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.

Corporate profit without distribution
company gross profit - 100 000 EUR
corporate income tax - 0 EUR
real tax - 0%
profit to use - 100 000 EUR
Payment of dividends
company gross profit to distribute - 100 000 EUR
corporate income tax rate - 20%
corporate income tax - 20 000 EUR
dividend paid to shareholders - 80 000 EUR
real tax - 20%
withholding tax - 0%
shareholders receive - 80 000 EUR
Implicit way of profit distribution
costs or payments unrelated to business - 100 000 EUR
corporate income tax - 20%*
tax to pay - 25 000 EUR
* although it looks as tax rate is 25% (25 000 from 100 000 = 25%), but actually tax is always calculated from gross profit (in this case distributed implicitly), which in this case is 100 000 + 25 000 = 125 000 EUR, and 25 000 out of 125 000 is 20%.
More examples of dividend taxation
A resident legal person pays 10 000 EUR of (not regular) dividends to a natural person. A tax of 2500 EUR (10 000 × 20/80) has to be paid by the resident legal person (total cost 12 500 EUR). In case of regular dividends paid, corporate income tax of 14/86 has to be paid instead (1627.91 EUR). If the recipient of such dividend taxed at a reduced rate is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld in addition (700 EUR).
A resident legal person pays 10 000 EUR of (not regular) dividends to a non-resident legal person who owns less than 10% of the profit-distributing entity. A tax of 2500 EUR (10 000 × 20/80) has to be paid by the resident legal person. In case of regular dividends paid, corporate income tax of 14/86 has to be paid instead (1627.91 EUR). As the recipient of such dividend taxed at a reduced rate is a legal person, no income tax is withheld from the payment.
A resident legal person pays 10 000 EUR of (not regular) dividends to a resident legal person, who owns less than 10% share in the profit-distributing entity. A tax of 2500 EUR (10 000 × 20/80) has to be paid. When the receiving entity pays out dividends further to other persons, then the tax of 20/80 of the amount paid out has to be paid again. In case of regular dividends paid, corporate income tax of 14/86 has to be paid instead (1627.91 EUR). As the recipient of such dividend taxed at a reduced rate is a legal person, no income tax is withheld from the payment.
A resident legal person A pays 10 000 EUR of (not regular) dividends to resident legal person B, who owns more than 10% share in the profit-distributing entity A. A tax of 2500 EUR (10 000 × 20/80) has to be paid by A. In case of regular dividends paid, corporate income tax of 14/86 has to be paid by A instead (1627.91 EUR). When the receiving entity B pays out dividends further to other persons, then the tax of 20/80 or 14/86 of the amount paid out shall not be paid. Still, if the recipient of such dividend paid by B and taxed at a reduced rate by A is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld in addition (700 EUR).

Information and examples above are taken from the website of the Estonian Tax and Custom Board. This guideline is informative, very general and should not be treated as an advice. In case of further questions, you are welcome to contact us.
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