• From 1 January 2019, Estonia applies new reduced 14% corporate tax on regular dividends and other profit distributions (regardless whether the decision on dividend distribution has been made in 2019 or in 2018). The 14% corporate tax applies also to profits taken out from Estonia by the permanent establishment or branch office of the non-resident (on appendix 3 of the form TSD).
• The reduced 14% rate will be applied automatically in the appendix 7 of the form TSD:
• In 2019 to 1/3 of profits distributed during 2018, which was taxed with 20% corporate tax, and
• In 2020 to 1/3 of profits distributed during 2018 and 2019, which was taxed with 20% or 14% corporate tax.
• From 2021, the reduced 14% rate will be applied to profit distributions, which are equal or less than average distributed profits of the last three calendar years, on which the company has paid either 20% or 14% corporate tax.
• Generally, the application of the reduced 14% rate on the appendix 7 of the form TSD will be automatical, without having an option to apply the 20% rate. For example, if during 2018 any dividends or profit distributions have been taxed with 20% corporate tax, then to 1/3 of that amount of dividends will be automatically applied 14% rate upon payment of dividends in 2019.
• On the appendix 7 of the form TSD the total amount of dividends will be declared on code 7008, after which the application will automatically divide these dividends to reduced rate dividends on code 7009 and to standard rate dividends on code 7010.
• On code 13050 of the form INF 1, companies will have to declare separately the type of payment „DK“ for dividends which are taxed with 20% rate and the type of payment „MDK“ for dividends which are taxed with 14% rate.
• In addition, the new 7% income tax rate will be introduced to dividends paid to any individual shareholder, if these dividends have been previously subject to reduced 14% corporate tax rate at any level of group of companies paying the dividends. This 7% withholding tax will be declared on form INF 1.
• For example, if the Estonian company A has at least 10% participation in the company B and the dividends have been subject to the reduced 14% corporate tax by the company B, then the company A may apply the participation exemption from corporate tax in respect of redistribution of dividends paid to its individual shareholder, but must withhold 7% income tax on such redistributed dividends.
• If the company A has less than 10% participation in the company B and the dividends have been subject to the reduced 14% corporate tax by the company B, then the company A must apply upon redistribution of these dividends 20% corporate tax in respect of dividends paid to its individual shareholder, but is not liable to withhold 7% income tax.
• Upon type of payment „MDK” will be declared on form INF 1 on code 13060 the gross amount of dividends of the individual, on code 13073 the rate of withholding tax and on code 13074 the tax withheld.
• This 7% withholding tax will be generally applicable to dividends paid to non-resident individuals, but not to corporate shareholders. As an exception, under few Estonian double tax treaties there will be an exemption from or reduction of the withholding tax for dividends paid to such individuals (0% – to residents of Mexico, Georgia, Cyprus, Jersey, Isle of Man, United Arab Emirates and Bahrain; 5% – to residents of Bulgaria, Israel and Macedonia).
• If among the recipients of dividends are any individuals, then the company distributing the dividends may combine upon the payment of different type of dividends (taxed with 14% or 20% rate) whether to pay to individuals:
• Dividends taxed with 20% tax rate, or
• Dividends taxed with 14% tax rate and withhold 7% income tax, or
• Dividends taxed with 20% and 14% tax rate, withholding from the last-mentioned dividends 7% withholding tax.
• With the increase of payment of dividends taxed with reduced 14% corporate tax rate to the individual shareholder, the corporate tax payable by the company (and the overall tax burden on dividends) will decrease, but due to the 7% withholding tax will be generally reduced also the amount of net dividends received by the individual shareholder.
