Newly Formed Entities and the Estonian CIT Regime
The Employment Condition, Taxpayer-Commencing-Activity Status, and the Landmark Ruling of the Supreme Administrative Court in Case II FSK 1412/24
Robert Nogacki | Attorney at Law (radca prawny) | Kancelaria Prawna Skarbiec
The lump-sum taxation of corporate income (ryczałt od dochodów spółek, colloquially known as the “Estonian CIT”) — Poland’s answer to the distributed-profits regime pioneered by Estonia — extends significant preferential treatment to taxpayers commencing business activity. These preferences encompass both an exemption from the employment condition during the entity’s formative years and a reduced rate of taxation. Yet the deceptively simple question of who, precisely, qualifies as a “taxpayer commencing business activity” under the Corporate Income Tax Act (ustawa o CIT; hereinafter “CIT Act”) has generated some of the most contentious interpretive disputes in Polish tax law in recent years.
This article examines the preferential mechanism established by Article 28j(2) of the CIT Act, analyses the pivotal administrative court decisions — including the landmark ruling of the Supreme Administrative Court (Naczelny Sąd Administracyjny, hereinafter “SAC”) of 11 March 2025 (case no. II FSK 1412/24) — and identifies the practical risks confronting both newly incorporated entities and companies formed through the transformation of a sole proprietorship.
Statutory Preferences for Taxpayers Commencing Business Activity
Article 28j(2) of the CIT Act establishes two relaxations of the entry conditions for the Estonian CIT regime applicable to taxpayers commencing business activity.
First, the revenue-structure condition (Article 28j(1)(2)) — requiring that less than 50% of the taxpayer’s revenue from the preceding tax year be derived from passive sources — is deemed automatically satisfied in the first tax year of lump-sum taxation. The rationale is self-evident: an entity commencing activity could not, by definition, have generated any revenue in a prior tax year. To apply a requirement predicated on historical revenue data to such an entity would be to preclude it ab initio from electing the lump-sum regime. The Voivodeship Administrative Court (Wojewódzki Sąd Administracyjny, hereinafter “VAC”) in Gdańsk expressly acknowledged this logic in its judgment of 6 August 2024 (case no. I SA/Gd 400/24).
Second — and this is the more operationally consequential provision — the employment condition (Article 28j(1)(3)) does not apply during the year in which the activity commences and the two immediately succeeding tax years. Within this three-year preferential window, however, a graduated ramp-up mechanism operates: beginning with the second tax year, the taxpayer must increase headcount by at least one full-time equivalent per annum until reaching the statutory threshold specified in Article 28j(1)(3) — namely, at least three persons employed under an employment contract (lit. a) or at least three natural persons engaged under civil-law contracts with monthly expenditure equal to at least three times the average monthly remuneration in the enterprise sector (lit. b).
Practical note. The foregoing applies equally to employment contracts and to civil-law engagements. In either case, the entity’s shareholders are excluded from the headcount. As confirmed by the Director of the National Tax Information Service (Dyrektor Krajowej Informacji Skarbowej, hereinafter “Director of the NTIS”) in individual tax ruling no. 0111-KDIB1-2.4010.314.2025.2.EJ of 23 July 2025, the requirements of Article 28j(1)(3)(b) must be satisfied cumulatively: in each month of the tax year, the taxpayer must engage at least three natural persons under non-employment contracts, and the monthly remuneration expenditure must equal or exceed three times the average monthly wage in the enterprise sector. It suffices, however, for the taxpayer to function as the withholding agent in respect of any one of three levies: personal income tax, social insurance contributions, or health insurance contributions.
It bears noting that Article 28j(3) introduces an additional accommodation for small taxpayers (mały podatnik) in their first tax year of lump-sum taxation: the employment condition is deemed satisfied with as few as one full-time employee (lit. a) or one person engaged under a civil-law contract with expenditure corresponding to a single multiple of the average wage (lit. b). This preference operates cumulatively with the exemption under paragraph 2 — a small taxpayer commencing activity thus benefits from both relaxations simultaneously (cf. commentary on Article 28j(2) and (3), in W. Modzelewski & J. Pyssa (eds.), Komentarz do ustawy o podatku dochodowym od osób prawnych, 26th ed. 2026, Art. 28j).
Finally, eligibility for the lump-sum regime is confined to entities operating in the form of a limited liability company (spółka z ograniczoną odpowiedzialnością), joint-stock company, simple joint-stock company, limited partnership, or limited joint-stock partnership whose shareholders are exclusively natural persons holding no property rights connected with family foundations, trusts, or other fiduciary vehicles — with the exclusion of founders and beneficiaries of family foundations (Article 28j(1)(4)).
Who Constitutes a “Taxpayer Commencing Business Activity”?
The CIT Act provides no definition of this term. It is precisely this statutory lacuna that has given rise to protracted tax litigation, proceeding along at least two distinct axes.
The newly formed entity that did not elect the lump-sum regime from inception
The first line of controversy concerns newly incorporated companies that, for various reasons, did not opt into the lump-sum regime from the first day of their existence. The paradigmatic illustration is provided by the judgment of the VAC in Gdańsk of 6 August 2024 (case no. I SA/Gd 400/24).
Facts. F. sp. z o.o. was registered in the National Court Register on 22 December 2023. Availing itself of the right to extend its first financial year, the company designated a financial year ending on 31 December 2024. In January 2024, it filed the ZAW-RD notification (the prescribed form for electing lump-sum taxation). Prior thereto, however — as of 31 December 2023 — it closed its accounting books and prepared financial statements (showing exclusively nil entries save for the initial contributions to share capital), inasmuch as Article 28j(5) of the CIT Act requires the closure of books before the month in which lump-sum taxation commences.
The question presented was whether the company should be classified as a taxpayer commencing business activity and, accordingly, be entitled to the employment-condition relaxations under Article 28j(2).
Both the Director of the NTIS (ruling of 29 March 2024, no. 0111-KDIB1-1.4010.53.2024.1.RH) and the VAC in Gdańsk answered in the negative. The court reasoned as follows:
“It is untenable to hold that a company in its second tax year is only just commencing its activity. A literal construction of the phrase “commences activity” leads to the conclusion that, in the year 2024, the Company is an entity conducting (continuing) its activity, which it commenced in 2023 […]. It is equally untenable to hold that accounting books are closed by an entity that is commencing activity.”
The court drew a critical distinction: the reference to the first tax year in Article 28j(2) delineates the temporal scope within which compliance with the enumerated conditions is waived — it does not purport to define the concept of “commencing business activity.” In other words, paragraph 2 prescribes the consequences that attend the status of a commencing taxpayer; it does not constitute that status.
In its holding, the VAC in Gdańsk formulated the principle thus: “Taxpayers commencing business activity are entities that elected lump-sum taxation concurrently with the commencement of their business activity.” An identical position was adopted by the VAC in Bydgoszcz in its judgment of 11 June 2024 (case no. I SA/Bd 249/24).
Practical implication. An entity seeking to avail itself of the “commencing taxpayer” status must elect lump-sum taxation from the very first day of its existence as a taxpayer. The closure of books after merely several days — even where the resultant financial statements show nil entries — and the subsequent transition to the lump-sum regime from the beginning of a new tax year suffice to deprive the entity of that status. Incorporation in December followed by lump-sum taxation from January constitutes a sequence that generates a second tax year, thereby precluding the preference.
The entity transformed from a sole proprietorship — the SAC breakthrough
The second — and considerably more consequential — controversy concerns companies formed through the transformation of a sole proprietorship (jednoosobowa działalność gospodarcza, hereinafter “JDG”). For years, the tax authorities systematically denied such entities the “commencing taxpayer” status, arguing that a transformation constitutes merely a change in organizational form rather than the emergence of a new taxpayer — invoking the principle of continuity under Article 93a(4) of the Tax Ordinance, and Articles 551(5), 584¹, and 584² of the Commercial Companies Code (Kodeks spółek handlowych).
This position was first challenged by the VAC in Wrocław (judgment of 4 July 2024, case no. I SA/Wr 105/24) and thereafter definitively resolved by the Supreme Administrative Court in its ruling of 11 March 2025 (case no. II FSK 1412/24). The SAC dismissed the Director of the NTIS’s cassation appeal, affirming the position favorable to taxpayers.
The SAC’s reasoning rests on several complementary pillars.
