The taxation rules of a dividend from an Estonian company
How to calculate the value of CIT on dividends?
One of the possibilities of paying out the profit achieved by an Estonian company is the payment of dividends. As a rule, the dividend payment generates 20% CIT on the gross amount, which corresponds to 25% on the net amount. Taxation of the dividend is expressed by a ratio of 20/80 of the paid out amount. The tax due can be calculated using two alternative methods.
The tax amount calculated during the distribution of the entire profit generated by the company
If we want to pay out the entire profit generated by an Estonian company in a given tax year, the process is straightforward as we can apply the 20% CIT rate. For example, if a company has made a profit of 100,000 euros (i.e. gross dividends), multiplying the profit by 20% CIT, we get 20,000 euros of tax to pay. In such case, the net dividend, i.e. the amount we can pay out, will be the difference between the amount of profit achieved and the amount of tax, i.e. 80,000 euros.
Tax value calculated on the net dividend amount
If you want to pay out only a part of the profit generated by the company, i.e. receive a specific amount to your personal bank account in Estonia, the starting point will be the net dividend amount. For this example, we will use the same numbers: you want to receive 80,000 euros (net dividend), so you have to divide this value by 80%, which gives 100,000 euros (gross dividend). The received gross dividend value should be multiplied, as in the previous example, by 20% of CIT, which in our case gives 20,000 euro and this amount should be paid to the tax office.
Reduced CIT rate in Estonia
The Estonian tax system allows for the application of a reduced CIT rate on the dividend paid, expressed in ratio 14/86. This solution is available if the company has a stable dividend payout policy. In practice, this possibility exists if the value of the dividend to be paid out is equal to or lower than the average dividend paid out for the previous three years. So if the company pays out dividends regularly, the effective tax rate will be lower every year. It sounds complicated, but the Estonian system for settlements with the tax office calculates it automatically.
Dividend tax (WHT)
After we have settled our CIT liabilities, we need to consider whether we are still burdened with additional tax obligations arising from the dividend tax (WHT). In the case of an Estonian company, if we have applied the full 20% CIT rate, the WHT will not apply regardless of whom the dividend was paid out to. However, if a reduced CIT rate was applied, in some cases it will be necessary to charge an additional WHT of 7%. If a company pays out a dividend to a natural person, whether he is an Estonian resident or not, it must collect and pay 7% WHT on behalf of that individual. If the dividend is paid to another company, the WHT doesn’t have to be deducted.
When paying out dividends from an Estonian company, remember to check carefully if the rules of foreign income taxation are applicable in your country of residence. Dividend received from a foreign company is your income, which you should declare in your tax settlements. What’s more, you should read the Double Tax Treaty between Estonia and your country of residence to be able to deduct tax paid in Estonia.