Hidden Profits Under the Estonian CIT Regime: The Substance-Over-Form Doctrine and Share Capital Increases from Reserve Funds
The interposition of a reserve capital fund between the profit allocation and the share capital increase does not alter the economic substance of the transaction. Where the ultimate source of financing is the company’s distributable profit — irrespective of intermediary steps — the transaction constitutes a hidden profit subject to lump-sum taxation. The Provincial Administrative Court in Gdańsk confirmed this proposition in its judgment of 20 January 2026 (I SA/Gd 839/25), dismissing the taxpayer’s complaint.
The Architecture of Profit Taxation Under Estonian CIT
The lump-sum corporate income tax regime operates upon a fundamentally different premise from the classical system: taxation is deferred until the moment of profit distribution to shareholders. Article 28m(1)(2) of the CIT Act establishes the category of income from “hidden profits” — benefits performed in connection with the right to participate in profit, the beneficiary of which is a shareholder or a related party. Article 28m(3) elaborates this definition through an illustrative enumeration, specifying in point 6 that hidden profits include, inter alia, “the equivalent of profit allocated to the increase of share capital”.
The Factual Configuration: A Sole-Shareholder Joint-Stock Company
The applicant — a joint-stock company subject to Estonian CIT since 1 January 2022 — had a single shareholder who was a natural person. This circumstance is material: the entirety of newly issued shares accrued to one individual, eliminating any ambiguity regarding the directness of the shareholder’s benefit from the capitalisation.
At the Ordinary General Meeting, three resolutions of cascading effect were adopted on the same date. Resolution No. 2 approved financial statements disclosing net profit of approximately PLN 2.375 million. Resolution No. 8 allocated this profit: PLN 200,000 to dividends, PLN 1.325 million to supplementary capital, and PLN 850,000 to reserve capital — with the express notation that reserve funds would be available for a subsequent share capital increase pursuant to Article 442 of the Commercial Companies Code. Resolution No. 18 increased the share capital from PLN 150,000 to PLN 1,000,000, funded entirely from the reserve capital.
The company contended that this two-step mechanism fell outside Article 28m(3)(6), reasoning that the provision refers to “profit allocated to the increase of share capital,” whereas the actual increase was funded from the reserve capital. It further argued that the illustrative catalogue of Article 28m(3) should be treated as exhaustive, invoking Article 217 of the Polish Constitution.
The Court’s Analysis: Economic Tracing
The Provincial Administrative Court dismissed the complaint. The Court held that the circumstance of routing profit through reserve capital before applying it to the share capital increase does not alter the fundamental economic reality: the source of the increase is the company’s distributable profit. In its reasoning, the Court stated that the share capital increase was financed indirectly from the company’s profit (the judgment text contains an apparent scribal error at this point, referring to “supplementary capital” where the entire context concerns share capital — an evident lapsus calami that does not affect the ratio decidendi).
The Court emphasised the design of Article 442(1) of the CCC, which provides that a share capital increase from the company’s own resources may be funded from supplementary capital or reserve funds created from profit. The legislative architecture thus presupposes an intermediary step — profit cannot be applied “directly” to a share capital increase in a joint-stock company.
The Open Catalogue: “In Particular” Means Illustrative
The Court unequivocally rejected the argument that Article 28m(3) contains a closed enumeration, drawing upon an extensive line of Supreme Administrative Court jurisprudence. The key precedent was the NSA judgment of 9 October 2024 (II FSK 797/24), which the Court invoked twice — including in its analysis of the structural design of the hidden-profits definition. Additional authority included NSA judgments of 11 January 2023 (III OSK 6549/21), 22 January 2026 (I OW 217/25), 20 January 2026 (III OSK 246/23), and 14 January 2026 (II GSK 2097/25).
The Court explained: the introductory sentence of Article 28m(3) establishes general criteria. The subsequent enumeration identifies categories that “always, and therefore a fortiori” satisfy those criteria. With respect to specifically enumerated categories, exclusion from the hidden-profits classification is foreclosed.
Procedural Arguments Also Rejected
The applicant raised extensive procedural challenges under Articles 14b, 14c, and 121(1) of the Tax Ordinance. The Court addressed these substantively, noting in particular that the principle of thorough factual clarification under Article 122 of the Tax Ordinance does not apply in interpretation proceedings — it is excluded by Article 14h. The burden of presenting a comprehensive factual description rests on the applicant under Article 14b(3). The Court found the authority’s reasoning clear and exhaustive.
Practical Implications
The judgment forecloses the two-step capitalisation strategy. Every share capital increase whose economic source is distributable profit will generate hidden-profit income — regardless of whether the profit was routed through reserve or supplementary capital.
The converse follows by argumentum a contrario: hidden-profit income does not arise where the capitalisation bears no “connection” with profit. By way of editorial observation — as this was not the subject of adjudication — examples might include shareholder contributions (dopłaty) or share premium attributable to fresh capital injection not derived from retained earnings. Each such case would, however, require independent analysis.
Legal basis: Judgment of the Provincial Administrative Court in Gdańsk of 20 January 2026, case no. I SA/Gd 839/25; Articles 28m(1)(2) and 28m(3)(6) of the Act of 15 February 1992 on Corporate Income Tax; Article 442(1) of the Commercial Companies Code.
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).
Kancelaria Skarbiec holds top positions in the tax law firm rankings of Dziennik Gazeta Prawna. Four-time winner of the European Medal, recipient of the title International Tax Planning Law Firm of the Year in Poland.
He specializes in tax disputes with fiscal authorities, international tax planning, crypto-asset regulation, and asset protection. Since 2006, he has led the WGI case – one of the longest-running criminal proceedings in the history of the Polish financial market – because there are things you do not leave half-done, even if they take two decades. He believes the law is too serious to be treated only seriously – and that the best legal advice is the kind that ensures the client never has to stand before a court.
