practice, it is also important to properly distinguish between the definitions of related parties applicable under the Estonian CIT provisions and those applicable for transfer pricing purposes. A common mistake is to equate the related-party thresholds applicable under the lump-sum corporate income regime with the definition of related parties used for transfer pricing compliance purposes.

For Estonian CIT purposes, the regulations refer to the transfer pricing definition of related parties while modifying the threshold of rights or ownership interests sufficient to establish a related-party relationship to 5% (Article 28m of the CIT Act). However, it should be noted that this threshold applies solely to hidden profits and expenses unrelated to business activity.

For transfer pricing purposes, entities applying Estonian CIT remain subject to the standard definition of related parties set out in Article 11a(1)(4) of the CIT Act, under which capital links generally arise where an entity directly or indirectly holds at least 25% of shares, voting rights, or profit participation rights.

Consequently, not every transaction with a related party analysed under the Estonian CIT regime, for example in the context of hidden profits, will automatically constitute a controlled transaction for transfer pricing purposes.

Another source of confusion is the incorrect assumption that transfer pricing regulations are relevant only to the traditional determination of taxable income. Some taxpayers have assumed that, because the Estonian CIT model does not require the ongoing calculation of taxable income under general rules, transfer pricing regulations lose their practical significance.

This approach is incorrect. Transfer pricing obligations primarily concern the verification of whether transactions between related parties are conducted on arm’s length terms, regardless of the taxpayer’s taxation model.

This position was confirmed by the judgment of the Provincial Administrative Court in Poznań of 11 January 2023 (case no. I SA/Po 697/22). The Court rejected the argument that the CIT Act provisions concerning transfer pricing documentation obligations do not apply to taxpayers using Estonian CIT. It emphasized that the mere form of income taxation applicable to related entities cannot exclude the application of generally applicable provisions (in this case Articles 11k–11t and Article 11e of the CIT Act) unless the tax legislator expressly provides otherwise.

The company that applied for the individual tax ruling disagreed with the judgment of the Provincial Administrative Court and filed a cassation appeal with the Supreme Administrative Court. In its judgment of 17 February 2026, the Supreme Administrative Court dismissed the appeal, upholding the position of both the Provincial Administrative Court and the tax authority.

This judgment confirmed an important principle: where no explicit exclusion exists, the relevant provisions continue to apply.

In practical terms, this means that taxpayers applying the lump-sum corporate income regime remain obliged, among other things, to:

• apply the arm’s length principle,
• review transactions with related parties,
• prepare local transfer pricing documentation,
• submit the TPR transfer pricing information return once the relevant documentation thresholds have been exceeded.

Change of Taxation Regime and Transfer Pricing Documentation Obligations

Since there should no longer be any doubt that entities applying the Estonian CIT regime remain subject to transfer pricing regulations, it is worth focusing on the obligations arising in this area.

Once the relevant documentation thresholds are exceeded, related parties are required to prepare local transfer pricing documentation for a given tax year by the end of the tenth month following the end of that tax year. In addition, certain entities are required to prepare a master file for the relevant financial year by the end of the twelfth month following the end of the tax year. Furthermore, transfer pricing information (TPR) must be submitted to the competent head of the tax office by the end of the eleventh month following the end of the tax year.

In practice, the impact of entering the Estonian CIT regime on documentation obligations is often overlooked. Pursuant to Article 28j(5) of the CIT Act, a taxpayer may opt for lump-sum taxation before the end of its adopted tax year, provided that it closes its accounting books and prepares financial statements. This results in an earlier termination of the tax year.

For example, a company may have a standard tax year corresponding to the calendar year, i.e. from 1 January to 31 December. During the year, the company decides to enter the Estonian CIT regime effective from 1 July and therefore closes its accounting books as at 30 June. As a result, the period from January to June becomes a separate, shortened tax year. This is particularly important from a transfer pricing perspective, as documentation obligations are assessed for a specific tax year, and the applicable deadlines are determined by reference to the end of that tax year.

Under standard circumstances, once the documentation thresholds are exceeded, the company would be required to prepare local transfer pricing documentation by the end of September of the following year, the master file by the end of December of the following year, and submit the TPR-C form by the end of November of the following year. However, if the company enters the Estonian CIT regime as of 1 July, these deadlines change. In such a case, the local file should be prepared by the end of March of the following year, the master file by the end of June, and the TPR-C form should be submitted by the end of May.

In practice, taxpayers often focus solely on the decision to adopt the lump-sum corporate income taxation regime, overlooking the need to separately assess transfer pricing obligations for the completed tax year. It should be remembered that failure to fulfil these obligations within the prescribed deadlines may result in fiscal penal sanctions being imposed on the individuals responsible.

Hidden Profits – An Area of Particular Risk

Under the Estonian CIT regime, particular importance is attached to the concept of so-called hidden profits referred to in Article 28m(3) of the CIT Act. These are benefits provided to shareholders or related parties that may be regarded as a form of indirect profit distribution.

In practice, tax authorities frequently analyse the following transactions from this perspective:

• intangible services,
• loans,
• rental of real estate from shareholders,
• licence fees,
• intragroup financing.

Importantly, the regulations governing hidden profits rely on a broader definition of related parties than that used for transfer pricing purposes. Pursuant to Article 28c(1) of the CIT Act, for the purposes of the Estonian CIT regime, related parties are defined by reference to Article 11a(1)(4) of the CIT Act, with the ownership and rights threshold reduced from 25% to 5%.

This means that the scope of relationships examined for hidden profit purposes may be broader than that relevant for transfer pricing documentation obligations. In practice, this may lead to situations where transactions that do not meet the definition of a controlled transaction for transfer pricing purposes are nevertheless subject to scrutiny as potential hidden profits.

Consequently, if a tax authority concludes that the terms of a transaction between related parties deviate from market conditions, or that a benefit is linked to the right to participate in profits, it may classify all or part of that benefit as income from hidden profits. This would result in taxation under the lump-sum corporate income regime.

Conclusion

Estonian CIT remains an attractive form of taxation, particularly for companies that reinvest their profits and seek to simplify their ongoing tax settlements. However, opting for this taxation model does not exempt taxpayers from transfer pricing obligations.

Current legislation, tax authority practice, and administrative court case law clearly confirm that taxpayers applying the lump-sum corporate income regime should continue to pay close attention to:

• identifying transactions with related parties,
• properly assessing transfer pricing documentation obligations,
• analysing risks associated with so-called hidden profits.

Particular attention should be paid to the moment of entering the Estonian CIT regime, as this may result in the early termination of a tax year and require a separate assessment of transfer pricing documentation obligations for the shortened reporting period.

In practice, this means that Estonian CIT neither eliminates transfer pricing obligations nor fully simplifies this area; rather, it modifies the way in which it should be analysed. Applying Estonian CIT in conjunction with transfer pricing compliance therefore requires a consistent approach to the entire tax framework—from analysing the ownership structure, through reviewing transactions with related parties, to correctly identifying documentation obligations.

Properly addressing these areas not only helps mitigate tax risks but also provides greater certainty and predictability in tax settlements over the long term.