Reduced tax rate for regular dividend payments

Estonia has implemented a lower income tax rate of 14% for regular profit distributions compared to the standard rate of 20% (from gross amount), effective 1 January 2018.¹ In practice, this tax rate can be applied to dividends distributed in annual periods beginning on or after 2019. However, as dividends paid to individuals will be subject to an additional 7% income tax withholding, the change does not lighten the tax burden of natural person shareholders.

The 14% income tax rate shall be applied in accordance with the following principles:

• Profit distributions are considered regular if the amount of the distribution does not exceed the company's last three years' average profit distributions subject to taxation in Estonia. The portion of the distribution exceeding this threshold shall remain taxable at 20%.
• The unused portion of the right to apply the lower tax rate cannot be carried forward.
• Dividends received from subsidiaries and profits from foreign permanent establishments will not be included in these reduced tax rate calculations.
• Any dividends paid to natural persons (including nonresident natural persons) from the profits of an Estonian company using the reduced tax rate will be subject to an additional 7% income tax withholding. For nonresidents, the tax rate shall be determined in accordance with the relevant tax treaty.
• The first year to be included in such income tax calculations will be 2018 (in 2019, the reduced tax rate can be applied to one-third of the 2018 profit distributions and in 2020 to one-third of the 2018 and 2019 profit distributions combined).

Declaration of certain intra-group loans

On 1 January 2018, an additional amendment to the Income Tax Act came into force, obligating Estonian resident companies and nonresident companies with a permanent establishment in Estonia to prove at the request of the tax authorities that their intra-group loan transactions (with a term exceeding 48 months) do not constitute a hidden profit distribution. If the circumstances of a loan transaction indicate a hidden profit distribution, income tax at the rate of 20% on the loan amount shall apply (tax base is divided by 0.8 before multiplied by the tax rate). Tax authorities are required to allow the company at least 30 days to demonstrate their capacity and intention of collecting the loan.

All hidden profit distributions shall be subject to income tax and have to be declared in the tax declaration submitted by the 10th of the month following the month of the distribution.

Loans granted to the parent company or other group companies as well as loans repaid must be reported to the Tax and Customs Board on a quarterly basis, by the 20th of the month following the quarter. The first such report will be due on 20 April 2018. All qualifying related-party loans granted and repaid should be reported (credit and debit turnovers in accounting) and interest received within a quarter, broken down by loan types and entities receiving the loans. For cash pools, total turnover for the quarter should be declared, not the balance.

———————————————
ENDNOTE

¹ See EY Global Tax Alert, Estonia enacts key changes to corporate income tax rules including reduced tax rate for regular dividend payments, dated 22 June 2017.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Baltic AS, Tallinn

• Ranno Tingas
  ranno.tingas@ee.ey.com
• Hedi Wahtramäe
  hedi.wahtramae@ee.ey.com
• Jevgeni Semjonov
  jevgeni.semjonov@ee.ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert