Taxation of profits in Estonia


How Corporate Income Tax is applied in Estonia

The core of the corporate income tax in Estonia is that the corporate taxation is shifted from the moment of earning the profits to the moment of their distribution. It means that as long the profit is not distributed there is no corporate income tax applicable to the company (unless some other costs must be taxed). In other words - it does not matter how successful your company is - it is possible to run your company without taxation at all and many entrepreneurs already do so.


Corporate profit without distribution - sample

100 000 EUR
0 EUR
0%
100 000 EUR

Gross profit of the company
Corporate income tax applicable
Real taxation
Profit available for the company


Implicit and explicit way of profit distribution

There are two types of profit distribution possible – an implicit and an explicit way.

The explicit way stands for dividends and other profit distributions (except for bonus issue, which is taxable for resident natural persons upon the alienation of assets received through the bonus issue).


Dividends or explicit way of distributing profits - sample

200 000 EUR
100 000 EUR
20%
20 000 EUR
80 000 EUR
20%
0%
100 000 EUR
80 000 EUR

Gross profit of the company
Gross profit decided to distribute
Corporate income tax rate
Corporate income tax to pay
Dividend paid to shareholders
Real taxation of gross distributed profit
Withholding tax
Will remain on company account
Shareholders receive


In other words - if a resident legal (Estonian company) person pays 80 000 EUR of dividends to a natural person. A tax of 20 000 EUR (100 000 x 20/80) has to be paid by the resident legal person (total cost 100 000 EUR).

Payments upon proceeds from liquidations, payments upon capital reductions and redemption or return of participation in a company are generally subject to corporate income tax in the hands of the payer: an Estonian company at the moment of distribution.

The implicit way to distribute profits is to do that through fringe benefits, gifts and donations, as well as expenses and payments unrelated to business activity.


Implicit way of distributing profits - sample

8 000 EUR
20%
2 000 EUR

Fringe benefits costs or costs without document
Corporate income tax rate
Corporate income tax to pay

 

It might seem that taxation here is 25% (2000 from 8000 = 25%), but actually the taxation is always calculated from gross (distributed) profit, which in this case is 8000 + 2000 = 10 000 EUR. 2000 from 10 000 is 20%.


The resident legal person and the non-resident legal person acting through its permanent establishment registered in Estonia carrying out profit distribution has to pay 20/80 of the amount of profits distributed.

For the recipient, dividends are not taxable income and additional income tax shall not be withheld on the amount of dividends.

Some more examples of company profit taxation:

  • A resident legal person pays 80 000 EUR of dividends to a non-resident legal person who owns less than 10% of the profit-distributing entity. A tax of 20 000 EUR (80 000 x 20/80) has to be paid by the resident legal person.
  • A resident legal person pays 80 000 EUR of dividends to a resident legal person, who owns less than 10% share in the profit-distributing entity. A tax of 20 000 EUR (80 000 x 20/80) has to be paid. When the receiving entity pays out dividends further to other persons, then the tax of 20/80 of the amount paid out has to be paid again.
  • A resident legal person pays 80 000 EUR of dividends to resident legal person, who owns more than 10% share in the profit-distributing entity. A tax of 20 000 EUR (80 000 x 20/80) has to be paid. When the receiving entity pays out dividends further to other persons, then the tax of 20/80 of the amount paid out shall not be paid.

This guideline is to be considered as informative and very general and should not be treated as a final law.