A special feature of the Estonian tax system is that company profit is not subject to corporate tax, providing it is reinvested rather than distributed as dividends.
Corporate Income Tax
The standard corporate income tax rate is 20% (calculated as 20/80 of the net dividend received).
From 1st January, 2019, based on Chapter 5, Paragraph 4 and Paragraph 50¹ of the Estonian Income Tax Act, regularly distributed dividends are subject to taxation at a lower rate of 14% (calculated as 14/86 of the net dividend received).
Regularly distributed dividends are deemed to be dividends paid out annually.
After the first year of a company’s operation, a standard corporate income tax rate of 20% is applied to dividend distribution.
If the dividends are paid after the second year of company activity, such distribution will be deemed “regular” and will be partially taxed at a lower rate of 14%. This rate will be applied to the part of the distribution equal to or lower than one third of the previous year’s dividends from which the company had paid the corporate tax, whereas the standard tax rate of 20% will be applied to the remaining part of the amount to be distributed.
After the third year of the company participating in regular dividend distribution, the lower rate of 14% will be applicable to the part of the payable sum equal to or lower than one third of the distributed profits for the two previous years from which the company had paid corporate tax, whereas to the remaining part of the payable sum, the standard tax rate of 20% will be applied.
If for a certain year the company has decided not to distribute dividends, then when distribution is resumed, for the first year of the resumed dividend distribution, the standard rate of 20% is to be applied, because since the distribution had been discontinued, it will no longer be regarded as regular.
Income Tax for a Dividend Recipient
When dividends are paid to a natural person – whether an Estonian resident or non-resident – the following rules are to be applied:
- The recipient of dividends will not be subject to additional income tax in Estonia if on dividend distribution the standard tax rate of 20% was applied to the company.
- If, at dividend distribution, the lower tax rate of 14% was applied to the company (Chapter 7² Paragraph 41 of the Income Tax Act), the recipient of dividends is levied with income tax of 7% (in some cases 5% or 0%, as outlined below) in Estonia. The income tax payable by the recipient is to be withheld from the sum of dividends paid to them.
This extra income tax to be withheld in Estonia from a non-resident dividend recipient is not 7% but only 5% if the recipient of dividends is either a resident of Bulgaria or North Macedonia.
The extra income tax of 7% will be reduced to 0% in Estonia from a recipient of dividends if they are a resident of one of the following countries: the United Arab Emirates, Bahrain, Georgia, Jersey, Cyprus, the Isle of Man or Mexico.
The reduced income tax rates of 5% and 0% for Estonian non-residents from certain countries are based on international tax treaties. For the reduced income tax rate to be applied, a document certifying residency of the aforementioned countries must be submitted.
The list of current bilateral treaties is available on the website of the Estonian Tax and Customs Board https://www.emta.ee/eng/business-client/income-expenses-supply-profits/external-agreements/conventions-avoidance-double
Distributed dividends are to be declared by the 10th day of the month following distribution, along with the Tax Deducted at Source (TDS) declaration to be submitted to the Estonian Tax and Customs Board, wherein the sum of the dividends is to be stated in Annex 7.
Their system will automatically calculate the sum of corporate income tax. It is also necessary to complete an INF Form, wherein the recipients of dividends are to be disclosed (ID code, name and surname, amount and country of residence or domicile).
Dividends can be distributed if the following conditions are met:
- The initial share capital of the company has been paid
- The annual report for the previous business year has been approved
- The maximum amount of the dividends to be paid out has been declared in the annual report
- The distribution of the dividends should not impair the solvency of the company.
Example of dividend distribution in 2019
Example: A company Х OÜ was established in 2018, with a sole shareholder being a resident of the Czech Republic, and share capital of 2500 EUR having been paid.
2018 – the first year of company activity
Upon the results of the first year of company activity, the Board made a resolution to distribute dividends out of profits to the amount of 60 000 EUR. In the resolution, the net amount to be paid out was stated. The resolution on dividend distribution can be made at the time of the annual report approval, when the annual report is filed in the Central Commercial Register (Äriregister). Alternatively, at the owners’ discretion this resolution can be formalised later.
During the first year of operation, the company’s dividends are subject to corporate income tax at a standard rate of 20% (20/80 of the net sum), since the lower tax rate of 14% (14/86 of the net sum) is only applied to regular, i.e. annual, dividend distributions.
The corporate income tax on the dividends will be 60 000 EUR X (20 / 80) = 15 000 EUR, this amount to be declared by the Estonian company and paid into the budget of Estonia.
Thus, at the corporate level, the expenditures on the dividends and the corporate tax will total 60 000 + 15 000 = 75 000 EUR.
2018 – the second year of company activity
Upon the results of the 2019 annual report, dividends declared in 2020 amount to 100 000 EUR. As it will be the second consecutive year of the dividend distribution, the lower rate of corporate income tax of 14% (14/86 of net dividend sum) meant for regular dividend distribution will be applied. Pursuant to the Income Tax Act, a company can apply the lower tax rate of 14/86:
- in 2019 for 1/3 of the distributed profits for 2018, for which the company had paid the corporate tax;
- in 2020 for 1/3 of the distributed profits for 2018 and 2019 for which the company had paid the corporate tax.
As for 2018, the sum of the distributed dividends was 60 000 EUR, 1/3 of the paid out sum amounts to 20 000 EUR (60 000 EUR X (1/3) = 20 000 EUR) and for this sum the corporate income tax is applicable at the lower rate of 14/86, in addition to which a 7% tax on the income of a natural person is to be imposed (an additional income tax applicable to dividends distributed to a natural person if the lower corporate tax rate was applied).
Corporate tax at the rate of 14/86 will be calculated as follows 20 000 X (14 /86) = 3255.814 EUR or 3256 EUR rounded up.
Income tax levied on a natural person at the rate of 7% will be calculated as follows: 20 000 X 7% = 1400 EUR
From the remaining amount of the declared dividends for 2019, i.e. 80 000 EUR (100 000 EUR – 20 000 EUR = 80 000 EUR), the company is to pay corporate income tax at the standard rate of 20/80.
Calculation of the corporate income tax at the rate of 20/80:
80 000 X (20/80) = 20 000 EUR.
The dividend amount for 2019 to be paid out to the shareholder will be 98 600 EUR (20 000 – 1 400 + 80 000 = 98 600).
Taken together, the company is to declare and pay into the budget of Estonia the dividend-related taxes to the amount of 20 000 + 3256 + 1400 (withheld from the dividend recipient) = 24 656 EUR.
Thus, the company’s expenditure on dividends and the corporate income tax will be 98 600 + 24 656 = 123 256 EUR.
Income Tax Act1
Conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital