Company in Estonia and Dividends Distribution
In general, dividend payments are not taxed on a receiver level in Estonia.
Corporate income tax related to the sum, must be paid by the company disbursing the dividend at the time of dividend distribution, i.e. company in Estonia should pay tax on dividends.
Taxation rules pertaining to tax paying residents of Estonia, who are receiving dividends –
1. Dividends distributed from company in Estonia to an Estonian resident (private person)
If an Estonian tax resident receives a dividend(s) from an Estonian company, then he is not required to pay any additional tax on the received sum. All taxation (20% of gross profit) is handled by the company at the time of distribution (By the 10th day of the following month). For example, in the case of a gross sum of 200,000 EUR. If a company distributes 160,000 EUR in April, a corporate income tax of 40,000 EUR (20% of gross profit) must be paid by the company, no later than the 10th of May.
Because dividends received from Estonian companies are not taxable income, they can not be placed on the receivers annual tax return. Although, on company level the dividend payments are recorded and therefore taxation authorities have access to one’s official income.
2. Dividends distributed from a foreign company to an Estonian resident (private person)
If an Estonian resident (private individual) responsible for taxes, receives dividends from jurisdictions other than Estonia, the same taxation rules apply. Taxation happens on a company level in this case as well. As long as corporate income taxes are paid, the receiver of the dividend will not be taxed.
Dividends received from non Estonian companies, must be declared on the receivers annual tax return. In addition, the receiver must provide proof that the corporate income tax has been payed. If the company who disbursed the dividend has failed to pay the corporate income tax on a received dividend, then the receiver becomes responsible for payment of the 20% income tax.
If a German company distributes a dividend to an Estonian resident (private person), the rule is that the German company is taxed and pays 20% of the gross profit, the dividend payment received by the Estonian resident is then tax free, for example.
3. Dividends payed by a foreign company and received by Company in Estonia
If a Estonian company receives a dividend payment from a foreign company, then the corporate income tax is required to be payed at the time that the profit is received. After the dividend has been taxed and proof of this taxation has been documented (documentation is not required for sums received by companies in OECD countries), the sum shall not be taxed further when distributed from the Estonian company.
The fore mentioned rule is always true, unless the Estonian company’s subsidiary share is less than 10%. In this case, the profit will be taxed at the time that dividends are redistributed, regardless of any previous taxation.
How foreign tax paying residents are taxed, when receiving dividends from Estonian companies
1. Dividends distributed from an Estonian company to a non Estonian resident (Foreign private person)
In many countries dividends are not considered a non taxable income. This means that even though the company disbursing the dividend is responsible for corporate income tax, the receiver of the dividend will also be taxed. In most cases the receiver (foreign private person) must pay a tax equal to 15% ( actual % varies by country) of the received dividend to their local tax authority.
As an example: In the case of a sole shareholder of an Estonian company being a foreign resident. If he chooses to distribute a dividend of 160,000 EUR, then the Estonian company will be responsible to pay 40,000 EUR in corporate income tax at the time of dividend distribution (paid no later than the 10th day of the following month). After this corporate income tax is paid, the shareholder must then pay 15% ( actual % may vary by country) of the 160,000 EUR, a sum equal to 24,000 EUR as a personal income tax. This additional tax raises the total dividend taxation amount from 20%, to 32%.
This means from the entire sum of 200,000 EUR, 64,000 EUR is paid out in taxes and the actual amount distributed is equal to 136,000 EUR. In actual cases of taxation the final amount owed in taxes and the actual amount distributed will depend on the receivers residency and the local taxation laws.
2. Dividends disbursed from an Estonian company and received by a foreign company
If a dividend is payed to a foreign company, by an Estonian company the receiving company is not taxed. The Estonian company will be responsible for the usual 20% corporate income tax, as usual. This rule is especially true if a double taxation avoidance agreement is in place.
This rule also applies when dividends are disbursed by an Estonian company and paid to a company that is located within low tax rate territories.
If you would like to incorporate company in Estonia or would like to learn more about taxation in Estonia, please feel free to contact our specialists.