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 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 (or 25%). This tax rate should not be deceiving. It is still the same 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.
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 20/80 of the amount of profits distributed.
For the recipient, dividends are not taxable income and additional income tax shall not be withheld on the amount of dividends.
Examples of dividend taxation are to follow.
- A resident legal person pays 10 000 EUR of 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).
- A resident legal person pays 10 000 EUR of 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.
- A resident legal person pays 10 000 EUR of 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.
- A resident legal person pays 10 000 EUR of dividends to resident legal person, who owns more 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 shall not be paid.
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) 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.
December 2012, amended 2015