A dividend is a payment made pursuant to a decision of the competent authority of a legal entity with a net profit or with an undistributed profit for the preceding business years, based on the share of the beneficiary in a legal person (ownership of shares or shares, participation in a full or limited partnership, or membership in a commercial cooperative or other forms of participation in accordance with the laws of the country of the place of business).
The new dividend tax system in Estonia has been in force since January 2018, but it can only be partially implemented since 2019, with the proviso that dividends were paid in 2018. Estonia now has two income tax rates – 14 per cent and 20 per cent (in practice 14/86 and 20/80) to tax dividends.
Commercial associations pay tax at 20/80 on profit distribution or dividend.
According to the Estonian legislation, a resident business association may apply a lower tax rate of 14/86:
- 1/3 of the allocated profits in 2018 with which the resident business association paid income tax;
- 1/3 of the allocated profits in 2018 and 2019 with which the resident business association paid income tax.
Commercial association may, for the fourth year, levy a lower tax rate of 14/86 dividend payments equal to the average of taxable dividends and equity for the three preceding calendar years.
If a person is paid a dividend at a lower tax rate, 7 per cent of the income tax should be additionally deducted. Income tax is deductible from dividends paid to an individual, both resident and non-resident.
How to declare
The resident commercial association declares in Annex 7 of Form TSD and in Form INF 1 dividend payments, both at the lower tax rate and at the normal rate.
In the e-MTA environment there is in Annex 7 of Form TSD «Calculation of the Distributed Profit for Application of a Lower Tax Rate», where the commercial association is displayed at the moment:
- In the previous year, dividends paid and equity payments (profit-sharing) from which the business association paid income tax
- Profits for which a lower tax rate is applied
- In a calendar year, distributed profits with a lower tax rate
- Profit, which can be distributed in a calendar year with a lower tax rate
The amount of the dividend – the income of the individual and the withheld income tax on dividends – is declared in form INF 1. The form INF 1 under code 13050 has the form of MDK – dividends stamped at a lower tax rate, and still the type of DK payment – dividends, covered at the usual rate. The gross amount of dividends – the income of a natural person with the form of payment «MDK» is declared in the form INF 1 under the code 13060, the rate of withheld income tax under the code 13073 and withheld income tax under the code 13074.
If an individual is paid a dividend at a lower tax rate, or if the dividend continues to be paid to an individual from the received dividend at a lower tax rate, the income tax is usually withheld at 7%, but, in the case of a non-resident natural person, the tax treaty and the residence certificate may reduce the withholding income tax rate (respectively 0 per cent or 5 per cent).
Important things to consider:
- The authorized capital must be paid
- Dividends cannot be paid until the authorized capital has been paid. If dividends are paid from the net profit of a financial year, a report for the financial year must be submitted and approved.