Dividends represent a part of the profits of an Estonian company which are distributed among the shareholders after the business has paid all the taxes. Both natural persons and legal entities are imposed with the income tax on the dividends received from an Estonian company.
Below, our company formation agents in Estonia explain how dividends are taxed in this country.
Distribution of dividends in Estonia
Estonia is a very developed country from a taxation point of view, as all profits, dividends included are not imposed any tax until the moment of their distribution. Moreover, Estonian companies making profits under the form of dividends in other countries will not be imposed the withholding tax on this income.
Over time, the Estonian tax legislation has suffered various modifications to the benefit of companies and individuals, which is one of the main reasons for which this country is very appealing to investors and those who want to move here for employment purposes, for example.
If you want to open a company in Estonia and need guidance, our local consultants are at your service.
The methods the dividend tax applies in Estonia
Profits made by companies in Estonia can be distributed in two ways: the implicit and the explicit ones. Out of these, dividends are distributed the explicit way and are taxed at the moment of their distribution. This also applies to the corporate tax, which must be paid the same way.
This principle can also be adopted by permanent establishments of foreign companies, such as subsidiaries set up in Estonia. Non-resident companies can also pay the income tax on the profits they have distributed and not on an assessment providing for the taxes that should be paid.
There is no income tax applied on dividends received in Estonia, which is what makes this country a great option for creating a business.
When it comes to the implicit way, companies can distribute profits under the form of gifts, expenses and payments that are not directly connected to the business activity, as well as donations and fringe benefits. These profits are levied at a rate of 20/80.
If you have any questions about the taxation of companies, including the dividend tax, you can rely on the answers of our company registration advisors in Estonia.
How are dividend payments taxed in Estonia?
The Estonian taxation system implies for the corporate tax to apply to all types of incomes generated by local companies and foreign companies with activities in this country. Under the current tax legislation, dividend payments imply the following:
- – Estonian natural persons can be taxed when receiving dividends from an Estonian company;
- – Estonian residents can be taxed when receiving dividends from a foreign company;
- – foreign companies can also be taxed when receiving dividends from an Estonian company;
- – an Estonian company can be taxed when receiving dividends from a foreign company.
While the taxation of Estonian companies and natural persons follow the requirements of the local legislation, the taxation of foreigners and overseas companies must also comply with the tax requirements imposed by their home countries. These relations are usually governed by the Estonian double taxation agreements.
Taxation of dividends distributed by companies in Estonia
Taxation of dividends in Estonia applies for resident and non-residents that act through their permanent establishment registered in the country. Dividends are subject to income tax as well as other profit distributions received by an Estonian citizen from a foreign legal person in either monetary or non-monetary form.
If a resident company or a non-resident legal entity receives payment from outside Estonia, the income tax that has to be paid abroad can be deducted from the amount of profit taxable in Estonia. However, if a tax is paid in a foreign state on an income that has no tax applied in Estonia, a deduction will not be taken into consideration.
Undistributed profits are not subject to tax in Estonia, but there is a 21% charge rate on Estonian gross dividends. This tax is calculated as 21/79 of the net dividend, as well as corporate income tax in Estonia, according to the corporate tax system applied in here.
If certain conditions are respected, the retribution of dividends is not taxed in Estonia. Dividends received from a subsidiary that is part of the EEA Member State or Switzerland are not taxable if at least 10% of the shares or votes are held by an Estonian company, and if the tax has been paid or withheld. In addition, this exemption method can be applied to paid dividend generated by the profit that is attributed to a resident’s company. If Estonian dividends are received from companies in low tax jurisdictions, the exemption is not applied.
If an Estonian company receives the income and dividends are paid from profit that has been earned until the year 2000, then the company does not qualify for the exemption.
Resident companies, as well as branches in Estonia or permanent establishments of foreign entities, have to pay income tax on all distributed profits, including corporate profits distributed in the tax period, gifts, donations and representation expenses, as well as expenses and payments that are not related to the business.
Dividend tax exceptions in Estonia
Not all Estonian companies are required to pay the dividend tax, as several exceptions apply. Among these are:
- the Estonian company receives dividends from a company based in a European Economic Area (EEA) state, including in Switzerland;
- the dividend tax is not imposed on the Estonian company’s profits generated in an EEA country, Switzerland or another state if the tax has been paid in that country.
- the Estonian company received dividends from a company registered in a foreign country that is not known as an offshore destination (tax haven).
In this last situation, the Estonian company must own at least 10% of the shares or voting rights in the foreign company and pay the corporate or withholding tax for the respective assets.
It should be noted that the taxation of dividends is also influenced by the double tax treaties signed by Estonia with other countries, therefore different tax rates or regulations can apply to each particular situation when such an agreement is in place.
Our Estonian company formation specialists can guide foreign investors who want to set up businesses here, including by applying for e-residency which enables them to incorporate it remotely.
Taxation of dividends under Estonia’s double tax treaties
As mentioned above, the dividend tax rate can be different when it comes to the provisions of a double tax agreements signed by Estonia. In most cases, the rates are lower compared to the standard tax.
Considering that each country has its own taxation system in which dividends are taxed in different manners, these are treated separately by each signatory state. Considering Estonia does not impose any dividend tax on local businesses, these could be required to pay this levy in the country they obtain the respective payments. In this case, they will need to file their tax returns in Estonia where the payment of this tax will be shown.
At the level of 2019, Estonia had around 60 double taxation conventions in place with countries all over the world.
Our local consultants can offer more information on the taxation of dividends under Estonia’s double tax treaties. We can also help with various accounting services.
The corporate tax in Estonia
The Estonian corporate taxation system is unique and shifts the moment of corporate taxation in Estonia from the generation of profits to the distribution. In regards to distribution, there are two possible types of profit distribution, an implicit type, and an explicit type. The explicit type refers to Estonian dividends and other profit distributions, while the implicit type handles the way profits are distributed through fringe benefits, gifts and donations, adding expenses and payments not related to the business activity.
A resident legal person as well as the non-resident legal person that acts through a company registered in Estonia, carrying out profit distribution, must pay 21/79 of the profits distributed.
Tax return filings in Estonia
Estonian companies are not required to file tax returns annually, as the income tax is assessed on a monthly basis. Companies are required to declare their taxable amounts by the 10th of the month following the payment, if dividends are distributed. Estonian businesses are also required to file their annual tax returns, just like companies in other countries.
If you need assistance in filing tax returns, you can rely on our consultants who can also explain how the taxation system here works.
New Estonian tax regulations starting with 2019
An important change brought by the Estonian government to the taxation system targets the corporate tax which also comprises the levies imposed on dividend payments. Under the new regulations, the Estonian Tax Office provides for the following:
- – dividend payments subject to a reduced rate of the corporate tax will be applied a 7% withholding tax when distributed to natural persons – Estonian or foreign citizens;
- – the distribution of dividends will be subject to a reduced rate of 14% if they do not exceed the average taxable amount of money distributed in the last 3 years;
- – in order to benefit from a reduced tax rate of dividend payments, the distribution must represent 1/3 of the profits of the company distributed in 2018;
- – the participation exemption will apply just like before when it comes to the Parent-Subsidiary Directive.
Our Estonian company formation consultants can offer more information on the new tax regulations to be imposed starting with 2019. We also offer accounting services for companies and foreign investors interested in operating on the Estonian market.
Our company formation agents can provide qualified assistance with all legal aspects involved in the process of opening a company in Estonia. Also, please contact our Estonian specialists for issues concerning dividend taxation matters.