Dividends in Estonia: rules, taxation, and compliance
Congrats! Your Estonian company made a profit and you look forward to profiting from it yourself. Well, this happy moment is regulated by law. In fact, it becomes one of the routine annual processes. Let’s examine what are prerequisites, taxes, and points to think about when distributing dividends.
Dividends are a part of a company’s profit that you’re supposed to get according to the number of shares you own. A dividend payout is basically the withdrawal of a company’s profit at the end of the financial year.
Dividend distribution is optional. You may distribute dividends or keep money in the company. By default, the government encourages the second option. If you keep money and reinvest in the business, you do not pay CIT. If you withdraw money from the company, you abide by the following guidelines.
Pre-dividends distribution checklist
You have paid in the mandatory share capital
The minimum share capital for private limited companies (OÜ) in Estonia is € 2.500. Normally, the contribution to the share capital can be deferred up to 10 years from the company formation day for a purpose of saving money for business management at the beginning.
However, if you’re looking to distribute dividends, the share capital should be fully paid in. According to the Business Register Act adopted by the Estonian Parliament this April, the minimum requirement to share capital will be removed starting from February 2023.
You have prepared the Annual report for the latest financial year, which is over
The Annual report was approved with the signed resolution of the sole shareholder or the general meeting of shareholders.
With Enty Standard and higher subscriptions, you’ve got CIT calculated and carefully reflected in the Annual report. You can use your consultation with an accountant to clarify associated issues.
You've prepared and signed a Sole shareholder’s resolution or a Resolution of the general meeting (majority of votes). The amount of dividends is stated in this document.
You have not distributed dividends this year yet. Dividends can be paid only once a year.
How many dividends can you distribute
The point behind the limits of dividend distribution is that it should not impair the solvency of your company. First, the amount of the dividends must not exceed retained earnings shown in the Annual report.
Second, the net assets of the company must not fall below the mandatory share capital (if you put the minimum) or a half of the share capital (if you put more than € 2.500) as a result of the withdrawal of the dividends.
NB! When you count the remaining net assets, you have to take into account the additional income tax expense.
How to pay dividends out
Basically, the company pays the dividends to the shareholder’s current account. Then a person responsible for accounting in the company makes respective entries in the accounting books.
Post-dividends payment checklist
You declare this dividend payment on the form TSD Annex 7. TSD in Estonia is the monthly combined income tax and the social tax return. Annex 7 is to be for dividends.
You remit corporate income tax (CIT) till the 10th day of the month following the actual payment. The CIT rate in Estonia is formally expressed as 20/80. But actually, it reaches 25% on the net distribution.
You declare the dividend income from the Estonian company in your annual personal income tax return in your state of residence.
E-Residency does not make you personally an Estonian tax resident. Therefore, you highly likely (list of exemptions) must pay personal income tax in your country. It usually varies from ~15 to 20%.
So, check the tax rate and pay this tax in your country of residence. If it’s required in your country to provide a certificate confirming the tax amount paid in Estonia, you can request it online.
NB! If a company distributes dividends to Estonian citizens, they do not pay personal income tax for it.
How to pay fewer taxes from dividends
A reduced CIT rate of 14/86 can be applied to part of the dividends when an Estonian company regularly distributes dividends in the last three years.
For example, a company pays dividends out
in 2019 in the sum of € 9.000,
in 2020 in the sum of € 2.000,
and in 2021 in the sum of € 4.000.
That is a total in the last three years of € 15.000.
The average taxed dividend is € 15.000/ 3 years = € 5.000.
In 2022, the company applies the 14/86 tax rate to payments of dividends in the sum of € 5.000 and then applies the 20/80 tax rate to the remaining sum.
NB! Unlike salary or#nbsp;director’s fees, dividends are not subject to#nbsp;social taxes. But still, you do#nbsp;have not to#nbsp;opt for dividends to#nbsp;save on#nbsp;taxes.
Please, analyze your role in the company and consult with the accountant before making payments. Enty will help you with all routine tasks of your company including dividend distribution. Check out our solution!