Absence of a statutory definition. The SAC observed that the CIT Act contains no definition of either “entity commencing activity” (podmiot rozpoczynający działalność) or “entity commencing the conduct of activity” (podmiot rozpoczynający prowadzenie działalności). The legislature employs these formulations interchangeably across various provisions (Articles 16k(7), 16k(11); 18da(4); 19(1a), 19(1d), 19(1e)), which — in the SAC’s assessment — demonstrates that no distinct semantic content was intended for either expression.
Systemic context — argumentum a contrario. In those provisions of the CIT Act where the legislature wished to exclude transformed entities from specific preferences, it did so expressly — e.g., Article 19(1a) enumerates the restructuring activities that disqualify a taxpayer from the reduced 9% CIT rate. By contrast, Article 28j(2)(2) “in no manner narrows the class of taxpayers commencing business activity to entities commencing it in a particular manner.” Where the legislature has not stipulated that the preference does not extend to entities formed by way of transformation, there exists no warrant for the courts or the tax authorities to engraft such a limitation.
Autonomous construction within the Estonian CIT framework. The central holding of the SAC ruling provides: “Under Article 28j(2)(2) of the CIT Act, an entity “commencing the conduct of activity” is an entity commencing the conduct of activity subject to corporate income tax, falling within the regime of the Corporate Income Tax Act — not activity in general.”
A limited liability company formed through the transformation of a JDG becomes a corporate income taxpayer for the first time. The activity previously conducted was subject to personal income tax — under an entirely separate statute and an entirely distinct regime. From the vantage point of the CIT Act, such an entity genuinely commences the conduct of activity within the meaning of that statute.
Legislative-intent argument. The SAC noted that had the legislature intended to subject companies formed from the transformation of a JDG to the limitation arising from Article 28j(2)(2), the amending act of 2020 (which introduced the Estonian CIT regime) would have incorporated an express exclusionary provision — in a manner analogous to that employed in Article 19(1a). The absence of such a provision represents a deliberate legislative choice, not an inadvertent lacuna.
Significance of the ruling. Case no. II FSK 1412/24 resolves a multi-year interpretive controversy and opens to companies transformed from sole proprietorships the full panoply of preferences available to new Estonian CIT taxpayers — including both the relaxed employment condition (the three-year window) and the preferential 10% rate. The SAC expressly relied upon its earlier ruling in case no. II FSK 2080/23 of 11 July 2024 (addressing an analogous question in the context of small-taxpayer status), thereby establishing a coherent line of jurisprudence.
The ZAW-RD Filing Deadline for Newly Formed Entities
Article 28j(1)(7) of the CIT Act requires the filing of the ZAW-RD notification by the end of the first month of the first tax year in which the entity is to be subject to lump-sum taxation. For a newly incorporated company, the fundamental question is: from what date does this “first month” commence — from the execution of the articles of association, from entry in the National Court Register, or from the assignment of a tax identification number (NIP)?
The tax authorities have consistently adopted the earliest possible construction: the date of commencement of activity is deemed to be the date on which the articles of association of the limited liability company are executed, on the ground that a company in organization (spółka w organizacji) possessing legal subjectivity comes into being at the moment the articles are signed. This position is confirmed inter alia by individual tax ruling no. 0111-KDIB1-2.4010.139.2025.2.END of 7 May 2025 and ruling no. 0111-KDIB1-1.4010.464.2024.2.MF of 9 October 2024.
The practical consequences are formidable. It is not uncommon for several weeks to elapse between the execution of the articles of association and the assignment of a NIP (which is conferred upon entry in the National Court Register). The ZAW-RD form requires the NIP to be stated. Where the articles are executed toward the end of a month, the filing deadline may expire before the entity has even obtained a NIP. The paradox is self-evident — and, as of this writing, unresolved.
Mid-Year Entry into the Estonian CIT Regime
Article 28j(5) of the CIT Act permits the election of lump-sum taxation before the expiry of the adopted tax year, provided the taxpayer closes its accounting books and prepares financial statements as of the last day of the month preceding the first month of lump-sum taxation.
For a newly formed entity that has missed the ZAW-RD deadline, the mid-year entry procedure constitutes the sole avenue for acceding to the Estonian CIT within the same tax year. This pathway, however, necessitates the preparation of two sets of financial statements, the settlement of standard CIT for the initial portion of the year, and the reopening of accounting books — an undertaking that is both costly and susceptible to formal error.