• For a conclusion, from 2019 upon the payment of dividends to individual shareholders companies must take into account the following:
• Dividends taxed with 20% – no 7% withholding tax, type of payment „DK“ (INF1)
• Dividends taxed with 14% – 7% withholding tax, type fo payment „MDK“ (INF1)
• Dividends received from foreign countries (or from Estonia, if dividends have been initially subject to tax with 20%) and redistributed under participation exemption as tax exempt dividends– no 7% withholding tax, type of payment „DK“ (INF1)
• Dividends received from Estonia, which were taxed at 20% rate and redistributed – no 7% withholding tax, type of payment „DK“ (INF1)
• Dividends received from Estonia, which were taxed at any level at 14% rate and redistributed – 7% withholding tax, type of payment „MDK“ (INF1)
Example 1 – corporate shareholder
2018 – the amount of dividends distributed – 10 000, which includes:
• Tax exempt dividends – 6 000 and
• Dividends taxed with 20% corporate tax – 4 000 (20/80*4 000 = corporate tax 1 000)
2019 – the amount of dividends that will be distributed – 10 000, which includes:
• Tax exempt dividends – 5 000
• The amount 5 000 will be taxed as follows:
o 1/3 from 4 000 = 1 333*14/86 (corporate tax 217,05) and
o Remaining (5 000-1 333) 3 667 * 20/80 (corporate tax 916,75)
2020 – the amount of dividends that will be distributed – 10 000, which includes:
• Tax exempt dividends – 6 000
• The amount 4 000 will be taxed as follows:
o 1/3 from 9 000 (4 000+5 000) = 3 000 x 14/86 (corporate tax 488,37) and
o Remaining (4 000-3 000) 1 000 x 20/80 (corporate tax 250)
In total, during 2019-2020 the corporate tax on taxable dividends (9 000) will be 1872,17, instead of standard 20/80 corporate tax, which would have been 2 250 (thus, the savings from reduced corporate tax will be 377,83).
Example 2 – individual shareholder
2018 – the amount of dividends distributed – 12 000, on which the 20/80 corporate tax paid was 3 000
2019 – the amount of dividends that will be distributed – 8 000, which includes:
• 1/3 from 12 000 = 4 000*14/86 (corporate tax 651,16), in addition to which:
o 7% withholding tax on the individual income – 4 000*7% = 280
• Remaining 4 000*20/80 (corporate tax 1 000)
Example 3 – corporate and individual shareholder
2018 – the amount of dividends distributed – 18 000, on which the 20/80 corporate tax paid was 4 500
2019 – reduced 14% rate will be applied to 1/3 from 18 000 = 6 000, dividends will be distributed in the amount of 10 000
Shareholders of company are: 50% legal entity and 50% individual, to each of which will be paid dividends in the amount of 5 000
Corporate tax obligation will be as follows:
• 1/3 from 18 000 = 6 000*14/86 (976,74) and
• Remaining 4 000*20/80 (1000)
The 7% tax obligation on dividends payable to the individual shareholder will depend upon the decision on of dividends subject to 20% or 14% corporate tax by the company:
• if 4 000 is taxed at 20% and 1 000 is taxed at 14%, then the 7% withholding tax is 70 and the amount of dividends payable to the individual is 4 930 (5 000-70)
• if 2 000 is taxed at 20% and 3 000 is taxed at 14%, then the 7% withholding tax is 210 and the amount of dividends payable to the individual is 4 790 (5 000-210)
• if 5 000 is taxed at 14%, then the 7% withholding tax is 350 and the amount of dividends payable to the individual is 4 650 (5 000-350)
Example 4 – corporate and individual shareholder
2018 – the amount of dividends distributed – 9 000, on which the 20/80 corporate tax paid was 2 250
2019 – the amount of dividends received from the subsidiary – 2 000, from which 1 400 was taxed at 20% and 600 at 14%. The company can redistribute tax exempt dividends 2 000 and dividends at reduced 14% rate 1/3 from 9 000=3 000
Shareholders are 50% legal entity and 50% individual, to each of which will be paid dividends in the amount of 6 000 (in total 12 000)
Corporate tax obligation on these dividends:
• 1/3 from 9 000 = 3 000*14/86 (488) and
• Remaining 7 000*20/80 (1 750)
• 2 000, which was received from the subsidiary, is exempt from corporate tax
The 7% tax obligation on dividends payable to the individual shareholder will depend upon the amount of dividends subject to 20% or 14% corporate tax by the company:
• if 5 000 is taxed at 20% + 1 000 is tax exempt, then the 7% withholding tax is 600*0,07= 42 and the amount of dividends payable to the individual is 5 958 (6 000-42)
• if 2 000 is taxed at 20% + 2 000 is tax exempt + 2 000 is taxed at 14%, then the 7% withholding tax is (600+2 000)*0,07=182 and the amount of dividends payable to the individual is 5 818 (6 000-182)
• if 1 000 is taxed at 20% + 2 000 is tax exempt + 3 000 is taxed at 14%, then the 7% withholding tax is (600 + 3 000)*0,07= 252 and the amount of dividends payable to the individual is 5 748 (6 000-252)