If an Estonian company has distributed their profit to dividends, the preferential tax rate of 14% (14/86 of the net sum of the dividends) will be applied to the dividends that are paid in 2019. The preferential tax rate is applied to the one third of the profit that was distributed in 2018 from which the resident company has paid the income tax.
Section 501 of the Income Tax Act the entered into force in 2018 states that the profit distributed in the calendar year that is smaller or equal to the average profit distributed and taxed during the preceded three years, will be taxed with 14%. The implementing provision specifies that this amendment can be used from 2019.
During the first years (2019, 2020) of applying this amendment, the dividends taxed with income tax of one (2018) and two (2018, 2019) preceding calendar years will be considered as a transfer in calculating the average profit. In 2021, the lower tax rate 14/86 is calculated to the paid dividend that will not exceed the payment of the average taxed dividend and equity of the preceding three years.
The lower tax rate can be applied only in case the profit is distributed to the legal entities. If the dividend is paid to the natural person (incl non-resident natural person), the company has to withhold additional 7% of the income tax. Or, the private person gets smaller sum as a net dividend than the persons who get the dividend from the company by the same payer of the dividends. If the recipient is the non-resident natural person, the transnational tax agreements may exempt the dividend payment of the non-resident natural person from withholding the income tax or lower the withholding tax rate to 5%.
NB! The lowered tax rate indicated above is applied also to the profit of the non-resident legal entity regularly taken out from the permanent establishment in Estonia. Hence, when the profit is regularly taken out of the permanent establishment in Estonia and the income tax sum is smaller than when accumulating and distributing the profit, for example, in a single sum at the same time at the end of the activity.
Please contact the Advisory Unit of Leinonen OÜ for more information or drawing up the dividend distribution decision.
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