Taxation of dividends in Estonia
As a rule, payment of dividends is not taxed in Estonia.
At the moment of profit distribution, corporate income tax corresponding to the distributed sum must be paid.
How Estonian tax residents are taxed when receiving dividends
1. Dividends from an Estonian company to an Estonian private person
If an Estonian tax resident is receiving dividends from an Estonian company, then he does not need to pay any additional tax. All taxation (20% from gross profit) happens on the level of the company in the moment of profit distribution (latest next month 10th date). For example if a company distributes dividends 80 000 EUR during October, then corporate income tax 20 000 EUR (20% from distributed gross profit, which in this example is 100 000 EUR), must be paid latest November 10th. The corporate income tax will be paid by the company who is distributing the dividends.
As dividends from an Estonian company are not considered taxable income, then there is no need and it can't be added into the receiver's annual tax return. However, as on a company level the dividend payments are declared, then the tax authorities have a full overview of one's (official) income.
2. Dividends from a foreign company to an Estonian private person
If an Estonian tax resident (private individual) is receiving dividends from other jurisdictions, then the same taxation rule applies here as well. In other words, taxation happens in the company level and if corporate income tax is paid, then there is no taxation on the level of a dividend receiver. However, these dividends must be declared on annual tax return and proof of payment of corporate income tax must be provided. If this profit was not taxed on a company level or required proof presented, then 20% income tax must be paid on the level of a private individual.
For example, if an Estonian tax resident (private person) receives dividends from a Finnish company, then as a rule the Finnish company profit is taxed with Finnish corporate income tax (20%) and dividends, received by the Estonian tax resident, are tax free.
3. Dividends from a foreign company to an Estonian company
If an Estonian company receives dividends from a foreign company, then as a rule the corporate income tax is taxed on the level of first appearance of profit. Once it is taxed there and documented proof given, this money will not be taxed when distributed from an Estonian company (documented proof is not required if dividends are received from an OECD country). However, if the Estonian company share of the subsidiary is less than 10%, then the earned profit will be taxed on the moment of distribution of dividends regardless of the previous taxation.
How foreign tax residents are taxed by receiving dividends
1. Dividends from an Estonian company to a foreign private person
In most countries, dividends are not tax free and it means that beside corporate income tax, most foreign shareholders of an Estonian company will be taxed on a private level as well. Often taxation of such dividends is 15% and this (private person income) tax must be paid to the local tax authorities where the dividend's receivers tax residence is currently.
For example: If the Estonian company's sole shareholder is a foreign private person and he decides to distribute 80 000 EUR of dividends, then on the company level 20 000 EUR corporate tax must be paid. In addition, 15% (might be different in many countries) from 80 000 EUR must be paid by the shareholder, which is 12 000 EUR. This makes effective taxation 32%. In other words from cross profit, 100 000 EUR total taxes are 32 000 EUR and money after taxation left to the shareholder is 68 000 EUR, meaning the shareholder receives 68%.
Real taxation in each case depends on the tax residency of the dividend receiver and how it is regulated by the mutual tax treaties.
2. Dividends from an Estonian company to a foreign company
As a rule, especially if there is double taxation avoidance agreement, foreign companies who are shareholders of an Estonian company are not taxed when they receive dividends from Estonia.
It is also valid if dividends are paid from an Estonian company to low tax rate territories companies.