It is precisely within this context that the full import of the VAC Gdańsk ruling (I SA/Gd 400/24) becomes apparent: an entity that closes its books, prepares financial statements, and subsequently transitions to the lump-sum regime from the commencement of a new tax year is no longer a taxpayer commencing activity within the meaning of Article 28j(2) — thus forfeiting the employment-condition relief. In planning its sequence of steps, a newly formed entity must therefore elect one of two mutually exclusive paths: lump-sum taxation from day one (with full preferences) or mid-year entry (without the commencing-taxpayer preferences).
Prospective amendment. A draft CIT amendment circulated in March 2026 proposes the elimination of mid-year entry into the Estonian CIT regime. Should this amendment be enacted, a missed ZAW-RD deadline would necessitate waiting until the expiry of the current tax year and entering the lump-sum regime from the following year — without the commencing-taxpayer status.
The Employment Condition: Civil-Law Contracts and the Preferential Period
Article 28j(2)(2) relieves new entities from the employment condition in the year of commencement and the two succeeding years, while simultaneously imposing the obligation of annual headcount increases from the second year onward. The provision does not, on its face, differentiate between employment contracts and civil-law engagements.
The tax authorities have, however, adopted a pro-fiscal reading: the condition pertaining to the threshold of monthly remuneration expenditure under civil-law contracts must be fully satisfied from the second tax year onward, in each individual month of the tax year. This position is affirmed by the Director of the NTIS’s ruling of 23 July 2025 (no. 0111-KDIB1-2.4010.314.2025.2.EJ), in which the authority stated that “the concept of monthly expenditure is to be understood as expenditure actually disbursed in a given month, as indicated by the literal wording of the provision.”
This construction finds support in the statutory text — Article 28j(1)(3)(b) speaks of expenditure incurred “monthly” (miesięcznie). A taxpayer is accordingly precluded from offsetting lower disbursements in one month with higher payments in another. Each month is assessed independently.
Practical Conclusions
A synthesis of the statutory provisions, case law, and administrative practice yields the following recommendations.
For newly incorporated entities. It is imperative that the ZAW-RD notification be filed without delay following the execution of the articles of association — ideally on the same day or within several days thereafter. The statutory deadline runs from the date of execution of the articles, not from registration in the National Court Register. A delay of even one month eliminates the commencing-taxpayer status and forfeits the three-year employment-condition relief. It should be borne in mind that the proposed 2026 amendment, if enacted, may eliminate the possibility of curing a missed deadline through mid-year entry.
For entities transformed from sole proprietorships. The SAC’s ruling in case no. II FSK 1412/24 furnishes a robust precedential argument for recognizing such an entity as a commencing taxpayer. The preference encompasses both the relaxed employment condition (the three-year window) and the 10% lump-sum rate (subject to satisfaction of the small-taxpayer criterion). One should anticipate, however, that the tax authorities may continue to contest this position until the jurisprudential line is further consolidated or a general interpretive ruling is issued. The most prudent strategy is to obtain an individual tax ruling, invoking both II FSK 1412/24 and the corroborating judgment in II FSK 2080/23.
For entities already subject to lump-sum taxation. The employment condition under civil-law contracts must be satisfied in each month of the tax year independently — annual offsetting is impermissible. Remuneration actually disbursed in a given month must equal or exceed three times the average monthly wage in the enterprise sector, in respect of at least three non-shareholder individuals. Non-compliance in even a single month may result in the forfeiture of the right to lump-sum taxation.
Robert Nogacki – licensed legal counsel (radca prawny, WA-9026), Founder of Kancelaria Prawna Skarbiec.
There are lawyers who practice law. And there are those who deal with problems for which the law has no ready answer. For over twenty years, Kancelaria Skarbiec has worked at the intersection of tax law, corporate structures, and the deeply human reluctance to give the state more than the state is owed. We advise entrepreneurs from over a dozen countries – from those on the Forbes list to those whose bank account was just seized by the tax authority and who do not know what to do tomorrow morning.
One of the most frequently cited experts on tax law in Polish media – he writes for Rzeczpospolita, Dziennik Gazeta Prawna, and Parkiet not because it looks good on a résumé, but because certain things cannot be explained in a court filing and someone needs to say them out loud. Author of AI Decoding Satoshi Nakamoto: Artificial Intelligence on the Trail of Bitcoin’s Creator. Co-author of the award-winning book Bezpieczeństwo współczesnej firmy (Security of a Modern Company).
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