Dividend tax 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.

Income tax is charged on all dividends and other profit distributions received by a resident natural person from a foreign legal person in monetary or non-monetary form.

Dividends are taxed at a rate of 21/79 (approximately 26,6%). 21% is applied to gross payments and 21/79 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 21/79 of the amount of profits distributed.

From 2009, if dividends are paid to a non-resident, additional 21% 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 2658,23 EUR (10 000 x 21/79) has to be paid by the resident legal person.
• 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 2658,23 EUR (10 000 x 21/79) 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 2658,23 EUR (10 000 x 21/79) has to be paid. When the receiving entity pays out dividends further to other persons, then the tax of 21/79 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 2658,23 EUR (10 000 x 21/79) has to be paid. When the receiving entity pays out dividends further to other persons, then the tax of 21/79 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 (21/79) 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 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.

The income tax is not charged on dividends if:

1) the resident company paying the dividend has derived the dividend which is the basis for the payment from a resident company of a Contracting State or the Swiss Confederation subject to income tax (except for companies located within a low tax rate territory) and at least 10 per cent of such company's shares or votes belonged to the company at the time of deriving the dividend;

2) the dividend is paid out of profit attributed to a resident company's permanent establishment located in a Contracting State or Swiss Confederation;

3) the company paying the dividend has derived the dividend which is the basis for payment from a company of a foreign state not specified in clause (1) (except for a company located within a low tax rate territory) and at the time of deriving the dividend, the company owned at least 10 per cent of the shares or votes of such company, and income tax has been withheld from the dividend or income tax has been charged on the share of profit which is the basis thereof;

4) the dividend is paid out of the profit attributed to foreign permanent establishment of a resident company and income tax has been charged on such profit;

5) the dividend is paid on account of the portion of payments specified in the Income Tax Act.

The income tax imposed on profit attributed to permanent establishment which has been taken out of the permanent establishment during a period of taxation in monetary or non-monetary form is not charged on profit taken out of the permanent establishment, the basis for which is the dividend derived through or on account of the permanent establishment, provided that at the time the dividend was derived, the recipient of the dividend owned at least 10 per cent of the shares or votes of the company paying the dividend, and if:

1) the dividend was derived from a resident company of a Contracting State or the Swiss Confederation subject to income tax (except for companies located within a low tax rate territory);

2) the dividend was derived from a company of a foreign state not specified in clause (1) (except for a company located within a low tax rate territory) and income tax has been withheld from the dividend or income tax has been charged on the share of profit which is the basis thereof.