Question 1

When Can You Pay Out Dividends and How Are They Taxed in Estonia?

John Doe · Accepted Answer

According to Estonian laws, dividends can only be distributed from the previous year’s profit. It is not possible to pay out profit for the current year.
Secondly, the company’s annual report must be submitted to show last year’s profit and determine the amount that can be paid out as dividends.
And finally, the share capital of the company must be paid in. As Estonia has made it very easy to start a company without paying the share capital in right away, then the idea behind this requirement is that you wouldn’t take any money out of the company before you have paid your contribution.

The share capital amount can be used for business purposes, meaning that it doesn’t have to stay on your business bank account as a deposit. As soon as it is transferred to the bank account, it can be used for business expenses, paying out salaries, and so on. After the share capital has been paid in, it has to be registered in the Business Register to pay out dividends. It is also required that you declare the share capital in the Estonian Tax and Customs Board (the ETCB). This becomes useful, if at some point you want to liquidate the company and are obligated to pay income tax on the company’s profit. If the minimum share capital of 2500 € has been declared in the ETCB beforehand, then in the case of company liquidation, 2500 € of the company’s profit will be tax-free. In Estonia, the regular corporate income tax rate on profit is 20% from the gross amount. If you receive dividends from subsidiaries or permanent establishments, then these may be tax-free in case there is a double treaty agreement signed between the countries. There is also an option to use a reduced corporate income tax rate which is 14%. When a company uses the reduced rate, then a private person has to pay 7% of the personal income tax. However, there are several rules for when the reduced tax rate can be used.

First, you can start using the reduced tax rate from the third year after the company was established. But in that case, you had to distribute dividends in the second year, otherwise the regular 20% tax rate still applies.
If you paid out dividends in the second year, then 1/3 of this amount can be taxed with a reduced rate on the third year and the rest of the amount with the regular 20% tax rate.
In the fourth year, you have to sum up all the dividends distributed in the second and third year, and 2/3 of this amount will be taxed with the reduced rate and the rest with the regular 20% rate.

The 7% that is withheld as a personal income tax, can be deducted in the personal income declaration in your home country (in a country where your personal tax residency is). For that, you need to get proof from the ETCB that the income tax has been paid in Estonia and then your taxes will be reduced in your home country. If a company distributes dividends to another company with a reduced rate, then the company only pays 14% of corporate income tax on that. But if the owner of the second company is a private person, and the second company pays out dividends to the owner, then the 7% personal income tax will be withheld from that private person. So, using the reduced tax rate is rather complicated and involves different calculations and nuances. If the reduced tax rate is used, the full structure of the dividends should be known to make better judgments. If you have filled the requirements for a reduced tax rate and want to use it, then we recommend consulting with our accountants who can explain how it will work for your company.

Question 2

When Can You Pay Out Dividends and How Are They Taxed in Estonia?

John Doe · Accepted Answer

According to Estonian laws, dividends can only be distributed from the previous year’s profit. It is not possible to pay out profit for the current year.
Secondly, the company’s annual report must be submitted to show last year’s profit and determine the amount that can be paid out as dividends.
And finally, the share capital of the company must be paid in. As Estonia has made it very easy to start a company without paying the share capital in right away, then the idea behind this requirement is that you wouldn’t take any money out of the company before you have paid your contribution.

The share capital amount can be used for business purposes, meaning that it doesn’t have to stay on your business bank account as a deposit. As soon as it is transferred to the bank account, it can be used for business expenses, paying out salaries, and so on. After the share capital has been paid in, it has to be registered in the Business Register to pay out dividends. It is also required that you declare the share capital in the Estonian Tax and Customs Board (the ETCB). This becomes useful, if at some point you want to liquidate the company and are obligated to pay income tax on the company’s profit. If the minimum share capital of 2500 € has been declared in the ETCB beforehand, then in the case of company liquidation, 2500 € of the company’s profit will be tax-free. In Estonia, the regular corporate income tax rate on profit is 20% from the gross amount. If you receive dividends from subsidiaries or permanent establishments, then these may be tax-free in case there is a double treaty agreement signed between the countries. There is also an option to use a reduced corporate income tax rate which is 14%. When a company uses the reduced rate, then a private person has to pay 7% of the personal income tax. However, there are several rules for when the reduced tax rate can be used.

First, you can start using the reduced tax rate from the third year after the company was established. But in that case, you had to distribute dividends in the second year, otherwise the regular 20% tax rate still applies.
If you paid out dividends in the second year, then 1/3 of this amount can be taxed with a reduced rate on the third year and the rest of the amount with the regular 20% tax rate.
In the fourth year, you have to sum up all the dividends distributed in the second and third year, and 2/3 of this amount will be taxed with the reduced rate and the rest with the regular 20% rate.

The 7% that is withheld as a personal income tax, can be deducted in the personal income declaration in your home country (in a country where your personal tax residency is). For that, you need to get proof from the ETCB that the income tax has been paid in Estonia and then your taxes will be reduced in your home country. If a company distributes dividends to another company with a reduced rate, then the company only pays 14% of corporate income tax on that. But if the owner of the second company is a private person, and the second company pays out dividends to the owner, then the 7% personal income tax will be withheld from that private person. So, using the reduced tax rate is rather complicated and involves different calculations and nuances. If the reduced tax rate is used, the full structure of the dividends should be known to make better judgments. If you have filled the requirements for a reduced tax rate and want to use it, then we recommend consulting with our accountants who can explain how it will work for your company.