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Taxation of profits in Estonia

The system of corporate earnings taxation in force currently in Estonia is a unique system, which shifts the moment of corporate taxation from the moment of earning the profits to the moment of their distribution.

There are two types of profit distribution possible – an implicit and an explicit way.

The explicit way stands for dividends and other profit distributions (except for bonus issue, which is taxable for resident natural persons upon the alienation of assets received through the bonus issue).

Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company are generally subject to corporate income tax in the hands of the payer: an Estonian company at the moment of distribution.

The resident legal person and the non-resident legal person acting through its permanent establishment registered in Estonia carrying out profit distribution has to pay income tax of the amount of profits distributed.
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 lower tax rate (14/86) applies to part of dividends paid by the Estonan resident company regularly (The profit distributed in a calendar year, which is smaller than or equal to the average distributed profit of the previous three calendar years (starting from 2018) on which a resident company has paid income tax).

The natural person receiving such dividends taxed at a lower 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 (Form TSD with Annexes), 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.

Examples of dividend taxation are to follow.

  • A resident legal person pays 10 000 EUR of (not regular) dividends to a natural person. A tax of 2500 EUR (10 000 x 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 lower rate is a natural person (both resident or non-resident), income tax at a rate of 7% has to be withheld in addition (70 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 x 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 lower 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 x 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 lower 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 x 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 lower 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 (70 EUR).

There are tax exemptions available for resident legal persons and non-resident legal persons acting through its permanent establishment in Estonia. The income tax (20/80 or 14/86) is not charged on dividends or on payments upon a reduction in share capital or contributions, redemption of shares or liquidation of a legal person in conditions specified in § 50 (11), (21) and § 53 (41), (47) of the Income Tax Act. The threshold for the application of participation exemptions is 10%.

When a resident company or a non-resident legal person acting through its permanent establishment in Estonia has received payments from abroad, the income tax paid abroad may be deducted from the taxable amount of profit distributed in Estonia. Income tax paid in a foreign state on the income which was the basis of the payment not taxable in Estonia shall not be taken into account for deduction.

This guideline is to be considered as informative and very general and should not be treated as a final law. In specific cases one must act according to law. In case of further questions, you are welcome to contact the Estonian Tax and Customs Board.

Amended in December 2018
 

24.01.2019