Taxation of profits and dividends in Estonia
The system of corporate earnings taxation in Estonia is unique, since it shifts the moment of corporate taxation from the moment of earning the profits to the moment of their distribution. It means that as long the profit is not distributed, there is no corporate income tax (CIT) applicable to the company (unless some other costs must be taxed).
Implicit and explicit profit distribution
The explicit way stands for dividends and other profit distributions. Payments from liquidations, payments upon capital reductions etc are generally subject to corporate income tax at the moment of distribution on the side of the payer - a company. The Estonian company pays corporate income tax at the moment of payment, while tax rate is calculated from net amount, 20/80 of the payment. The company income tax rate is the rate of 20% as in the provisions for the taxation of salaried work payments. The difference is that 20% is applied to gross payments and 20/80 is applied to net payments.
No income tax is withheld from income of the dividend recipient generally.
From year 2019, a reduced tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly. The natural person receiving such dividends taxed at a reduced rate (14/86) in the hands of the Estonian company, has to pay income tax at a rate of 7% in addition. It has to be withheld by the payer.
A non-resident natural person has to pay income tax on dividends received from the Estonian company in the resident country also and he or she cannot take into account the corporate income tax (20/80 or 14/86) paid in Estonia by the Estonian resident company to avoid double taxation of the recipient. Only the income tax withheld at a rate of 7% may qualify to avoid double taxation of the natural person recipient.
The implicit way to distribute profits is to do that through fringe benefits, gifts and donations, as well as expenses and payments unrelated to business activity. All of these profit distributions are taxed at a rate of 20/80.
Hence, there is no obligation to submit a tax return annually, regardless of profits or losses. Income tax is assessed monthly, thus taxable amount must be declared monthly (10th day of the month following the payment) whenever profits are distributed or other taxable expenses are incurred.