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Taxation of Estonian companies being a part of international groups

Taxation of Estonian companies being a part of international groups

The readers probably know that Estonia has a quite unique and fairly simple corporate income tax system with a flat tax rate. The basic idea is not to tax profits until they are used in business. The profits are taxed when distributed. It is less known that in most cases the profits earned abroad when distributed by the Estonian company to its shareholders are not taxed. This makes Estonia quite interesting jurisdiction for international businesses. The following gives a general overview of the relevant rules.

The moment of corporate taxation is not the moment of earning the profit by the Estonian company (EstCo) but the moment of its distribution. The tax rate is 21/79 of net dividends (21% of gross disbursement). If EstCo pays 1 MEUR as dividends the income tax shall be EUR 265,823 (21/79 of 1 MEUR). This means that if EstCo wants to distribute dividends in the amount 1 MEUR, it should have cash at least of EUR 1,265,823 (1 MEUR for dividends and EUR 265 823 for tax payment). 

The shareholder is not taxed. Taking the example of the previous paragraph – the net dividend of the EstCo shareholder shall be 1 MEUR and this is not further taxed in Estonia. It is irrelevant whether the shareholder is Estonian or non-Estonian resident. 

The income tax shall not be payable by EstCo in following cases: 

1. EstCo itself has received dividend (which is the basis for EstCo’s dividend payment) from a resident company of any European Economic Area (EEA) state or Switzerland and such company is a corporate income-taxpayer there (except from companies located in a low tax rate territory) and EstCo had at least 10% shares or votes in that company.

2. EstCo has derived the dividend from a company of any other foreign state (except low tax rate territories), EstCo had at least 10% shares or votes in that company and income tax has been withheld from the dividend or income tax has been charged on the share of profit which was the basis thereof.

3. The dividend is paid out of profit attributed to EstCo’s permanent establishment located in EEA state or Switzerland, or if located elsewhere, such profit has been taxed with income tax abroad. 

To sum up – in most of cases Estonia does not “touch” neither Estonian companies nor their shareholders regarding the foreign profits and thus Estonia might well suit as a location for a parent or subsidiary company for international operations.

Ants Karu

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